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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1997
COMMISSION FILE NUMBER 0-19561
BPI PACKAGING TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2997486
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
455 SOMERSET AVENUE, NORTH DIGHTON, MASSACHUSETTS 02764
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(Address of principal executive offices) (Zip code)
(508) 824-8636
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
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Common Stock, $.01 par value
Series A Convertible Preferred Stock, $.01 par value
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 60 days.
Yes X No
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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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the average of the bid and ask prices of the
Common Stock and Series A Convertible Preferred Stock as reported by NASDAQ/NMS
on June 10, 1997 was approximately $22,887,098 for the Common Stock and $594,731
for the Series A Convertible Preferred Stock. As of June 10, 1997, 14,084,368
shares of Common Stock, $.01 par value per share,
were outstanding and 339,846 shares of Series A Convertible Preferred Stock,
$.01 par value per share, were outstanding.
FORWARD-LOOKING STATEMENTS OR INFORMATION
This Form 10-K includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Form 10-K which address
activities, events or developments that the Company expects or anticipates will
or may occur in the future, including such things as future capital expenditures
(including the amount and nature thereof), expansion and other development
trends of industry segments in which the Company is active, business strategy,
expansion and growth of the Company's business and operations and other such
matters are forward-looking statements. Although the Company believes the
expectations expressed in such forward-looking statements are based on
reasonable assumptions within the bounds of its knowledge of its business, a
number of factors could cause actual results to differ materially from those
expressed in any forward-looking statements, whether oral or written, made by or
on behalf of the Company. Many of these factors have previously been identified
in filings or statements made by or on behalf of the Company.
All phases of the Company's operations are subject to influences
outside its control. Any one, or a combination, of these factors could
materially affect the results of the Company's operations. These factors
include: sales, competition, inflation, raw material price increases, rate of
market penetration for products, new product development and market acceptance,
litigation, interest rate fluctuations, availability of equity financing,
availability of capital and operating lease financing, availability of bank or
other financial institution lines of credit and other capital market conditions.
Forward-looking statements made by or on behalf of the Company are based on a
knowledge of its business and the environment in which it operates, but because
of the factors listed above, actual results may differ from those in the
forward-looking statements. Consequently, all of the forward- looking statements
made are qualified by these cautionary statements and there can be no assurance
that the actual results or developments anticipated by the Company will be
realized or, even if substantially realized, that they will have the expected
consequences to or effects on the Company or its business or operations.
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PART I
ITEM 1. BUSINESS
GENERAL
BPI Packaging Technologies, Inc., (the "Company") is a specialty
packaging and in-store advertising and promotion company. The Company develops,
manufactures, markets and sells plastic bags and advertising and promotion
products to grocery, convenience, retail and drug store chains. The Company
manufactures traditional plastic grocery carry out bags of "T-shirt sack" design
commonly used at the checkout counter and plastic T-shirt carry out bags in
proprietary, value-added dispensing systems for use in the produce section of
the supermarket and the checkout counters of convenience, retail and drug store
chains. The Company's T-shirt carry out bags and plastic film are manufactured
in a new, state-of -the-art plant which utilizes some of the world's most
advanced and highest quality printing, extrusion and bag making equipment. The
Company's investment in state-of- the-art manufacturing equipment and computer
controlled process technology allows the Company to manufacture its products
with flexibility because 100% of manufacturing capacity can be allocated to any
one product and allows it to be a lower cost and high quality producer in its
markets. The Company's Floor Focus Ad-Tile(TM) in-store advertising and
promotion product is manufactured by a licensor.
The Company's strategy is to (i) integrate its proprietary bag products
and proprietary in-store advertising and promotion products in grocery,
convenience, retail and drug store chains, and (ii) replace the manufacturing
capacity allocated to the lower margin traditional plastic grocery carry out bag
with higher margin proprietary bag and plastic film products and to grow the
proprietary packaging and in-store advertising and promotion business segments.
Sales for the year ended February 28, 1997, ("Fiscal 1997") were $30.8 million,
of which $12.0 million or 39.0% was attributed to sales of proprietary bag and
plastic film products. Sales of in-store advertising and promotion products are
at the initial stage of market penetration and were nominal.
Sales of packaging products based on the present business plan are
forecast as follows: Fiscal 1998; $38.6 million, Fiscal 1999; $77.6 million and
Fiscal 2000; $91.0 million. The forecast anticipates that the Company will be
profitable from packaging operations in each fiscal year. Sales of in-store
advertising and promotion products are not included in the above forecast
because, notwithstanding the anticipated success of these programs, it is too
early to forecast trends. However, sales of in-store advertising and promotion
products are expected to be in the $60.0 million range in Fiscal 2000, based on
present programs.
The Company can be categorized as having completed in Fiscal 1997 the
developmental stage of the Company's business and entering the sales and
marketing stage beginning in Fiscal 1998. Management's sales and marketing goal
is to have its existing and planned manufacturing capacity fully utilized by the
end of Fiscal 1999 with higher margin proprietary bag and film products.
Traditional grocery carry out bags are forecast to decline to nominal levels in
the fourth quarter of Fiscal 1998.
During the period June 1991 to February 1997, which is categorized as
the development stage of the Company's business, the Company acquired and
brought on-line $38.1 million of new, state-of-the-art extrusion, printing and
bag making equipment in its Dighton, Massachusetts facility,
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and developed patented and proprietary bag and plastic film products and
developed and acquired in-store advertising and promotion products. The
Company's proprietary bag and in-store advertising and promotion products are
uniquely positioned in their markets and have limited direct competition.
The Company's present manufacturing capacity will support estimated
sales of $40 to $50 million annually. In Fiscal 1998, the Company plans a $0.5
million investment in manufacturing capacity and subject to appropriate
agreements, capacity additions in Fiscal 1999 and 2000 are planned to be $6.1
million and $2.7 million, respectively, which capacity additions will provide
the total manufacturing capacity to support estimated sales of $70 to $90
million annually at its Dighton, Massachusetts facility. The Company currently
has outstanding commitments of $0.3 million of the planned Fiscal 1998 $0.5
million investment. However, upon the completion of a minimum of $2.0 million of
a maximum $5.0 million private placement of senior long term debt and equity
presently being negotiated, the Company intends to accelerate Fiscal 1999
capital investment by increasing commitments for Fiscal 1998 by $3.5 to $3.9
million. All capacity estimates are based upon certain assumptions regarding
pricing, manufacturing efficiencies and product mix.
Sales of packaging products require a prior capital investment of
approximately $1 for each $2.0 to $2.5 of sales. The Company's in-store
advertising and promotion products, Floor Focus Ad- Tile(TM) and Produce Profit
Builder(TM) Cartridge Talker(TM) are produced by a licensor and the Company,
respectively. Sales are directly related to market penetration and are not
constrained by the Company's prior investment in manufacturing capacity.
Developing the capability to penetrate the in-store advertising and promotion
market requires an investment in sales and marketing infrastructure, but
management expects that this capital investment will be significantly less than
the investment required to support equivalent sales of bag and plastic film
products. Management's goal of integrating proprietary bag and film products and
proprietary in-store advertising and promotion products is expected to create in
the future, new market opportunities and reduce the capital requirements
necessary to support growth.
The Company competes in the $731 million annual market for 1996 based
on management's estimate for traditional plastic grocery carry out T-shirt bags.
This market is highly competitive and margins have remained low for several
years covering variable manufacturing costs but making no, or little
contribution to manufacturing overhead, SG&A, interest or profit. Management's
goal is to reduce sales of this product in the first quarter and to nominal
levels in the second and third quarters and to withdraw from this market by the
end of this fiscal year. In conjunction with this exit strategy, certain
write-downs of assets and expenses related to the traditional T-shirt product
line were recorded in the fourth quarter of Fiscal 1997 amounting to $5,897,648
in order to reflect these items, now considered impaired, at fair value. In
addition, due to the deterioration of the product lines' gross margin due to
intense competition, approximately $1,165,000 of inventory reserves were
established in the fourth quarter in Fiscal 1997 to properly state the
traditional T-shirt bag product line inventory at net realizable value. In May
1997, the withdrawal from this market resulted in the Company reducing its work
force 26% to 143 employees and reducing salary, wages, fringe benefit costs and
other variable costs by an estimated $6.0 million annually.
The Company has entered the in-store advertising and promotion market
with two new products: (i) Produce Profit Builder(TM), which incorporates the
Company's established proprietary FRESH-SAC(R) T-shirt produce bag, which is
used by approximately 1,000 supermarkets, into a new in-store advertising and
promotion vehicle for supermarkets, and (ii) the new patented Floor Focus
Ad-Tile(TM) system, which is a semi-permanent floor tile which contains full
color advertising messages
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manufactured into it and is installed in the floor in strategic locations
throughout the store. The objective of the Produce Profit Builder program and
Floor Focus Ad-Tile(TM) is to increase sales in-store at the point of purchase.
In-store tests for both of these programs were successfully completed
in Fiscal 1997. The results of the in-store test for the Produce Profit Builder
program, utilizing the Fresh-Sac(R) T-shirt produce bag and Cartridge
Talker(TM), showed increased produce revenues for six advertised items of $18.71
per one thousand customers which translates into an estimated increase in pretax
profits for a 185 store supermarket chain of approximately $1.2 million
annually. Floor Focus Ad-Tile(TM) was successfully tested in-store at Winn-Dixie
Supermarkets. Information Resources, Inc., an independent market research firm,
conducted research based on scan data for a 12-week period ending November 1996.
The research reported sales gains of 21.5% to 29.5% for Nestle's, Campbell Soup
and H.J. Heinz products. The Produce Profit Builder sales and marketing campaign
began in December 1996, and presently there are 18 supermarket chains
representing sales estimated by management of $30 million annually in various
stages of in-store test, and it is anticipated that sales from this program will
begin to increase in the second quarter. Coca-Cola France and a major
international supermarket chain have agreed to an eight week in-store test for
Floor Focus Ad-Tile(TM) in several hypermarkets (referred to as Super Stores in
the U.S.) beginning in July 1997. It is anticipated that the test will be
successful and that sales of Floor Focus Ad-Tile(TM) advertising to Coca-Cola
France and others will begin in France in the third quarter of Fiscal 1998. In
June 1997, Coca-Cola USA budgeted Floor Focus Ad-Tile(TM) for a national program
for convenience stores, to begin in 1998, subject to an in-store test.
Management believes that Fiscal 1998 will be a transition year to
profitability. The Company is being propelled forward by two structural
dynamics: proprietary plastic film and proprietary bag products. A third
structural dynamic in-store advertising and promotion products is expected to
develop sales momentum in this fiscal year.
A new proprietary film for the encapsulation of fiberglass insulation
is being purchased by a major manufacturer of fiberglass insulation that plans
to convert all of its production lines to the encapsulated film over a four year
period. If other manufacturers make the decision to encapsulate fiberglass
insulation, the total market for film for the encapsulation of fiberglass
insulation is estimated by management at $243 million annually.
The proprietary Fresh-Sac(R) and Handi-Sac(TM) bag products have six to
18 months of sAles and marketing effort in the pipeline and both of these
products are expected to have accelerating sales in Fiscal 1998. Handi-Sac(TM)
is already being sold to approximately 8,686 convenience stores. Fresh- Sac(R)
is being sold to approximately 1,000 supermarkets and 18 supermarket chains
representing potential annual revenues of approximately $30 million are in
various stages of in-store test. The total market for Handi-Sac(TM) and
Fresh-Sac(R), including Fresh Focus Cartridge Talker advertising, is estimated
by management at $619 million annually.
A third structural dynamic, in-store advertising and promotion
products, is expected to develop sales momentum in Fiscal 1998. The Floor Focus
Ad-Tile(TM) advertising market in the U.S. for grocery and convenience stores is
estimated at $606 million annually. The hypermarkets in France represent a
market potential estimated by management at $100 million annually for Floor
Focus Ad- Tile(TM) advertising. Cause Marketing anti-smoking advertising and
promotion messages directed to
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the youth of the nation by the installation of Educational Tile(TM) in the
nations public schools is estimated by management to be a $150 million annual
market.
HISTORY
The Company's predecessor, Beresford Packaging, Inc. ("Beresford-U.S.")
was organized as a wholly owned subsidiary of Beresford Packaging, Inc., a
Canadian corporation (that was subsequently amalgamated into Beresford Box
Company Limited ("Beresford -Canada")) in February 1988 to acquire certain
assets and assume certain liabilities of Surrey Industries, Inc., an
unaffiliated entity, which manufactured traditional high molecular weight, high
density polyethylene ("HMWPE") plastic bags. The Company was organized as a
Delaware corporation in May 1990 and in August 1990 Beresford-U.S. merged into
the Company. In February 1993, the stockholders and directors of the Company
approved the name change of the Company from BPI Environmental, Inc. to BPI
Packaging Technologies, Inc. The Company operates three wholly owned
subsidiaries: RC America, Inc., which purchases surplus inventory from
manufacturers of consumer products and markets and sells the products to mass
merchandise retailers and other retail chains; BPI Packaging (UK) Limited, which
markets and sells the Company's products in Europe and Market Media, Inc., which
sells and markets in-store advertising and promotion programs. BPI Packaging,
Inc., which was established to purchase, sell and market plastic bag products
manufactured by another bag manufacturer, is a non-operating wholly owned
subsidiary of the Company. Unless otherwise indicated, the term "Company"
includes BPI Packaging Technologies, Inc., its predecessor Beresford-U.S., and
its four subsidiaries.
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PRODUCTS AND MARKETS
Direct competition refers to competition from identical products, and
indirect competition refers to products which are not identical, but which could
be substituted for the Company's product.
Market size estimates are management estimates:
<TABLE>
<CAPTION>
1996 PATENT
ANNUAL MARKET (MILLIONS) STATUS COMPETITION
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<S> <C> <C> <C>
TRADITIONAL GROCERY T-SHIRT BAG $731 U.S. Patent Sonoco,Vanguard,
(Including Non-Food Retail) Issued 1989 and Others
HANDI-SAC(TM) $120 U.S. Patent No Direct
Convenience & Auto Stores Issued 1993 IndirectPaperand
Sonoco T-Sack Roll Bag
PROPRIETARY FILM-Construction Industry $243 Trade Secrets No Direct
(Final stage of research and development - $100 Trade Secrets No Direct
Tissue Overwrap) $223 Process Technology Limited Direct
---
Sub Total: $566
FRESH-SAC(R) $264 U.S. Patent No Direct;
T-Shirt Produce Bag Issued 1993 Produce Bag
On a Roll - Indirect
FRESH FOCUS CARTRIDGE TALKER(TM) $235 U.S. Patent No Direct
(Sold with FRESH-SAC(R)) Issued 1996
Advertising/Promotion
IN-STORE ADVERTISING AND PROMOTION PRODUCTS:
FLOOR FOCUS AD-TILE
(Floor Billboard Advertising) $380 Grocery, U.S. Patent No Direct; Indirect 3M
$ 88 Produce Issued 1993 Indirect Heritage Media
$138 Convenience Store (Exclusive License) Indirect Catalina Mktg.
N/A Non Food Retail
$100 Hypermarkets France
$706 Total
CAUSE MARKETING $150 Anti-Smoking schools U.S. Patent No Direct
EDUCATIONAL TILE(TM) Issued 1993
(Floor Billboard Advertising (Exclusive License)
For Schools & Others)
GRAND TOTAL $2,772 (after withdrawal from the traditional grocery T-shirt bag market of $731 million
annually, the adjusted total is $2,041)
</TABLE>
HANDI-SAC(TM) is a T-shirt bag sold in a patented dispensing mechanism.
The system allows the retailer to effectively store and dispense T-shirt bags in
a limited space, which is important to convenience, drug, retail and hardware
stores. The marketing program for this product began in Fiscal 1995 and in the
first quarter of Fiscal 1998, the product is being sold to approximately 8,686
convenience, drug, retail and hardware stores excluding approximately 3,700
Mobil Marts which are expected to be added in Fiscal 1998. The annual market
potential for HANDI-SAC(TM) in the 97,000 convenience stores and 40,000 auto
store markets is estimated by management at $120 million annually. The Company
has no direct competition in this market, but has indirect competition from
paper bags and the T-shirt bag on a roll manufactured by Sonoco Products Company
("Sonoco"). The principal competition in this market is paper bags, which have
the largest share of the market and cost approximately two to three times the
price of HANDI-SAC(TM). Sales of Handi-Sac(TM) were $3.6 million in Fiscal 1997.
FRESH-SAC(R) T-shirt produce bag is a thin, high clarity, high
molecular weight, high density produce bag manufactured from a proprietary
plastic developed by the Company and sold in
-7-
a patented dispensing mechanism. The product is presently sold to approximately
1,000 supermarkets directly and through distributors. In 1997, there are 34,000
supermarkets in the United States, which represents an annual market potential
for this product of $264 million. The Company has no direct competition in this
market, but has indirect competition from the traditional produce bag on a roll.
Sales of Fresh-Sac(R) were $3.2 million in Fiscal 1997.
TRADITIONAL GROCERY T-SHIRT BAG is classified as a non-proprietary
product although the Company owns an issued patent on this product. The bags are
manufactured using HMWPE plastic resin and are sold to grocery, convenience,
drug and retail chains. Management's goal is to reduce sales of this product in
the first quarter and to nominal levels in the second and third quarters and to
withdraw from this market by the end of this fiscal year. In conjunction with
this exit strategy, certain write-downs of assets and expenses related to the
traditional T-shirt product lines were recorded in the fourth quarter of Fiscal
1997 amounting to $5,897,648 in order to reflect these items, now considered
impaired, at fair value. In addition, due to the deterioration of the product
lines' gross margin due to intense competition, approximately $1,165,000 of
inventory reserves were established in the fourth quarter in Fiscal 1997 to
properly state the traditional T-shirt bag product line inventory at net
realizable value. In May 1997, the withdrawal from this market resulted in the
Company reducing its work force 26% to 143 employees and reducing salary, wages,
fringe benefit costs and other variable costs by an estimated $6.0 million
annually. Sales of the traditional grocery t-shirt bag were $16.6 million in
Fiscal 1997.
The estimated by management $731 million annual market in 1996 for
T-shirt bags has developed over the past ten years primarily because the T-shirt
bag has been approximately one-half to one-quarter the price of kraft paper bags
over the period and the T-shirt bag has been a less expensive alternative to
paper and plastic merchandise bags. Plastic T-shirt bags have an estimated 75%
market share of the supermarket industry. This market is highly competitive. The
Company's competitors include divisions of large multinational companies and
other specialty bag manufacturers. There are high barriers to entry into the
market due to the significant capital requirements. In Sonoco's 1996 Annual
Report it was estimated that it presently requires a capital investment of
approximately $15 million for each one billion bags of manufacturing capacity.
The Company's capacity is estimated at 3.3 to 4.8 billion bags annually
depending on product mix and the minimum value of its installed capacity is
estimated at approximately $49.5 million.
FILM PRODUCTS are anticipated by management to contribute significantly
to the Company's proprietary sales over the next several years. In the past
fiscal year, the Company has focused on the development of proprietary plastic
film products for the building products and consumer products industries. A
proprietary film for the encapsulation of fiberglass insulation was developed in
Fiscal 1997 for a major manufacturer of fiberglass insulation that plans to
convert all of its production lines to the encapsulated film over a four year
period. If all of the manufacturers' production lines are converted as planned,
forecasts supplied by the customer anticipate that requirements for film for the
encapsulation of fiberglass insulation will be $7.3 million in Fiscal 1998
increasing to $46 million in Fiscal 2001.
The encapsulation of fiberglass insulation is believed to be driven
primarily by concerns that certain length fiberglass fibers could be a health
hazard. The Company has received inquiries for its film for the encapsulation of
fiberglass insulation from a number of other companies in the industry. It is
management's opinion that the encapsulation of fiberglass insulation will become
an industry-wide standard in the next several years. The market for the
Company's proprietary film for the
-8-
encapsulation of fiberglass insulation is estimated by management at $243
million annually should the encapsulation of fiberglass insulation become an
industry standard.
The Company is in the final stages of developing another proprietary
film for the replacement of fiberglass insulation backing which is expected to
be tested at Underwriter's Laboratories in July - September 1997. The Company is
working with an equipment supplier and a major consumer packaging company to
develop a thin film for tissue overwrap (paper towels for use in the kitchen and
toilet tissue). This development is being driven by a major consumer products
company, which has made the shift from the standard industry thick, clear, low
density film for tissue overwrap to a thin, less clear, high density film. The
consumer products company is reported to have entered into a five year contract
with a competitor, which locks up all of the available (and necessary capacity
to support the shift) high density, thin film capacity in the market. This move
effectively blocks competitors from making the shift and realizing the estimated
savings of $1 million for each 1% of market share. The savings realized by the
consumer products company are reported to have placed competitors at a severe
competitive disadvantage in the paper towel and toilet tissue market. The
Company has the only available capacity in the market to support the shift by
the consumer products company competitors to a high density, thin film tissue
overwrap. The total market for this product, including the consumer products
company, is estimated by management at $223 million annually. The Company passed
an important qualifying test for its tissue overwrap film in April 1997, and if
all qualifying tests are successful, production of this thin film for tissue
overwrap is expected to begin in July 1997. The Company also manufacturers a
proprietary film for the overwrap of McDonalds' hamburger buns. Sales of plastic
film were $3.6 million in Fiscal 1997.
IN-STORE ADVERTISING AND PROMOTION PRODUCTS are the Floor Focus
Ad-Tile(TM), an in-floor advertising system (billboard on the floor), and the
Produce Profit Builder(TM), which consists of the (i) Floor Focus Ad-Tile(TM),
(ii) the FRESH-SAC(R) T-shirt sack produce bag in a patented dispensing system
and (iii) the patented Fresh Focus Cartridge Talker(TM), an attachment to the
patented dispensing system, which is utilized as an advertising and promotion
vehicle and coupon dispensing mechanism. The patented Floor Focus Ad-Tile(TM)
system has full-color advertising messages manufactured into a tile which is
then installed in the floor in strategic locations throughout the store with the
objective of increasing brand sales at the point of purchase. Floor Focus
Ad-Tile(TM) is a semi-permanent installation that withstands heavy traffic, yet
is easily replaced when the message changes.
Market Media, Inc. ("Market Media"), a wholly owned subsidiary, was
organized in Fiscal 1996 to develop in-store advertising and promotion products,
which were to be marketed with the FRESH-SAC(R) produce bag. Subsequently, an
exclusive worldwide license on Floor Focus Ad- Tile(TM) was purchased.
In Fiscal 1996, Market Media entered into a contract with Winn-Dixie
Stores, Inc., of Florida to install its Floor Focus Ad-Tile(TM) advertising
product in all of the 1,178 Winn-Dixie supermarkets. In the first quarter of
Fiscal 1997, the roll out began for the first Winn-Dixie Division (109 stores of
which ten stores were control stores) with national brand advertisers which
included Nestle, Campbell Soup, Hebrew National, and H.J. Heinz. Initial
advertising contracts totaled approximately $100,000 with individual contracts
from one to three advertising cycles (4 to 12 weeks). Information Resources,
Inc., an independent market research firm, conducted research based on scan data
for a 12-week period ending November 1996. The research reported sales gains of
21.5% to 29.5% for Floor Focus Ad-Tile(TM) advertised products. Market Media's
Floor Focus Ad-Tile(TM) for
-9-
supermarkets, convenience stores and non-food retail stores, has the potential
of creating new in-store advertising and promotion markets. Management estimates
that the market potential for the Floor Focus Ad-Tile(TM) program is $606
million annually.
Under the contract, Market Media is responsible for the sale of Floor
Focus Ad-Tile(TM) advertising to national consumer package goods advertisers in
the 1,178 Winn-Dixie supermarkets. The sale of in-store advertising to the
consumer package goods companies is difficult if the advertising base does not
have a national reach which is generally considered to be 5,000 to 8,000
supermarkets that reach 40% of the U.S. population each week. In Fiscal 1997,
the Company did not have available to allocate the resources for a rapid
expansion of the Winn-Dixie store base to the critical mass required for a
national in-store advertising and promotion program. In addition to the expanded
store base, the sale of supermarket advertising to the package goods companies
requires a greater investment in sales and marketing resources than were
allocated in Fiscal 1997. For these reasons, the Winn-Dixie Floor Focus
Ad-Tile(TM) program is behind schedule. The Company's objective is to attempt to
include a renegotiated Winn-Dixie contract in a possible new joint venture
agreement, which is being discussed with a major in-store advertising and
promotion company. In this context, Winn-Dixie would become a pilot program for
the possible new joint venture. The Winn-Dixie contract expired on May 31, 1997.
Negotiations with all parties are still in progress regarding a joint venture
agreement.
In Fiscal 1997, the Company identified markets for the Floor Focus
Ad-Tile(TM) program in foreign markets and in the U.S., which it considers more
attractive and easier to reach than the U.S. grocery market. For example, the
1,056 hypermarkets in France are estimated by managment to have an annual market
potential for Floor Focus Ad-Tile(TM) of $100 million which compares to an
annual market potential estimated by management at $14.0 million for 1,178
Winn-Dixie supermarkets. The U.S. grocery market is a mature and highly
competitive market for in-store advertising and promotion programs. The Company
believes that the best approach to efficiently penetrate the grocery market is
to enter into a joint venture with a major in-store advertising and promotion
company. Discussions regarding incorporating the Floor Focus Ad-Tile(TM) program
in a joint venture for the U.S. grocery market are being held with a major
in-store advertising and promotion company that has the sales force and
necessary critical mass of supermarkets to consititute a national program.
Foreign markets are in the early stages of in-store advertising and
promotion and do not have established goals regarding population reach for
national in-store advertising and promotion programs. Foreign advertising
agencies generally take a much more proactive posture regarding introducing new
marketing programs to their clients, and as a result, there is an established
infrastructure at these advertising agencies for the sale and marketing of Floor
Focus Ad-Tile(TM) advertising. These factors and more attractive margins,
combined with the interest of Coca-Cola France in using Floor Focus Ad-Tile(TM)
advertising in the 1,056 hypermarkets in France, have resulted in the decision
to focus sales and marketing resources on France, South America and other
foreign markets. The convenience store market is also regarded as attractive
because it is not highly competitive for in-store advertising and promotion
programs, and the Company has an existing base of 8,686 convenience stores which
are currently purchasing Handi-Sac(TM) and can be used as a marketing platform
for Floor Focus Ad-Tile(TM) advertising.
Coca-Cola France and a major international supermarket chain have
agreed to an eight week in-store test for Floor Focus Ad-Tile(TM) in
hypermarkets (referred to as Super Stores in the U.S.) beginning in July 1997.
Coca-Cola France plans to have seven Floor Focus Ad-Tiles(TM) advertising
-10-
various Coca-Cola products installed in each test hypermarket. Upon the
successful completion of the eight week in-store test, Coca-Cola France intends
to expand the program to all 1,056 hypermarkets in France as Market Media enters
into retailer agreements with the supermarket chains and floor space becomes
available. The Company is confident that the Floor Focus Ad-Tile(TM) in-store
test will be as successful for Coca-Cola as it has been for other products in
the U.S. where sales increased 21.5% to 29.5%. Management estimates that the
1,056 hypermarkets in France represent an annual market for Floor Focus
Ad-Tile(TM), based on current pricing, of $100 million annually. It is
anticipated that a successful in-store test with Coca-Cola France will open up
the French, European and South American markets for Floor Focus Ad-Tile(TM)
advertising with Coca-Cola, other multi-national package goods companies and
supermarkets. Floor Focus Ad-Tile(TM) advertising sales from the French market
are anticipated to begin in the third quarter of this fiscal year. In June 1997,
Coca- Cola USA budgeted Floor Focus Ad-Tile(TM) for a national program for
convenience stores to begin in 1998, subject to an in-store test.
The Company's Produce Profit Builder has three elements: FRESH-SAC(R)
T-shirt produce bag, Fresh Focus Cartridge Talker(TM) and Floor Focus
Ad-Tile(TM). All three products create a marketing program for the produce
department of the supermarket, which is the highest margin department, and have
the objective of increasing produce sales.
The Produce Profit Builder program provides a platform for the Company
to potentially reach its goal of capturing a 60% market share of the estimated
by management $264 million annual 1996 market for the FRESH-SAC(R) T-shirt
produce bag. This estimate is based on the approximately 22 billion produce bags
on a roll sold annually and the replacement of the produce bag on a roll with
FRESH-SAC(R) T-shirt produce bag. FRESH-SAC(R) is now sold to approximately
1,000 supermarkets. In the context of the Produce Profit Builder program,
FRESH-SAC(R) becomes an important component of a marketing program that can
increase store profits. In Fiscal 1997, the Produce Profit Builder program,
utilizing the Fresh-Sac(R) T-shirt produce bag and Cartridge Talker(TM), was
tested in-store and increased produce revenues for six advertised items by
$18.71 per one thousand customers, which translates into an estimated increase
in pretax profit for a 185 store supermarket chain of approximately $1.2 million
annually. The Produce Profit Builder sales and marketing campaign began in
December 1996, and presently there are 18 supermarket chains representing sales
estimated by management at $30 million annually in various stages of in-store
test. It is anticipated that sales from the in-store test will begin to close in
the second quarter of Fiscal 1998. Sales of Fresh-Sac(R) were $3.2 million in
Fiscal 1997.
The Produce Profit Builder program is also the platform to launch a
second proprietary product, Fresh Focus Cartridge Talker(TM) along with Floor
Focus Ad-Tile(TM), into this market. The Cartridge Talker(TM) can be used to
market produce for the supermarket chain or as an advertising device for third
party paid advertising.
3M has entered the floor tile advertising market with a "decal" that is
attached to the existing floor tile surface and is regarded as an indirect
competitor of Floor Focus Ad-Tile(TM). 3M is classified as an indirect
competitor because its decal advertising message is attached to the surface of
the floor tile rather than having the advertising message manufactured into the
floor tile like the Floor Focus Ad-Tile(TM). The Company's Floor Focus
Ad-Tile(TM) has wear characteristics similiar to standard vinyl floor tiles. The
3M decal is reported to show wear within four to six weeks in the supermarket
environment.
-11-
Market Media has established a Cause Marketing division to use
Educational Ad-Tile(TM) to support a national anti-smoking advertising and
promotion program for the youth of the nation in the nations public schools. The
anti-smoking program was officially launched by United States Senator, John
Kerry, on June 6, 1997. Management believes that Cause Marketing and
anti-smoking is a large and immediate market.
RC AMERICA, INC.
The Company, through its RC America, Inc., subsidiary, purchases
surplus finished goods inventories from manufacturers of consumer products and
markets and sells the products to mass merchandise retailers and other retail
chains and distributors. RC America, Inc., purchases and sells these products
both in the United States and overseas.
COMPETITION
The plastic bag and the in-store advertising and promotion markets are
highly competitive. In the traditional plastic grocery T-shirt bag market, from
which the Company plans to withdraw in Fiscal 1998, and to a lesser extent in
other plastic bag markets, the Company's competitors include divisions of large
multinational companies e.g. Tenneco, Inc., ("Tenneco") and Sonoco and other
specialty bag manufacturers. The Company believes that Sonoco and Tenneco are,
respectively, the leading manufacturers of HMWPE and linear low density
polyethylene ("LLDPE") T-shirt grocery bags. (Mobil recently exited the grocery
T-shirt sack market and sold this business to Tenneco.) There are high barriers
to entry into the plastic bag market due to the significant capital
requirements. In Sonoco's 1996 Annual Report it was estimated that it presently
requires a capital investment of approximately $15 million for each one billion
bags of manufacturing capacity. The Company's capacity is estimated at 3.3 to
4.8 billion bags annually depending on product mix and the minimum value of its
installed capacity is estimated at approximately $49.5 million.
The Company's in-store advertising and promotion products compete in
the same markets that are dominated by Heritage Media Corporation and Catalina
Marketing Corporation, both of which offer in-store advertising and promotion
products which are not related to the Floor Focus Ad- Tile(TM) or the
FRESH-SAC(R) produce bag dispensing system. Consequently, the Company
anticipates much of its competition will come from larger, well-capitalized
businesses which have significantly greater financial and other resources than
the Company. Accordingly, no assurance can be given that the Company will be
able to compete successfully with any of these companies or achieve a greater
market share than it currently possesses. The Company competes in the plastic
bag and in-store advertising and promotion industries by (i) developing and
marketing what it believes are innovative plastic bags and in-store advertising
and promotion products, (ii) filing for patent protection in the United States
and numerous foreign countries for its proprietary products, (iii) using
state-of-the-art manufacturing equipment in an effort to increase productivity
and lower costs, and (iv) integrating its proprietary bag and in-store
advertising and promotion products to create barriers to market entry for
manufacturers of plastic bags, which do not have in-store advertising and
promotion products, and to create barriers to market entry for in-store
advertising and promotion companies that do not manufacture plastic bags.
-12-
PROPRIETARY PROCESSES, PATENTS AND OTHER RIGHTS
PATENT STRATEGY
The Company's strategy is to first, be a low cost producer in each of
its markets, and second, to develop patentable, proprietary products in order to
differentiate its products in the marketplace.
The Company has developed a patent position in the T-shirt bag and
in-store advertising markets. The Company owns a patent issued in 1989 for its
T-shirt carryout bag and patents for its HANDI-SAC(TM) and FRESH-SAC(R) T-shirt
bag dispensing systems and owns a patent for its Fresh Focus Cartridge
Talker(TM) in-store advertising and promotion product. The Company also owns an
exclusive worldwide license for the patented Floor Focus Ad-Tile(TM) system.
Recently, the Company received a copyright for the phrase "Must Be Tobacco Free"
In 1993, the Company was issued a United States patent for the
dispensing system used in conjunction with its FRESH-SAC(R) product and other
T-shirt sack products and has filed patent applications for the dispensing
system in 20 foreign countries. The Company has filed a patent application in
the United States for the FRESH-SAC(R) HMWPE material and was notified that a
corresponding patent has been issued in a foreign country. The Company has also
filed patent applications in the United States for its RAPID-SAC(TM) product and
for its RACK 'N SACK(TM) product, a new dispensing system for T-shirt sacks for
non-food retail markets. The Company was issued a United States patent for its
Fresh Focus Cartridge Talker(TM) in 1996. For Fiscal 1997, the Company spent
approximately $145,000 for patent activities, including applications, legal fees
and related costs. No assurance can be given that any of these patents will be
granted or that the patents currently owned by the Company and any patents that
may be granted in the future will be enforceable or provide the Company with
meaningful protection from competitors. Even if a competitor's products were to
infringe patents owned by the Company, it could be costly for the Company to
enforce its rights in an infringement action and would divert funds and
resources otherwise used in the Company's operations. Furthermore, no assurance
can be given that the Company would be successful in enforcing such rights. No
assurance can be given that any of the Company's patent applications will be
allowed, or if allowed, will provide the Company with any advantage against
competitors selling similar products. Similarly, no assurance can be given that
the Company's products will not infringe patents or rights of others. The
Company has a registered trademark in the United States for FRESH-SAC(R).
The Company has developed a number of proprietary manufacturing methods
and processes utilized in the manufacture of its products, including processes
that utilize greater percentages of recycled plastic materials in plastic bags,
and produce strong, thin, high clarity and traditional HMWPE bags using less
plastic. The Company relies on and employs various methods to protect the
concepts, ideas, and documentation for these manufacturing methods such as
patents and confidentiality agreements with its employees. However, such methods
may not afford sufficient protection and no assurance can be given that others
will not independently develop such know-how or obtain access to the Company's
know-how, concepts, ideas and documentation.
The Company owns patents in the United States and Canada relating to
the methods for making a pack of plastic T-shirt sacks which permits the
individual sacks to be mounted on a handle- supported dispensing rack system and
to be easily separated and dispensed from the pack utilizing a central "pull
tab." Sonoco also owns a patent relating to the methods for holding plastic bags
in a metal rack. In 1990, Sonoco indicated its intent to seek licenses under a
broadened reissue patent
-13-
from all manufacturers of plastic bags which utilize a particular method for
holding plastic bags in a metal rack. Sonoco has commenced litigation against
several plastic bag manufacturers other than the Company. The United States
District Court for the Central District of California entered summary judgment
in February 1994 for the defendants in a suit relating to alleged patent
infringement by the defendants. The court declared Sonoco's three reissue claims
to be invalid. It is expected that Sonoco will appeal this judgment. Subsequent
to this decision, the Company filed suit against Sonoco alleging infringement of
the Company's patent by Sonoco. In the first quarter of Fiscal 1997, the patent
infringement suit against Sonoco and Sonoco counterclaims against the Company
were dismissed by mutual agreement of the parties.
If Sonoco was to appeal the February 1994 judgment which declared
Sonoco's three reissue claims invalid, and have that judgment reversed, Sonoco
could institute a patent infringement suit against the Company. If Sonoco was to
institute and succeed in any infringement claim against the Company, Sonoco
might be able to prevent the future use, sale and manufacture of certain of the
Company's products using certain racking systems, or alternatively, might
require the Company to pay Sonoco a license fee for the use of this technology.
Either outcome could have a material adverse effect on the Company's business.
Infringement of any patent may also render the Company liable to purchasers and
end-users of the infringing product. The Company has been advised by patent
counsel that the Sonoco patent applies to the traditional grocery T-shirt sack
and does not apply to the Company's proprietary HANDI-SAC(TM) and FRESH-SAC(R)
bag products.
Mobil owns a reissue patent that relates to avoiding stress
concentration and preventing the tearing of plastic bags. This reissue patent
originally was to expire in 1996. Due to a change in U.S. patent law, the
reissue patent is now extended until 1998. On December 4, 1995, Mobil instituted
an infringement claim against the Company. Subsequently, the Company filed a
counter claim against Mobil for patent infringement. In December 1996, Mobil and
the Company settled this patent litigation by mutual agreement. See "LEGAL
PROCEEDINGS."
No assurance can be given that the Company's products will not infringe
patents or rights of others. The Company could incur substantial costs in
defending itself in any patent litigation.
MANUFACTURING
All of the Company's plastics products are manufactured in its Dighton,
Massachusetts facility. The HMWPE resin is delivered to the Company by rail car,
where it is brought into the facility to be heated and blown into a thin film on
blown film extrusion lines. The film is cooled and wound on large rolls and
printed with the customer's information using non-toxic inks. The film is then
cut into bags, reviewed by quality control inspectors, boxed, and shipped to
customers. The Company retains customer design ink plates for future use and has
an art department which assists in graphic design for the bags.
The Company's manufacturing equipment consists of blown film extrusion
lines, printing presses and bag making machines. The Company anticipates further
increases in manufacturing capacity in the Dighton facility during Fiscal 1998.
Its present manufacturing capacity is approximately 3.3 to 4.8 billion bags and
additional film, printing and slitting capacity is planned. All
-14-
capacity estimates are based upon certain assumptions regarding pricing,
manufacturing efficiencies and product mix.
RAW MATERIALS
HMWPE resin comprises the principal raw material in the Company's
products, the principal component of which is ethylene, a derivative of natural
gas. HMWPE resin is currently available from several sources, but is being
produced at over 90% of industry capacity utilization. During the past fiscal
year, as in some prior fiscal years, resin prices fluctuated significantly,
which trend the Company expects will continue. Although the Company currently
purchases the additives used in the production of its FRESH-SAC(R) products from
a single source, it believes that alternate sources would be available, if the
current manufacturer were to cease production. In such event, however, the
Company may experience delays in obtaining the additives, which could result in
temporary delays in FRESH-SAC(R) production. To date, the Company has not
experienced any shortages of raw materials.
BACKLOG
The Company's backlog of firm orders at May 30, 1997, was $520,065 as
compared to $912,265 at May 31, 1996. The Company generally sells products on an
individual purchase order to regular customers rather than under annual
contracts on a scheduled delivery basis. Accordingly, backlog may fluctuate
significantly and may not be an accurate indicator of general business trends.
SEASONALITY
Management of the Company does not believe that the Company's business
is seasonal. However, general demand for the traditional T-shirt grocery bag
decreases in the first calendar quarter of each year because demand for non-food
retail bags is significantly less in this period.
MAJOR CUSTOMERS
For the fiscal year ended February 28, 1997, Duro Bag Manufacturing
Company ("Duro Bag") accounted for approximately 16% of the Company's sales.
Because Duro Bag sales are primarily of the traditional grocery T-shirt bag, and
the Company is withdrawing from this business segment, sales to Duro Bag are
expected to decline substantially in Fiscal 1998 to nominal levels. The decline
of Duro Bag sales is not expected to have a material adverse effect on the
Company's business.
EMPLOYEES
As of May 30, 1997, the Company had 143 full-time employees, including
its four executive officers, of whom 8 are employed in general and
administrative activities, 24 are involved in sales and marketing, and 103 are
involved in production. None of the Company's employees are represented by a
union.
-15-
ITEM 2. FACILITIES
The Company maintains its principal executive offices and manufacturing
operations in a 124,000 square foot facility in Dighton, Massachusetts. The
premises are leased from an unaffiliated landlord under a lease which expires on
December 31, 2007 at a monthly rent of $30,636 and effective August 1, 1997, and
thereafter to be adjusted based on certain indices. The Company is responsible
for payment of real estate taxes, which are approximately $45,000 per year, and
maintenance costs which approximate $30,000 per year. The Company has an option
to extend the lease for a seven year period at the expiration of the lease.
ITEM 3. LEGAL PROCEEDINGS
On December 4, 1995, Mobil Oil Corporation ("Mobil") filed suit against
the Company in the U.S. District Court for the District of Delaware, Civil
Action No. 95-737. Mobil also named Inteplast Corporation and Integrated Bagging
Systems Corporation as defendants in this matter. Mobil has alleged that the
Company has infringed on Mobil's rights under U.S. Patent No. Re. 34,019 (the
"Patent"), regarding the manufacture of plastic carrying bags known as "T-shirt
bags." Subsequently, the Company filed a counter claim against Mobil for patent
infringement. In December 1996, Mobil and the Company settled this patent
litigation by mutual agreement.
The Company is involved in pending commercial legal proceedings that
the Company does not consider to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended February 28, 1997, through the
solicitation of proxies or otherwise.
-16-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded on the National Association
of Securities Dealers Automated Quotation National Market System ("NASDAQ/NMS")
since October 12, 1992. Prior to October 12, 1992, the Company's Common Stock
was traded on the over-the-counter market through the National Association of
Securities Dealers Automated Quotation System ("NASDAQ").
As of June 10, 1997, the Company had 224 holders of record of its
Common Stock and 38 stockholders of record for its Series A Convertible
Preferred Stock. Management believes that there are approximately 4,500 to 5,000
beneficial owners of the Company's Common Stock and Series A Convertible
Preferred Stock.
For the fiscal quarters reported below, the following table sets forth
the range of high and low sale quotations for the Common Stock for the relevant
periods as reported by NASDAQ/NMS. Such quotations represent inter-dealer
quotations without adjustment for retail markups, markdowns or commissions and
may not represent actual transactions.
<TABLE>
<CAPTION>
High Sale Low Sale
--------- --------
<S> <C> <C>
COMMON STOCK
Fiscal Year 1996
First Quarter............................................ $ 4.875 $ 3.50
Second Quarter .......................................... $ 4.00 $ 2.875
Third Quarter ........................................... $ 3.00 $ 1.875
Fourth Quarter .......................................... $ 2.50 $ 1.25
Fiscal Year 1997
First Quarter ............................................ $ 4.25 $ 1.375
Second Quarter............................................ $ 3.625 $ 1.625
Third Quarter............................................. $ 3.6875 $ 1.8125
Fourth Quarter............................................ $ 2.3125 $ 1.625
Fiscal Year 1998
First Quarter............................................. $1.96875 $1.5625
Second Quarter (through June 10, 1997).................... $1.875 $1.53125
</TABLE>
-17-
DIVIDENDS
The Company has not paid any cash dividends on its Common Stock since
inception and does not anticipate the payment of cash dividends on its Common
Stock in the foreseeable future. It is expected that any earnings which may be
generated from operations, after payment of dividends on the Company's Series A
and B classes of Preferred Stock, will be used to finance the growth of the
Company. Dividends on each of these classes of Preferred Stock are
non-cumulative.
The Company's current revolving line of credit loan arrangement
prohibits the payment of dividends (in cash or other property, except for the
Company's stock) on the Company's securities. However, the Company may make
dividend payments to its preferred stock, provided that the Company is not in
default on any covenants of its loan agreement at the time of such payments.
ITEM 6. SELECTED FINANCIAL DATA
The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
<TABLE>
<CAPTION>
Year
Ended Years Ended
------------ -----------------------------------------------------------------
February 28, February 23, February 24, February 25, February 26,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
STATEMENT OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net sales ................. $30,810,037 $28,839,954 $25,254,645 $16,754,056 $16,734,796
Cost of goods sold ........ 29,254,754 26,161,723 19,879,041 12,831,497 14,271,717
------------ ------------ ------------ ----------- -----------
Gross profit .............. 1,555,283 2,678,231 5,375,604 3,922,559 2,463,079
Selling, general and
administrative expense .. 7,318,352 6,370,956 5,029,832 3,746,227 3,837,148
Write-down of impaired assets
and related expenses 5,897,648 -- -- -- --
Restructuring charge....... -- -- -- -- 5,059,618
Income (loss) from
operations .............. (11,660,717) (3,692,725) 345,772 176,332 (6,433,687)
Interest and other
expense ................. 1,112,647 817,420 280,445 166,843 260,085
Other income .............. 9,133 -- 77,104 -- --
Non-recurring charges ..... -- -- (989,917) -- --
Income (loss) before
minority interest and
extraordinary items ..... (12,764,231) (4,510,145) (847,486) 9,489 (6,693,772)
Minority interest in
net (income) loss of
consol. subsidiaries..... -- -- -- (10,092) 12,100
Net loss .................. (12,764,231) (4,510,145) (847,486) (603) (6,681,672)
Loss per share............. (.96) (.38) (.08) 0.00 (1.04)
Weighted average shares
outstanding.............. 13,261,815 11,756,532 10,670,040 8,523,580 6,414,020
</TABLE>
-18-
<TABLE>
<CAPTION>
At At At At At
February 28, February 23, February 24, February 25, February 26,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
BALANCE SHEETS DATA:
<S> <C> <C> <C> <C> <C>
Total assets ..............$29,247,231 $ 35,277,975 $ 35,341,925 $ 25,222,929 $19,782,729
Long term obligations .....$ 3,809,241 $ 5,441,057 $ 4,495,692 $ 2,183,939 $ 961,719
Redeemable preferred
stock ...................$ --- $ 183,369 $ 183,369 $ 183,369 $ 183,369
Working capital (deficit)..$(5,819,144) $ (2,767,867) $ 3,909,634 $ 2,048,842 $(3,091,420)
Stockholders' equity.......$11,544,675 $ 19,768,971 $ 24,048,204 $ 17,618,729 $11,168,156
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
For the year ended February 28, 1997 ("Fiscal 1997"), the Company had
sales of $30,810,037 as compared to sales of $28,839,954 for the year ended
February 23, 1996 ("Fiscal 1996"), an increase of 6.8%.
The Company's core bag and film business (manufacture, sale and
marketing of traditional plastic grocery carryout bags and proprietary plastic
carryout bags of "T-shirt sack" design and plastic film products) had sales of
$28,607,359 in Fiscal 1997 compared to $26,439,203 in Fiscal 1996, an increase
of 8.2%.
Sales of the Company's proprietary bag products (FRESH-SAC(R) T-shirt
sack produce bag, HANDI-SAC(TM)and MAXI-SAC(TM)) and film products were
$12,035,704 in Fiscal 1997 compared to sales of $9,412,415 in Fiscal 1996, an
increase of 27.9%. Sales of traditional products decreased to $16,571,656 in
Fiscal 1997 from $17,026,788 in Fiscal 1996, a decrease of 2.7%. . BPI
Packaging, Inc. did not have any sales of products purchased from Integrated
Bagging Systems Corporation in Fiscal 1997 compared to sales of $416,255 in
Fiscal 1996. RC America, Inc.'s net sales were $2,067,746 in Fiscal 1997
compared to $1,984,496 in Fiscal 1996, an increase of 4.2%. RC America, Inc.'s.
sales may fluctuate significantly from year to year due to the nature of its
business and the timing of transactions. Market Media, Inc. recorded sales of
$134,932 during Fiscal 1997.
In Fiscal 1997, cost of goods sold was $29,254,754 or 95.0% of sales,
as compared to cost of goods sold in Fiscal 1996 of $26,161,723 or 90.7% of
sales. The increase in cost of goods sold as a percentage of sales was due
primarily to an increase in material costs relative to the selling prices of the
Company's products. Cost of goods were increased approximately $1,250,000 for
the establishment of reserves for exiting the traditional grocery T-shirt
carryout bag business and a loss of $1,125,734 on the sale of reprocessed resin
accumulated during plant start-up.
Selling, general and administrative expense for Fiscal 1997 was
$7,318,352 or 23.7% of sales as compared to selling, general and administrative
expense of $6,370,956 in Fiscal 1996, or 22.1% of sales. The increase is
primarily related to increased shipments (freight and related expenses are
included in SG&A), sales and marketing activity for proprietary bag and film
products and in-store advertising and promotion products, as well as start-up
costs for Market Media, Inc.
-19-
Fiscal 1997 interest expense increased to $1,112,647 or 3.6% of net
sales as compared to $865,206 in Fiscal 1996, or 3.0% of net sales. The increase
in interest expense was due to increased borrowing activity related to purchases
of equipment and higher rates of interest on the credit line.
The net loss of $12,764,231 in Fiscal 1997 as compared to a loss of
$4,510,145 in Fiscal 1996 was caused primarily by the write down of capital
equipment and other assets as a cost of exiting the traditional grocery carryout
bag business of $5,897,648, the establishment of inventory and other reserves of
$1,507,000 and increased cost of goods sold because of a loss of $1,125,734 on
the sale of reprocessed resin accumulated during plant start-up. These
non-recurring expenses total $8,530,382. Also, increased selling, general and
administrative expense and an increase in interest expense contributed to the
loss. (The non-cash expense of depreciation and amortization was $3,417,849 for
Fiscal 1997 compared to $2,643,138 for Fiscal 1996.)
The Company incurred a loss of $.96 per share in Fiscal 1997 as
compared to a loss of $.38 per share in Fiscal 1996.
Operating profits (loss) for the various business units are as follows:
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1996
----------- -----------
<S> <C> <C>
Proprietary, traditional and film products ($ 9,079,854) ($1,695,855)
RC America, Inc. 53,591 51,328
BPI Packaging, Inc. (2,205) 54,505
Market Media, Inc. (809,199) (585,687)
Unallocated corporate overhead (1,823,050) (1,517,016)
---------- ----------
Operating profit (loss) ($11,660,717) ($3,692,725)
Interest expense, net (1,103,514) (817,420)
---------- ----------
Net loss ($12,764,231) ($4,510,145)
============ ===========
</TABLE>
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
For the year ended February 23, 1996 ("Fiscal 1996"), the Company had
sales of $28,839,954 as compared to sales of $25,254,645 for the year ended
February 24, 1995 ("Fiscal 1995"), an increase of 14.2%.
The Company's core bag and film business (manufacture, sale and
marketing of traditional plastic grocery carryout bags and proprietary plastic
carryout bags of "T-shirt sack" design and plastic film products) increased
significantly during Fiscal 1996. Sales of the Company's core products of bags
and film were $26,439,203 in Fiscal 1996 compared to $18,894,246 in Fiscal 1995,
an increase
-20-
of 40%.
Sales of the Company's proprietary bag products (FRESH-SAC(R) T-shirt
sack produce bag, HANDI-SAC(TM)and MAXI-SAC(TM)) and film products were
$9,412,415 in Fiscal 1996 compared to sales of $7,408,297 in Fiscal 1995, an
increase of 27.1%. Sales of traditional products increased to $17,026,788 in
Fiscal 1996 from $11,485,949 in Fiscal 1995, an increase of 48.2%. BPI
Packaging, Inc.'s sales of products purchased from Integrated Bagging Systems
Corporation were $416,255 in Fiscal 1996 compared to sales of $2,148,539 in
Fiscal 1995, a decrease of 80.6%. Due to the pricing structure and poor margins
on these products, the Company did not allocate sales and marketing resources to
BPI Packaging, Inc. RC America, Inc.'s sales were $1,984,496 in Fiscal 1996
compared to $4,211,860 in Fiscal 1995, a decrease of 52.9%. RC America, Inc.'s.
sales may fluctuate significantly from year to year due to the nature of its
business and the timing of transactions.
In Fiscal 1996, cost of goods sold was $26,161,723 or 90.7% of sales,
as compared to cost of goods sold in Fiscal 1995 of $19,879,041, or 78.8% of
sales. The increase in cost of goods sold as a percentage of sales was due
primarily to an increase in material costs relative to the selling prices of the
Company's products. Several factors contributed to this result: (i) in the third
quarter of Fiscal 1996, a proprietary bag program to which the Company had
allocated more than 25% of its manufacturing capacity was cancelled by a major
retail chain. The manufacturing capacity released by the program cancellation
was partially replaced with lower margin traditional grocery T-shirt sacks which
have higher material costs compared to proprietary products as a percentage of
the selling price; (ii) the material cost component of inventory was revalued
downward because of declining raw material prices. Inventories increased during
a time of rising raw material prices and were at relatively high levels at the
end of the fiscal year resulting in a significant revaluation caused primarily
by a decline in raw material prices; and (iii) in Fiscal 1996, sales of
traditional products increased by 48.2% compared to an increase in sales of
proprietary products of 28.5% resulting in an unfavorable product mix which had
higher material costs relative to selling prices.
Selling, general and administrative expense for Fiscal 1996 was
$6,370,956 or 22.1% of sales as compared to selling, general and administrative
expense of $5,029,832 in Fiscal 1995, or 19.9% of sales. The increase in expense
and increase as a percentage of sales relates to sales and marketing personnel
hired in late Fiscal 1995 and in Fiscal 1996 to expand the Company's sales and
marketing activities into bag and film markets not previously serviced by the
Company. Sales and marketing costs related to the start up of Market Media, Inc.
of $585,687 and an additional loss on the disposition of the Taunton plant
assets of $140,504 both contributed to the increase in expense.
The operating loss of $3,692,725 in 1996 as compared to a profit of
$345,772 in 1995 was caused primarily by the increase of cost of goods sold as a
percentage of sales due primarily to an increase in material costs relative to
the selling prices of the Company's products and an increase in selling, general
and administrative expense.
Fiscal 1996 interest expense increased to $865,206 or 3.0% of net sales
as compared to $316,813 in Fiscal 1995, or 1.3% of net sales. The increase in
interest expense was due to increased borrowing activity related to purchases of
equipment and increased credit line activity.
-21-
In Fiscal 1996, the Company realized interest income of $47,786 as
compared to interest income of $36,368 in Fiscal 1995. In Fiscal 1995, the
Company also recognized other income of $77,104 in connection with a favorable
settlement of a vendor liability.
The net loss of $4,510,145 in 1996 as compared to a loss of $847,486 in
1995 was caused primarily by an increase in cost of goods sold, an increase in
selling, general and administrative expense and an increase in interest expense.
The loss in 1995 included a non-recurring charge of $989,917 from the sale of
assets associated with its former Taunton manufacturing plant.
The Company incurred a loss of $.38 per share in Fiscal 1996 as
compared to a loss of $.08 per share in Fiscal 1995.
Operating profits (loss) for the various business units are as follows:
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995
----------- -----------
<S> <C> <C>
Proprietary, traditional and film products ($1,695,855) $1,436,178
RC America, Inc. 51,328 342,725
BPI Packaging, Inc. 54,505 725
Market Media, Inc. (585,687) ----
Unallocated corporate overhead (1,517,016) (1,433,856)
----------- -----------
Operating profit (loss) ($3,692,725) $ 345,772
Interest expense, net (817,420) (280,445)
Other income ---- 77,104
Non-recurring charge ---- (989,917)
----------- -----------
Net loss ($4,510,145) ($ 847,486)
=========== ==========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since its initial public offering in October 1990, the Company has
generated funds to finance its activities through both public sales and private
placements of its securities, as well as bank loans, equipment lease financing
and cash from operations.
-22-
NOTE PAYABLE
On November 25, 1996, the Company refinanced its bank line of credit
with a new lending institution. The new revolving line of credit is $8,000,000
secured by accounts receivable and inventory and all other assets except for
equipment. Availability of borrowings under the line of credit is determined by
calculations of the borrowing base, as specifically defined in the loan and
security agreement, but generally means 85% of qualifying accounts receivable
and 40% of eligible inventories less the aggregate amount of all outstanding
commercial and standby letters of credit. The line of credit bears interest at
1.5% above the variable interest rate quoted by Norwest Bank of Minnesota with a
minimum rate of 8.0 (9.75% at February 28, 1997) and provides for a 1/2 of 1%
unused line fee. The credit line is for five years and is subject to renewal
annually. The line of credit includes certain financial covenants that the
Company must maintain to avoid a default including current ratio, debt to
equity, maintaining a net worth of $14 million and profitability. At February
28, 1997, the balance under the line of credit was $3,733,477 which was the
maximum available . Management believes that its current line of credit together
with anticipated cash from operations will be sufficient to fund the Company's
current operations. (See Cash Flow)
SALES OF SECURITIES
During Fiscal 1997, the Company received additional equity funding
through the sale of Common Stock from a Regulation S and a Regulation D
offering, the exercise of underwriters warrants and the exercise of its Class B
Common Stock Purchase Warrants. The Company received net proceeds of $4,384,835
from the sale of an aggregate of 2,121,861 shares of Common Stock and 100,000
shares of Series A Preferred Stock. The proceeds were used to purchase
equipment, for general corporate purposes and the reduction of bank debt. The
Company is presently negotiating additional financing through the sale of equity
or debt securities to pay for all or part of the planned increase in capacity at
the Dighton facility during the Fiscal 1998 as well as to increase general
working capital. The Company has no commitments for such financing, and no
assurance can be given that additional financings will be successfully completed
or that such financing will be available on terms favorable to the Company, if
at all.
EQUIPMENT AND LEASE FINANCING
From March 1994 through February 1997, the Company acquired through
purchase or lease approximately $19.7 million in additional equipment to
increase manufacturing capacity and efficiency and to expand the Company's
product line. This equipment was financed from the sale of equity securities and
from equipment lease financing and bank loans.
The Company currently has commitments to purchase $275,000 of
additional equipment. Management intends to finance the purchase of the new
equipment primarily through equipment lease financing. No assurance can be given
that the Company will be able to obtain new equipment financing through banks or
equipment lessors.
DISPOSITION OF TAUNTON ASSETS
At February 24, 1995, Plasco East Partnership, a Massachusetts general
partnership of corporations ("Plasco") owed the Company $1,824,917 for
manufacturing equipment it sold or
-23-
subleased to Plasco. A reserve of $989,917 was established in Fiscal 1995
resulting in a non-recurring charge for $989,917 and a net note receivable
balance of $835,000. In April 1995, the Company, through an independent
auctioneer, conducted an auction of the equipment originally sold to Plasco and
received proceeds of $650,000. An additional $65,000 was received in December
1995 from a third party guarantor. The remaining loan balance, plus additional
costs incurred during Fiscal 1996, were offset against the reserve resulting in
an additional loss of $140,504 for Fiscal 1996, which is included in selling,
general and administrative expenses.
CASH FLOW
During Fiscal 1997, the Company generated $3,417,849 from depreciation
and amortization, $103,922 from the return of lease deposits net, and $4,384,835
from the sale of Common Stock. The Company also raised $3,218,584 from an
increase in accounts payable and $84,372 from a reduction in accounts
receivable. The Company used $1,549,878 to purchase equipment and for plant
improvements and $1,945,014 was used to make principal payments on capital lease
obligations. At February 28, 1997, stockholders' equity was $11,544,675 as
compared to $19,768,971 at February 23, 1996. The Company's current ratio
deteriorated from 0.73:1 at February 23, 1996 to 0.58:1 at February 28, 1997.
The net book value of property and equipment decreased from $24,314,649 at
February 23, 1996 to $19,803,337 at February 28, 1997.
To date, the Company has generated cash flows from income, including
depreciation, financing activities, including sales of equity securities, lines
of credit, term loan facilities, equipment leasing arrangements and loans from
raw material suppliers. The Company is presently negotiating a $2.0 to $5.0
million debt and/or equity financing to increase general working capital and
provide funds for deposits on equipment. Management believes that upon the
completion of the $2.0 to $5.0 million financing, fixed asset or lease financing
will be available at competitive rates from banks and leasing companies to
finance a substantial part of the planned $0.5 million to $3.5 million increase
in capacity at the Dighton facility during Fiscal 1998, and that its current
revolving line of credit together with anticipated cash from operations will be
sufficient to fund the Company's current operations. If the $2.0 to $5.0 million
financing is not completed, management believes that the working capital ratio
of 0.58:1 at February 28, 1997 is too low for efficient operations. The low
working capital ratio has resulted in cash flow discontinuities in the first
quarter of Fiscal 1998 and the result has been that defaults have ocurred on
some leases, and certain trade accounts payable are past due. Management
believes that any lease defaults can be corrected upon the completion of the
present financing. The Company has no commitments for such financing, and no
assurance can be given that additional financings will be successfully completed
or that such financing will be available or, if available, will be on terms
favorable to the Company. Exiting the traditional grocery T-shirt sack product
lines will result in cost reductions estimated to be $6.0 million annually. In
the event that the present financing is not completed, the annual $6.0 million
savings combined with the Company's anticipated growth of its proprietary bag
and film products in Fiscal 1998 will, in management's opinion, provide the
necessary cash flows for the Company to continue its operations but such cash
flows will not be sufficient to support the Company's Fiscal 1998 business plan
and meet its sales and profit objectives.
-24-
RC AMERICA, INC.
Effective February 26, 1994, Ronald Caulfield exchanged his 49,500
shares of Common Stock of RC America, Inc. for 200,000 shares of the Company's
Common Stock, pursuant to the terms of a Stock Exchange Agreement by and between
the Company and Ronald Caulfield (the "RC Agreement"). As a result, RC America,
Inc. is now a wholly owned subsidiary of the Company. The RC Agreement also
provides for the issuance to Ronald Caulfield of up to an additional 100,000
shares of the Company's Common Stock over a five (5) year period based on RC
America, Inc. attaining certain levels of pre-tax earnings. Based on the
operating results of RC America, Inc. for Fiscal Year 1997, a total of 2,640
shares of Common Stock were earned and issued to Mr. Ronald Caulfield in April
1997. For Fiscal 1996 and 1995, 2,550 and 17,400 shares, respectively of the
100,000 shares of Common Stock were issued to Mr. Ronald Caulfield. The RC
Agreement contains certain demand and piggy-back registration rights for the
shares.
The value of the stock issued pursuant to the RC Agreement exceeded the
book value of the assets acquired and the Company has recognized goodwill of
$800,000 which is being amortized over a ten year period. Issuance of the 17,400
shares of Common Stock resulted in an additional $71,862 of goodwill. Issuance
of the 2,550 and 2,640 shares of Common Stock resulted in additional goodwill of
$5,100 and $4,290, respectively.
IMPACT OF INFLATION
Inflation during the last three fiscal years has not had a significant
effect on the Company's activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 below and the Index therein for a listing of the financial
statements and supplementary data filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No change in the Company's independent accountants occurred during the
Company's two most recent fiscal years, nor did any disagreements occur on any
matter of accounting principles or practices or financial statement disclosure
that would be required to be reported on a Form 8-K.
-25-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The directors and executive officers of the Company, their positions
held in the Company, and their ages are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Dennis N. Caulfield 58 Chairman of the Board of
Directors and Chief
Executive Officer
C. Jill Beresford 43 President, Treasurer and Director
Paul J. Decristofaro 49 Chief Financial Officer
Alex F. Vaicunas 69 Vice President, Film Sales
Gregory M. Davall 41 Vice President, Office of the
Chairman
Ronald V. Caulfield 55 Chief Executive Officer and
President of RC America, Inc.
and Director
David N. Laux 69 Director
Ivan J. Hughes 68 Director
</TABLE>
C. Jill Beresford, the Company's President and Gregory M. Davall, the
Company's Vice President, Office of the Chairman, are spouses. Dennis N.
Caulfield, the Company's Chief Executive Officer, and Ronald V. Caulfield,
President of RC America, Inc., are brothers. Except for such relationships, no
director or executive officer is related by blood, marriage or adoption to any
other director or executive officer.
The Company's Certificate of Incorporation and Bylaws, each as amended,
provide that the members of the Board of Directors (the "Board") shall be
classified as nearly as possible into three classes, each with, as nearly as
possible, one-third of the members of the Board. A classified board is designed
to assure continuity and stability in the Board's leadership and policies.
Dennis N. Caulfield and Ivan J. Hughes are classified as Class I directors and
serve until the 1998 Annual Meeting; David N. Laux and C. Jill Beresford are
classified as Class II directors and serve until the 1997 Annual Meeting; and
Ronald V. Caulfield is classified as Class III director and serves until the
1999 Annual Meeting. The successors to the class of directors whose terms expire
at an annual meeting would be elected for a term of office to expire at the
third succeeding annual meeting after
-26-
their election and until their successors have been duly elected by the
stockholders. Directors chosen to fill vacancies on a classified board shall
hold office until the next election of the class for which directors shall have
been chosen, and until their successors are duly elected by the stockholders.
Officers are elected by and serve at the discretion of the Board of Directors,
subject to their employment contracts.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires executive officers and Directors, and persons who beneficially own more
than ten percent (10%) of the Company's stock, to file initial reports on Form
3, reports of changes in ownership on Form 4 and annual statements of changes in
beneficial ownership on Form 5 with the Securities and Exchange Commission
("SEC") and any national securities exchange on which the Company's securities
are registered. Executive officers, Directors and greater than ten percent (10%)
beneficial owners are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the
Company and written representations from the executive officers and Directors,
the Company believes that all Section 16(a) filing requirements applicable to
its executive officers, Directors and greater than ten percent (10%) beneficial
owners were complied with for Fiscal 1997.
The following is a brief account of the business experience of each
officer and director of the Company:
DENNIS N. CAULFIELD. Mr. Caulfield has been Chairman of the Board of
Directors and Chief Executive Officer of the Company since May 1990 and a
Director of the Company since March 1989. From March 1989 to March 1990, Mr.
Caulfield provided consulting services to the Company. From 1984 to 1988 he was
Chairman of the Board of Directors and Chief Executive Officer of Northeast
Precision Feed Screw, Inc., a manufacturer of plastics processing equipment. Mr.
Caulfield was Chairman and Chief Executive Officer of Synthetic Materials
Corporation, a processor of thermoplastics, from 1979 to 1984. Mr. Caulfield
received a Bachelor of Arts degree in Political Science and a Master of Arts
degree in Economics from the University of Connecticut. Mr. Caulfield is the
brother of Ronald V. Caulfield, the Chief Executive Officer and President of RC
America, Inc. and a Director of the Company
C. JILL BERESFORD. Ms. Beresford has been the Company's President since
July 1996. She has been Treasurer of the Company since May 1990 and a Director
of the Company since March 1989. From May 1990 to July 1996, she was the Vice
President of Marketing. From 1987 to 1989, Ms. Beresford was President of CJB
Communications, a communications consulting firm involved in marketing,
advertising and public relations. From 1982 to 1987, Ms. Beresford was a Vice
President of Grey Canada, a marketing and communications firm, with
responsibility for marketing, advertising, and public relations programs for
Grey Canada's clients. Since 1984, Ms. Beresford has been a director of
Beresford-Canada. Ms. Beresford attended the University of Guelph, Ontario,
Canada and received a Masters degree in Business Administration from Boston
University. Ms. Beresford is a 100% shareholder of Beresford-Canada. Ms.
Beresford is the wife of Gregory M. Davall, the Company's Vice President, Office
of the Chairman.
-27-
PAUL J. DECRISTOFARO. Mr. Decristofaro is a certified public accountant
and has been the Company's Chief Financial Officer since January 1997. From 1991
to 1996, Mr. DeCristofaro served as Chief Financial Officer to Carol Gavazzi,
Inc., a privately held company that designs and manufactures custom computer
enclosures, peripherals and electronic components. From 1980 to 1991, Mr.
DeCristofaro served as Vice President of Finance and Chief Financial Officer for
Hersey Products, Inc., a privately held manufacturer of liquid measurement and
control devices. Mr. DeCristofaro received a Bachelor of Science degree in
Accounting from Stonehill College, a Masters of Science degree in Taxation from
Bentley College and a Masters degree in Business Administration from
Northeastern University.
ALEX F. VAICUNAS. Mr. Vaicunas has been the Company's Vice President ,
Film Sales since 1996. From 1988 to 1996 he was the Company's Vice President of
Sales. From 1985 to 1987, he was Vice President of Sales and a consultant to
Surrey Industries, Inc., the manufacturer whose business was acquired by the
Company in 1988. From 1973 to 1985, Mr. Vaicunas was Sales Manager in the
flexible film packaging markets for the Plastic Products Group of Union Camp
Corporation. Mr. Vaicunas previously held senior sales management positions at
Northern Petro Chemical and Philips Petroleum Corporation and has over 30 years
of experience in the marketing and sales of flexible film packaging.
GREGORY M. DAVALL. Mr. Davall has been the Company's Vice President,
Office of the Chairman, since March 1997, and previously served as the Vice
President of Manufacturing from May 1992 to March 1997. Mr. Davall was a
director of the Company from February 1994 to March 1997. Mr. Davall has 18
years experience in manufacturing and process engineering. From 1986 through
April 1992, Mr. Davall was employed in various capacities at Pacific Scientific,
Inc., a manufacturer of factory and office automation equipment, including Vice
President of Manufacturing and Director of Operations. From 1978 to 1986, Mr.
Davall served in various engineering capacities at Martin Marietta Energy
Systems. Mr. Davall received a Bachelor of Science degree in Mechanical
Engineering from Bucknell University, where he also engaged in postgraduate
studies in mechanical engineering and received a Masters in Business
Administration from Boston University. Mr. Davall is the husband of C. Jill
Beresford, the Company's President, Treasurer and a Director of the Company.
RONALD V. CAULFIELD. Mr. Caulfield has served as a Director of the
Company since June 1994. Mr. Caulfield has been the Chief Executive Officer and
President of RC America, Inc. since November 1992. From March 1989 to October
1992, Mr. Caulfield was the Vice President of Purchasing for F&F Merchandising
Company, a privately owned wholesale company, where he was principally
responsible for negotiating the purchase of nationally advertised brand name
close outs direct from the manufacturer. From February 1988 to March 1989, he
was the Executive Vice President of Mars Stores, Inc., a publicly held retail
discount store company. In this capacity, Mr. Caulfield was responsible for
establishing and achieving business plans for all buying, marketing and store
operations activities. From 1971 to 1988, Mr. Caulfield was employed in various
capacities at Caldor, Inc., a publicly owned discount store company, serving
lastly as the Vice President, Divisional Merchandise Manager and as a member of
the Operating Committee. Mr. Caulfield attended the University of Connecticut.
Mr. Caulfield is the brother of Dennis N. Caulfield, the Company's Chief
Executive Officer and Chairman of the Board of Directors.
-28-
DAVID N. LAUX. Mr. Laux has served as a Director of the Company since
January 1993. Since 1990, Mr. Laux has been President of the USA-ROC Economic
Council, a private non-profit association which promotes business relations
between the United States and Taiwan. From 1986 to 1990, Mr. Laux was Chairman
and Managing Director of the American Institute of Taiwan, a non- profit
corporation under contract to the United States Department of State to manage
commercial, cultural and other relations between the United States and Taiwan.
From 1982 to 1986, Mr. Laux was Director of Asian Affairs for the National
Security Council in the White House and prior to that held appointments at the
Department of Commerce, the Department of Treasury and other United States
Government agencies, primarily in Asian affairs. Mr. Laux is a Trustee of the
ROC Taiwan Fund. Mr. Laux received his Bachelor of Arts from Amherst College and
his Master of Business Administration from The American University in
Washington, D.C. and he has done graduate work at the University of California
(Berkeley) and Georgetown University. Mr. Laux is also a graduate of the
Advanced Management Program at Harvard Business School.
IVAN J. HUGHES. Mr. Hughes has served as a Director of the Company
since March 1996. Since 1991, Mr. Hughes has been the President of the Plastic
Division of Duro Bag Manufacturing Company, a privately held company which
manufactures grocery bags, shopping and specialty bags as well as plastic bags
for the food and retail industry. Mr. Hughes has been employed by Duro Bag in
various positions for the past 32 years. Mr. Hughes received a Bachelor of
Science in Mechanical Engineering at Lafayette College and completed his
graduate studies at Columbia University.
-29-
SIGNIFICANT EMPLOYEES
The Company also employs the following significant employees:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Peter J. Bertolami 54 National Accounts Manager,
Traditional T-shirt bag products
Steven J. Fabrizio 49 Sales Manager,
Traditional T-shirt bag products
Richard H. Nurse, Ph.D. 52 Vice President of Technical
Development
Tracy L. McGrath 32 Marketing Manager, Convenience Stores
Vadim Radunsky 31 Engineering Manager
Edward Rossi 47 Controller
Paul A. Wallace, III 55 National Sales Manager,
Convenience Stores
Richard M. Wile 54 Field Service Manager
</TABLE>
PETER J. BERTOLAMI. Mr. Bertolami has been the Company's National
Accounts Manager since June 1990. From 1985 to 1990, Mr. Bertolami was a Vice
President of McPherson Corporation, a commercial real estate brokerage company.
From 1984 to 1985, Mr. Bertolami was a principal for Surge, Inc., a distributor
of the Biomed total knee and total hip replacement products. Mr. Bertolami has a
Bachelor of Science degree in Marketing from Boston College.
STEVEN J. FABRIZIO. Mr. Fabrizio has been the Company's General Sales
Manager since November 1995. From 1994 to 1995, Mr. Fabrizio was a
broker/consultant in the flexible film industry. From 1990 to 1994, Mr. Fabrizio
was the General Sales Manager, Eastern Region, for Gaylord Bag, a publicly held
company that manufactures kraft paper and paper packaging. From 1986 to 1990,
Mr. Fabrizio was Regional Sales Manager for the southwest region for Stone
Container Corporation, a vertically integrated manufacturer of paper packaging.
From 1972 to 1986, Mr. Fabrizio was base Training Instructor for Eastern
Airlines, Inc. Mr. Fabrizio graduated from Hawthorne College, where he majored
in psychology.
RICHARD H. NURSE, PH.D. Dr. Nurse has been the Company's Vice President
of Technical Development since January 1995. Since 1989, Dr. Nurse has been an
independent consultant to the plastics industry. From 1987 to 1988, Dr. Nurse
was the Director of Research and Development for Cookson Performance Plastics, a
plastics additive manufacturer. From 1985 to 1987, Dr. Nurse was a Technical
Manager for Nortech Company, a plastics additive manufacturer. From 1979 to
1985, Dr. Nurse was the Manager of Technical Service and Applications
Development for American
-30-
Hoechst Corp., a plastics resin manufacturer. Dr. Nurse received a Ph.D. degree
in Polymer Technology from the University of Manchester Institute of Science and
Technology in England and a Bachelor of Science degree in Chemical and Plastics
Technology from the Polytechnic of South Bank in England.
TRACY L. MCGRATH. Ms. McGrath has been the Company's Marketing Manager
since November 1993. From 1988 to 1993, Ms. McGrath was employed at WFSB TV/3 in
Hartford, Connecticut, first as Promotion Coordinator, then as Sales Service
Coordinator, and then as a Research Assistant. Ms. McGrath has a Bachelor of
Science degree in Communications from Eastern Connecticut State University.
VADIM RADUNSKY. Mr. Radunsky has been the Company's Engineering Manager
since August, 1992. From 1990 to 1992, Mr. Radunsky was employed as a Process
Engineer at Unitrode Corp, Watertown, Massachusetts and from 1989 to 1990, Mr.
Radunsky was employed as a Mechanical Engineer at the Institute of Organice
Dyes, Moscow, USSR and from 1987 to 1989, Mr. Radunsky was employed as a piping
designer at Moscow Chemical Plant, Moscow, USSR. Mr. Radunsky received has a
Bachelor of Science degree in Mechanical Engineering from the Institute of
Chemical Engineering, Moscow, USSR .
EDWARD ROSSI. Mr. Rossi is a certified public accountant and has been
the Controller of the Company since January 1995. From 1988 to 1994, Mr. Rossi
was the Corporate Controller for Sentinel Products Corp., a private corporation
that manufactures cross linked polyethylene foam and rubber products. From 1981
to 1988, Mr. Rossi was Controller for Seltel, Inc., a television advertising
representative firm. Mr. Rossi worked for Gulf & Western Industries, Inc. (now
Paramount Communications) from 1977 to 1981, first as an Internal Audit
Supervisor and then as Division Controller for an export sales division. From
1972 to 1976, Mr. Rossi worked for Coopers & Lybrand as a supervisor and senior
accountant. Mr. Rossi received a Bachelor of Science degree from Rider
University.
PAUL A. WALLACE, III. Mr. Wallace has been the Company's National Sales
Representative since June 1995. From 1990 to 1995, Mr. Wallace was a Senior
Account Representative, High Density Film Products Division, Convenience Store
Group for Sonoco Products Company and from 1985 to 1990, Mr. Wallace held other
sales positions in the Sonoco Products Company Convenience Store Group. From
1984 to 1985, Mr. Wallace worked as a Detail Sales Representative for E.R.
Squibb & Sons, where he was responsible for selling pharmaceutical products to
doctors and hospitals. From 1982 to 1983, Mr. Wallace was employed by Geer Drug
Company as a Sales Representative, where he was responsible for selling
pharmaceutical and over-the-counter products to pharmacy chains and independent
drugstores. Mr. Wallace received a Bachelor of Arts degree from the University
of South Carolina.
RICHARD M. WILE. Mr. Wile has been the Company's field service manager
since June 1991. From 1989 to 1991, Mr. Wile was the Company's logistics and
special products manager. From 1984 to 1989, Mr. Wile was a Distribution Center
Manager for Honeywell Bull's national distribution operation. Mr. Wile received
a Bachelor of Science degree in Transportation from Syracuse University.
-31-
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth the compensation paid to the Company's
executive officers with respect to services rendered to the Company during the
Fiscal Years ended February 28, 1997, February 23, 1996 and February 24, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------- ------
(a) (b) (c) (d) (g) (i)
Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary(1) Bonus(2) Options(#) Compensation
--------------------------- ---- --------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Dennis N. Caulfield ................1997 $320,000 $ 0 265,320 $122,220(3)
Chairman of the Board 1996 $320,000 $ 0 265,320 $ 36,174(3)
Chief Executive Officer 1995 $320,000 $ 0 265,320 $ 35,472(3)
C. Jill Beresford ..................1997 $180,000 $ 0 163,224 $ 22,978(4)
President and Treasurer 1996 $180,000 $ 0 163,224 $ 13,989(4)
1995 $180,000 $ 0 163,224 $ 3,108(4)
Alex F. Vaicunas ...................1997 $125,000 $ 0 86,713 $ 780(5)
Vice President of Sales 1996 $125,000 $ 0 86,713 $ 780(5)
1995 $125,000 $ 0 86,713 $ 780(5)
James F. Koehlinger ................1997 $ 89,700 $ 0 0 $ 20,200(6)
Former Chief Financial Officer 1996 $135,300 $ 0 12,500 $ 0
1995 $136,530 $ 0 12,500 $ 0
Gregory M. Davall ..................1997 $125,000 $ 0 86,713 $ 17,826(7)
Vice President of Manufacturing 1996 $125,000 $ 0 86,713 $ 9,582(7)
1995 $125,000 $ 0 86,713 $ 1,140(7)
</TABLE>
(1) Amounts shown indicate cash compensation earned and received by
executive officers; no amounts were earned but deferred at the election
of those officers. Executive officers participate in Company group life
and health insurance. In Fiscal Years 1995-1997, the Company made no
awards of restricted stock.
2) Effective July 1, 1993, Mr. Caulfield, Ms. Beresford, Mr. Vaicunas and
Mr. Davall participate in an executive compensation program which
provides them with an aggregate bonus equal to six percent of the
Company's pre-tax profit for the first $1,000,000 in pre-tax profits in
any fiscal year, and 12% of pre-tax profits in excess of $1,000,000 in
any fiscal year except that in the discretion of the Board of Directors
the bonus will not exceed $750,000 in the aggregate in any fiscal year
beginning with Fiscal 1995. Except for a bonus of $25,000 paid to Mr.
Davall under his old compensation program, described below, no bonuses
were paid for Fiscal 1995, 1996 or 1997 under the new program. See
"MANAGEMENT - Employment Contracts, Termination of Employment and
Change In Control Arrangements."
(3) Effective December 15, 1993, the Company pays approximately $335 and
$990 per month, respectively for two (2) personal term life insurance
policies for Mr. Caulfield and $700 per month for a disability policy
effective February 7, 1994. The Company also makes monthly
-32-
automobile and insurance payments of approximately $980, $980 and $930
for Fiscal 1997, Fiscal 1996 and 1995, respectively, for an automobile
for Mr. Caulfield. The Fiscal 1997 amount includes $73,846 paid for
unused vacation from prior fiscal years and $12,308 for unused vacation
from Fiscal 1997.
(4) Effective December 15, 1993, the Company pays approximately $80 per
month for a personal term life insurance policy for Ms. Beresford and
approximately $190, $190 and $180 per month in Fiscal 1997, Fiscal 1996
and Fiscal 1995, respectively, for a disability policy that became
effective February 7, 1994. Effective November 1, 1995, the Company
also makes monthly automobile and insurance payments of approximately
$790 for an automobile for Ms. Beresford. The amount includes $10,385
and $7,616 of unused vacation pay that was paid in Fiscal 1997 and
1996, respectively.
(5) Effective February 7, 1994, the Company pays approximately $65 per
month for a disability policy. Excludes monthly automobile and
insurance payments from the Company on behalf of Mr. Vaicunas of
approximately $760 for an automobile. Mr. Vaicunas reimburses the
Company for any personal use of the automobile.
(6) After his termination in October 1996 as Chief Financial Officer, Mr.
Koehlinger provided contractual services to the Company for specific
projects.
(7) Effective December 15, 1993, the Company pays approximately $50 per
month for a personal term life insurance policy for Mr. Davall and $45
per month for a disability policy for Mr. Davall effective February 7,
1994. Effective November 1, 1995, the Company also makes monthly
automobile and insurance payments of approximately $790 for an
automobile for Mr. Davall. The amount includes $7,212 and $5,288 of
unused vacation pay that was paid in Fiscal 1997 and 1996.
-33-
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
--- --- --- --- ---
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options Options
Value at FY-End Exercisable/
Shares Acquired Realized Exercisable/ Unexercisable
Name on Exercise ($) Unexercisable ($)(1)
---- --------------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Dennis N. Caulfield ................ 0 0 198,922 / 66,308 0 / 0
C. Jill Beresford .................. 0 0 122,418 / 40,806 0 / 0
Alex F. Vaicunas ................... 0 0 73,356 / 43,357 0 / 0
James F. Koehlinger (2)............. 0 0 0 / 0 0 / 0
Gregory M. Davall .................. 0 0 55,356 / 43,357 0 / 0
</TABLE>
(1) In-the-Money options are those options for which the fair market value
of the underlying Common Stock is greater than the exercise price of
the option. On February 28, 1997, the last day of Fiscal 1997, the fair
market value of the Company's Common Stock underlying the options (as
determined by the last sale price quoted on NASDAQ/NMS) was $1.625.
Since the exercise price of all of the options reflected in this table
is greater than $1.625, the options held by these individuals are not
In-the-Money and are therefore not included in this calculation.
(2) Mr. Koehlinger's options terminated upon his resignation as the
Company's Chief Financial Officer in October 1996.
AUDIT COMMITTEE
The Board of Directors established an Audit Committee on December 31,
1992. The members of the Audit Committee are David N. Laux and Ivan J. Hughes.
The purpose of the Audit Committee is to: (i) review the Company's financial
results and recommend the selection of the Company's independent auditors; (ii)
review the effectiveness of the Company's accounting policies and practices,
financial reporting and internal controls; and (iii) review the scope of
independent audit coverages, the fees charged by the independent auditors, any
transactions which may involve a potential conflict of interest, and internal
control systems.
COMPENSATION OF DIRECTORS
Messrs. Laux and Hughes are paid $1,875 each per calendar quarter. No
other directors receive any compensation. In June 1992 and March 1996, David N.
Laux and Ivan J. Hughes each received options to purchase a total of 7,500
shares of Common Stock at a purchase price of $2.50 and $2.38 per share through
June 9, 2002 and March 24, 2006, respectively. In April 1997, accrued and unpaid
director fees of Messrs. Laux and Hughes were converted into 1,035 and 4,138
shares of the Company's Common Stock, respectively, based on the closing bid
price of the Company's Common Stock on April 25, 1997 of $1.875 as reported by
NASDAQ/NMS.
-34-
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
The Company has entered into employment, non-competition, and
confidentiality agreements with each of Mr. Caulfield, Ms. Beresford, Mr.
Vaicunas and Mr. Davall. Base salaries for Mr. Caulfield, Ms. Beresford, Mr.
Vaicunas and Mr. Davall are $320,000, $180,000, $125,000 and $125,000 per annum,
respectively, subject to periodic review by the Board of Directors. Each of
these agreements expires on June 30, 1998. These agreements provide for
severance payments of 24 months' base salary in the event employment is
terminated without cause and prohibit the individual from competing with the
Company for a period of 24 months following termination of employment with the
Company. In the event of a change of control in the Company, the individuals
have the option to terminate their employment and to receive additional
severance compensation subject to the provisions of their employment agreement.
The Company is the owner and the beneficiary of key-person life insurance on Mr.
Caulfield and Ms. Beresford in the amount of at least $1,000,000 per individual.
Prior to leaving the Company in October 1996, Mr. Koehlinger was paid on a
per-diem basis at a rate of $600 and he participated in health benefits that
were generally available to the Company's employees. The Company has also
entered into non-competition and confidentiality agreements with Mr. Koehlinger
and certain other employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors established a Compensation Committee on December
31, 1992. Members of the Compensation Committee are David N. Laux and Ivan J.
Hughes, the two outside Directors of the Company. None of the executive officers
of the Company have served on the Board of Directors of any other entity that
has had any of such entity's officers serve either on the Company's Board of
Directors or Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF VOTING SECURITIES
The following table sets forth, as of April 29, 1997, certain
information concerning stock ownership of the Company by (i) each person who is
known by the Company to own beneficially 5% or more of the Company's Common
Stock or Series A Convertible Preferred Stock, (ii) each of the Company's
directors, and (iii) all directors and officers as a group. Except as otherwise
indicated, the stockholders listed in the table have sole voting and investment
powers with respect to the shares indicated.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE
OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS(1)(2)
- ------------------- ------------------ --------------
<S> <C> <C>
C. Jill Beresford(3)(4)(5)(6)....................... 1,627,249 11.0%
Dennis N. Caulfield(3)(7)(8)........................ 1,304,506 8.9%
Ronald V. Caulfield(9).............................. 142,590 1.0%
741 Boston Post Road, Suite 101
Guilford, Connecticut 06437
Ivan J. Hughes(10).................................. 74,256 *
Davies and Oak Streets
Ludlow, Kentucky 41016-0250
David N. Laux(11). ................................. 11,572 *
1726 M Street, N.W., Suite 601
Washington, DC 20036
-35-
All Officers and Directors
as a Group (8 persons)(2)(4)(5)(6)
(7)(8)(9)(10)(11)(12)(13).......................... 3,395,629 22.3%
</TABLE>
* Less than one percent.
(1) Pursuant to the rules of the Securities and Exchange Commission, shares
of Common Stock which an individual or group has a right to acquire
within 60 days pursuant to the exercise of options or warrants are
deemed to be outstanding for the purpose of computing the percentage
ownership of such individual or group, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of
any other person shown in the table. This table reflects the ownership
of all shares of Common Stock and the Series A Convertible Preferred
Stock voting as a single class, since each is entitled to one vote per
share.
(2) Except as otherwise noted, does not give effect to the issuance of an
aggregate of 2,378,855 shares of Common Stock issuable upon the
exercise, conversion or issuance of (i) Series B Convertible Preferred
Stock for an aggregate of 146,695 shares of Common Stock; (ii) exercise
of warrants issued to an individual and principals of the placement
agent in the Company's Regulation S offerings for an aggregate of
21,000 shares of Common Stock; (iii) 1,933,750 options granted or
available for grant under the Company's 1990, 1993 and 1996 Stock
Option Plans; (iv) up to 77,410 additional shares issuable in
connection with the acquisition of the interest of a minority
shareholder of RC America, Inc. (the "RC America Stock"); and (v)
200,000 shares of Common Stock issuable upon the exercise of warrants
issued to financial consultants of the Company, subject to adjustments.
(3) These individuals may be reached at the Company's headquarters located
at 455 Somerset Avenue, North Dighton, Massachusetts 02764.
(4) Includes 1,314,130 shares of Common Stock and 146,695 shares of Series
B Convertible Preferred Stock. C. Jill Beresford owns 100% of the
outstanding voting stock of Beresford-Canada. Ms. Beresford may be
deemed to be a "parent" and "promoter" of the Company within the
meaning of the rules and regulations of the Securities and Exchange
Commission.
(5) Includes 3,200 shares of Common Stock held jointly by Ms. Beresford and
Mr. Davall.
(6) Includes 163,224 shares of Common Stock issuable upon the exercise of
an option at a price of $2.50 per share at any time prior to the
expiration date which is June 30, 2003. Effective April 28, 1997, the
exercise price of this option was repriced from $4.00 to $2.50.
(7) Consists of all shares of the Company held by Kingsley Associates, Ltd.
("Kingsley"). Mr. Caulfield owns 50% of the shares of Kingsley and the
remaining 50% interest in Kingsley is held by trusts for the benefit of
Mr. Caulfield's children, in which Mr. Caulfield disclaims any
beneficial interest. Mr. Caulfield may be deemed to be a "parent" and
"promoter" of the Company within the meaning of the rules and
regulations of the Securities and Exchange Commission.
(8) Includes 265,230 shares of Common Stock issuable upon the exercise of
an option at a price of $2.50 per share at any time prior to the
expiration date which is June 30, 2003. Effective April 28, 1997, the
exercise price of this option was repriced from $4.00 to $2.50.
(9) Excludes up to 77,410 shares of Common Stock that may be issued to
Ronald V. Caulfield pursuant to the terms of a Stock Exchange Agreement
between him and the Company. See "Certain Transactions."
-36-
(10) Includes 7,500 shares of Common Stock issuable upon exercise of an
option at a purchase price of $2.38 per share through March 24, 2006.
(11) Includes 7,500 shares of Common Stock issuable upon exercise of an
option at a purchase price of $2.50 per share through June 9, 2002.
Effective April 28, 1997, the exercise price of this option was
repriced from $4.00 to $2.50.
(12) Includes the following holdings of Mr. Vaicunas: (i) 20,000 shares of
Common Stock; (ii) 8,000 shares of Common Stock issuable upon exercise
of an option at a price of $3.00 per share any time prior to the
expiration date which is August 2, 2000; (iii) 12,000 shares issuable
upon the exercise of an option at a price of $3.88 per share at any
time prior to the expiration date which is July 8, 2001; (iv) 10,000
shares issuable upon the exercise of an option at a price of $2.50 per
share at any time prior to the expiration date which is June 15, 2002;
and (v) 86,713 shares issuable upon the exercise of an option at a
price of $2.50 per share at any time prior to the expiration date which
is June 30, 2003. Effective April 28, 1997, the exercise prices of the
options listed in (iv) and (v) were repriced from $4.00 and $4.00
respectively, to $2.50.
(13) Includes the following holdings of Mr. Davall: (i) 3,200 shares of
Common Stock held jointly with Ms. Beresford; (ii) 12,000 shares
issuable upon the exercise of an option at a price of $2.50 per share
at any time prior to the expiration date which is June 15, 2002; and
(iii) 86,713 shares of Common Stock issuable upon the exercise of an
option at a price of $2.50 per share at any time prior to the
expiration date which is June 30, 2003. Effective April 28, 1997, the
exercise price of these options were repriced from $4.00 to $2.50.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1990, the Company loaned $132,197 to Dennis N. Caulfield,
its Chairman. The note was amended in June 1996 and is now payable on or before
the fiscal year ending February 28, 1997 and effective at the beginning of
Fiscal 1996, accrues interest at the rate equal to the interest rate charged on
the Company's revolving line of credit with Citizens Savings Bank. The balance
of the loan as of February 28, 1997 was approximately $476,489, which included
interest on the loan and net additional advances of $72,598 received by Mr.
Caulfield in the past year. Mr. Caulfield has agreed to apply any bonus payments
received under the Company's executive bonus plan (the "Bonus Plan") to reduce
the amounts outstanding under the loan.
Ivan J. Hughes, a director of the Company, is the President of the
Plastics Division Duro Bag Manufacturing Company ("Duro"). For Fiscal 1996 and
1997, Duro accounted for approximately 10% and 16%, respectively, of the
Company's sales.
Effective February 26, 1994, Ronald Caulfield exchanged his 49,500
shares of Common Stock of RC America for 200,000 shares of the Company's Common
Stock, pursuant to the terms of a Stock Exchange Agreement by and between the
Company and Ronald Caulfield (the "Exchange Agreement"). The Exchange Agreement
also provides for the issuance to Ronald Caulfield of up to an additional
100,000 shares of the Company's Common Stock over a five (5) year period based
on RC America attaining certain levels of pre-tax earnings. As a result of RC
America's earnings for Fiscal 1995, Fiscal 1996 and Fiscal 1997, 17,400, 2,550
and 2,640 shares, respectively, of the 100,000 shares of Common Stock were
issued to Mr. Ronald Caulfield. The Exchange Agreement contains demand and
piggy-back registration rights for the shares.
-37-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. The financial statements required to be
filed by Item 8 herewith are as follows:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants - Price Waterhouse LLP F-1
Consolidated Balance Sheets as of February 28, 1997 and February 23, 1996 F-2
Consolidated Statements of Operations for the years ended February 28,
1997, February 23,1996 and February 24, 1995 F-4
Consolidated Statements of Stockholders' Equity for the years ended February
28, 1997, February 23, 1996 and February 24, 1995 F-5
Consolidated Statements of Cash Flows for the years ended February 28,
1997, February 23, 1996 and February 24, 1995 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
(a)(2) Financial Statement Schedules. The following financial statement
schedules are filed herewith:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule II Valuation and Qualifying Accounts S-1
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(a)(3) Exhibits.
(a) The following exhibits, required by Item 601 of Regulation S-K, are
filed herewith:
-38-
Exhibit
No. Title
--- -----
27 Financial Data Schedule.
(b) The following exhibits were filed as part of the Company's
Quarterly Report on Form 10-Q for the quarter ended November 22, 1996 and filed
with the Commission on January 7, 1997 and are incorporated herein by reference:
Exhibit
No. Title
--- -----
10a Loan and Security Agreement by and among the Company, RC
America, Inc. and Foothill Capital Corporation ("Foothill").
10b Secured Promissory Note from the Company and RC America to
Foothill.
10c Pledge and Security Agreement by and between the Company and
Foothill.
10d Continuing Guaranty of Market Media, Inc.
10e Continuing Guarantee of BPI Packaging (UK) Limited.
10f Security Agreement by and between Market Media, Inc. and
Foothill.
10g Security Agreement by and between BPI Packaging (UK) Limited
and Foothill.
10i* Settlement Agreement by and between the Company and Mobil Oil
Corporation, dated December 10, 1996.
27 Financial Data Schedule.
* Certain information withheld and filed separately with the Commission
pursuant to a request for confidential treatment.
(c) The following exhibit was filed as part of the Company's Quarterly
Report on Form 10-Q for the quarter ended August 23, 1996 and filed with the
Commission on October 15, 1996 and is incorporated herein by reference:
-39-
Exhibit
No. Title
--- -----
10** 1996 Stock Option Plan.
(d) The following exhibits were filed as part of the Company's Form
10-K for the fiscal year ended February 23, 1996 and filed with the Commission
on June 7, 1996 and are incorporated herein by reference:
Exhibit
No. Title
--- -----
10c Amendment to Promissory Note of Dennis N. Caulfield.
10d Lease for premises at 455-473 Somerset Avenue, North Dighton,
Massachusetts.
(e) The following exhibits were filed as part of the Company's
Quarterly Report on Form 10-Q for the quarter ended November 24, 1995 and filed
with the Commission on January 8, 1996 and are incorporated herein by reference:
Exhibit
No. Title
--- -----
3a Certificate of Incorporation of the Company, as amended.
3b Bylaws of the Company, as amended.
(f) The following exhibits were filed as part of the Company's
Quarterly Report on Form 10-Q for the quarter ended August 25, 1995 and filed
with the Commission on October 6, 1995 and are incorporated herein by reference:
Exhibit
No. Title
--- -----
10a Agreement for Purchase and Sale of Assets, dated June 23,
1995, by and among Market Media, Inc., Floor Focus Media, Inc.
and Carmen N. Fasula.
(g) The following exhibits were filed as part of the Company's Annual
Report on Form 10-K and amendment thereto initially filed with the Commission on
June 10, 1994 and are incorporated herein by reference:
-40-
Exhibit
No. Title
--- -----
10a Stock Exchange Agreement by and between the Company and Ronald
V. Caulfield.
10b** Employment Agreement of Ronald V. Caulfield.
21 Subsidiaries of the Company.
(h) The following exhibits were filed as part of the Company's Form S-1
Registration Statement (33-73780) declared effective by the Commission on April
7, 1994 and are incorporated herein by reference.
Exhibit
No. Title
--- -----
10a** Form of Employment Agreement of Dennis N. Caulfield.
10b** Form of Employment Agreement of C. Jill Beresford.
10c** Form of Employment Agreement of Alex F. Vaicunas.
10d** Form of Employment Agreement of Gregory M. Davall.
10e** 1993 Stock Option Plan.
(i) The following exhibits were filed as part of the Company's Form S-1
Registration Statement (No. 33-39463) declared effective by the Commission on
June 13, 1991 and are incorporated herein by reference:
Exhibit
No. Title
--- -----
3b Form of Certificate of Designation of Series A Convertible
Preferred Stock, as amended.
3c Form of Amended Certificate of Designation for Series B
Convertible Preferred Stock.
4a Specimen Series A Convertible Preferred Stock Certificate.
-41-
(j) The following exhibit was filed as part of the Company's Form S-18
Registration Statement (No. 33-36142-B) declared effective by the Commission on
October 3, 1990 and is incorporated herein by reference:
Exhibit
No. Title
--- -----
10i** 1990 Stock Option Plan.
**These exhibits relate to executive compensation plans and arrangements.
(k) The following Financial Statement Schedules were filed as part of
the Company's Form 10-K for the fiscal years ended February 23, 1996, February
24, 1995 and February 25, 1994 as filed with the Securities and Exchange
Commission on June 7, 1996, May 26, 1995 and June 10, 1994, respectively and are
incorporated herein by reference:
Schedule II: Valuation of Qualifying Accounts (formerly Schedule VIII)
(b) Reports on Form 8-K. On February 28, 1997, the Company filed a
current report on Form 8-K, dated February 14, 1997, relating to the mandatory
redemption of 18,337 shares of Series C Redeemable Preferred Stock owned by
Beresford Box Company Limited ("Beresford Box") and the issuance of 92,308
shares of Common Stock, which was completed under Regulation S to Beresford Box.
C. Jill Beresford, President of the Company, owns 100% of the outstanding stock
of Beresford Box.
-42-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BPI PACKAGING TECHNOLOGIES, INC.
Date: June 12, 1997
By:/s/ Dennis N. Caulfield
-----------------------------
Dennis N. Caulfield, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Name Capacity Date
- ---- -------- ----
<S> <C> <C>
/s/ Dennis N. Caulfield Chief Executive Officer and June 12, 1997
- ------------------------- Chairman of the Board of Directors
Dennis N. Caulfield (Principal Executive Officer
and Principal Accounting Officer)
/s/ C. Jill Beresford President, Treasurer and Director June 12, 1997
- -------------------------
C. Jill Beresford
/s/ Ronald V. Caulfield Director June 12, 1997
- -------------------------
Ronald V. Caulfield
/s/ Ivan J. Hughes Director June 12, 1997
- -------------------------
Ivan J. Hughes
/s/ David N. Laux Director June 12, 1997
- -------------------------
David N. Laux
</TABLE>
-43-
BPI PACKAGING TECHNOLOGIES, INC.
EXHIBIT INDEX
EXHIBIT
NO. TITLE
27 Financial Data Schedule.
-44-
BPI PACKAGING TECHNOLOGIES, INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants - Price Waterhouse LLP F-1
Consolidated Balance Sheets as of February 28, 1997 and February 23, 1996 F-2
Consolidated Statements of Operations for the years ended February 28,
1997, February 23, 1996 and February 24, 1995 F-4
Consolidated Statements of Stockholders' Equity for the years ended
February 28, 1997, February 23, 1996 and February 24, 1995 F-5
Consolidated Statements of Cash Flows for the years ended February 28, 1997,
February 23, 1996 and February 24, 1995 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
-45-
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Report of Independent Accountants
June 12, 1997
To the Board of Directors and
Stockholders of BPI Packaging Technologies, Inc.
In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) and (2) on page 37 present fairly, in all material respects, the
financial position of BPI Packaging Technologies, Inc. and its subsidiaries at
February 28, 1997 and February 23, 1996, and the results of their operations,
their changes in stockholders' equity, and their cash flows for each of the
three years in the period ended February 28, 1997, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has net working capital and operating cash flow deficiencies. All of these
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Notes 1 and 5 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of," for
the year ended February 28, 1997.
Price Waterhouse LLP
Boston, Massachusetts.
F-1
BPI PACKAGING TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 23,
1997 1996
------------------- -------------------
<S> <C> <C>
Current assets
Cash $ 58,134 $ 109,093
Accounts receivable, net 2,093,760 2,178,132
Inventories 4,534,453 3,927,597
Prepaid expenses and other assets 1,387,824 1,085,258
------------------- -------------------
Total current assets 8,074,171 7,300,080
------------------- -------------------
Property and equipment, net 19,803,337 24,314,649
------------------- -------------------
Patents, net --- 1,099,553
Deposits - leases and equipment purchases 128,461 802,383
Loans to officers 479,797 468,606
Other assets 761,465 1,292,704
------------------- -------------------
1,369,723 3,663,246
------------------- -------------------
$ 29,247,231 $ 35,277,975
=================== ===================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-2
BPI PACKAGING TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 23,
1997 1996
--------------------- -------------------
<S> <C> <C>
Current liabilities
Note payable $ 3,733,477 $ 3,752,604
Capital lease obligations due within one year 2,109,718 1,832,847
Accounts payable 7,090,283 3,871,699
Other accrued expenses 959,837 427,428
Series C mandatorily redeemable preferred stock,
$.01 par value, at stated value --- 183,369
--------------------- -------------------
Total current liabilities 13,893,315 10,067,947
--------------------- -------------------
Capital lease obligations-long-term portion 3,809,241 5,441,057
--------------------- -------------------
Stockholders' Equity
Series B convertible preferred stock, $.01 par value 1,466,954 1,466,954
Series A convertible preferred stock, $.01 par value 1,213,584 1,215,784
Common stock, $.01 par value; shares authorized - 30,000,000; shares issued
and outstanding - 14,074,428 at
February 28, 1997 and 11,800,909 at February 23, 1996 140,745 118,009
Capital in excess of par value 38,134,612 33,615,213
Accumulated deficit (29,411,220) (16,646,989)
--------------------- -------------------
11,544,675 19,768,971
--------------------- -------------------
Commitments and contingencies
$ 29,247,231 $ 35,277,975
===================== ===================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
BPI PACKAGING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
------------------FISCAL YEAR ------------------
FEBRUARY 28, FEBRUARY 23, FEBRUARY 24,
1997 1996 1995
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Net sales $ 30,810,037 $ 28,839,954 $ 25,254,645
Cost of goods sold 29,254,754 26,161,723 19,879,041
--------------------- --------------------- ---------------------
Gross profit 1,555,283 2,678,231 5,375,604
Operating expenses:
Selling, general and administrative 7,318,352 6,370,956 5,029,832
Write-down of impaired assets and related expenses 5,897,648 --- ---
--------------------- --------------------- ---------------------
(Loss) income from operations (11,660,717) (3,692,725) 345,772
Other (expense) income:
Interest expense (1,112,647) (865,206) (316,813)
Interest income 9,133 47,786 36,368
Other income --- --- 77,104
Non-recurring charge --- --- (989,917)
--------------------- --------------------- ---------------------
Net loss $ (12,764,231) $ 1,860,811 $ 4,182,346
===================== ===================== =====================
Loss per share $ (0.96) $ (0.38) $ (0.08)
Weighted average common shares outstanding 13,261,815 11,756,532 10,670,040
</TABLE>
The accompanying notes are an integral part
of these consolidated financialstatements.
F-4
BPI PACKAGING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED FEBRUARY 28, 1997,
FEBRUARY 23, 1996 AND FEBRUARY 24, 1995
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
--------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
------------- ---------- ----------------------------------- -------------
Balance at February 25, 1994 ...... 9,505,582 $95,056 582,243 $2,328,972 146,695 $1,466,954
Sale of common stock pursuant to
Regulation S and Regulation D
private placement offerings, net of
issuance costs .................... 626,470 6,265
Issuance of common stock for
minority interest in RC America.... 200,000 2,000
Conversion of Series A convertible
preferred stock to common stock.... 201,872 2,019 (201,872) (807,488)
Conversion of Class A Warrants...... 1,124,435 11,244
Net loss for the year ended
February 24, 1995..................
------------- ---------- ----------------------------------- -------------
Balance at February 24, 1995 11,658,359 116,584 380,371 1,521,484 146,695 1,466,954
Issuance of shares based on
RC America's FY95 results 17,400 174
Conversion of Series A convertible
preferred stock to common stock..... 76,425 764 (76,425) (305,700)
Sale of common stock pursuant to
partial exercise of Class A warrants,
net of issuance costs 48,725 487
Net loss for the year ended
February 23, 1996 ...................
------------- ---------- ------------- ----------- --------- ------------
Balance at February 23, 1996 11,800,909 118,009 303,946 1,215,784 146,695 1,466,954
Sale of common stock pursuant to
Regulation S and Regulation D
private placement offerings, net of
issuance costs...................... 1,207,500 12,075
Sale of common and preferred stock
pursuant to partial exercise of
underwriter's warrants from prior
public offerings, net of issuance costs 402,600 4,026 100,000 225,000
Conversion of Series A convertible
preferred stock to common stock..... 56,800 568 (56,800) (227,200)
Sale of common stock pursuant to
exercise of class B warrants from the
Company's third public offering, net
of issuance costs .................... 511,761 5,118
Issuance of common stock based on
RC America's FY96 results ............ 2,550 26
Issuance of 92,308 Regulation S common
shares in exchange for Series C redeemable
preferred stock ...................... 92,308 923
Net loss for the year ended
February 28, 1997 ....................
============= ========== ============ ============ ========= ============
Balance at February 28, 1997 14,074,428 $140,745 347,146 $1,213,584 146,695 $1,466,954
============= ========== ============ ============ ========= ============
</TABLE>
<TABLE>
<CAPTION>
Capital in
Excess of Accumulated
Par Value Deficit Total
<S> <C> <C> <C>
------------ ------------- -------------
Balance at February 25, 1994 ...... $25,017,105 ($11,289,358) $17,618,729
Sale of common stock pursuant to
Regulation S and Regulation D
private placement offerings, net of
issuance costs .................... 2,128,490 2,134,755
Issuance of common stock for
minority interest in RC America.... 918,517 920,517
Conversion of Series A convertible
preferred stock to common stock.... 805,469 ---
Conversion of Class A Warrants...... 4,210,445 4,221,689
Net loss for the year ended
February 24, 1995.................. (847,486) (847,486)
------------ ------------- -------------
Balance at February 24, 1995 33,080,026 (12,136,844) 24,048,204
Issuance of shares based on
RC America's FY95 results 71,688 71,862
Conversion of Series A convertible
preferred stock to common stock..... 304,936 ---
Sale of common stock pursuant to
partial exercise of Class A warrants,
net of issuance costs 158,563 159,050
Net loss for the year ended
February 23, 1996 ................... (4,510,145) (4,510,145)
------------ ------------- -------------
Balance at February 23, 1996 33,615,213 (16,646,989) 19,768,971
Sale of common stock pursuant to
Regulation S and Regulation D
private placement offerings, net of
issuance costs...................... 2,194,793 2,206,868
Sale of common and preferred stock
pursuant to partial exercise of
underwriter's warrants from prior
public offerings, net of issuance costs 851,024 1,080,050
Conversion of Series A convertible
preferred stock to common stock..... 226,632 ---
Sale of common stock pursuant to
exercise of class B warrants from the
Company's third public offering, net
of issuance costs .................... 1,092,799 1,097,917
Issuance of common stock based on
RC America's FY96 results ............ 5,074 5,100
Issuance of 92,308 Regulation S common
shares in exchange for Series C redeema
preferred stock ...................... 149,077 150,000
Net loss for the year ended
February 28, 1997 .................... (12,764,231) (12,764,231)
============ ============= =============
Balance at February 28, 1997 $38,134,612 ($29,411,220) $11,544,675
============ ============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<TABLE>
<CAPTION>
BPI PACKAGING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
--------------------- FISCAL YEAR ENDED ----------------
FEBRUARY 28, FEBRUARY 23, FEBRUARY 24,
1997 1996 1995
------------------ --------------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss $ (12,764,231) $ (4,510,145) $ (847,486)
------------------ ------------------ ------------------
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Depreciation and amortization 3,417,849 2,643,138 1,871,357
Write-down of impaired assets and related expenses 5,897,648 --- ---
Non-recurring charge --- --- 989,917
Decrease (increase) in accounts receivable - trade 84,372 339,333 (979,073)
(Increase) decrease in inventories (606,856) 1,396,496 (1,724,123)
(Increase) decrease in prepaid expenses and other current assets (302,566) (404,603) 709,144
Increase in accounts payable 3,218,584 513,979 579,766
Increase in other accrued expenses 132,409 108,899 66,457
------------------ ------------------ ------------------
Total adjustments 11,841,440 4,597,242 1,513,445
------------------ ------------------ ------------------
Net cash (used) provided by operating activities (922,791) 87,097 665,959
------------------ ------------------ ------------------
Cash flows from investing activities:
Additions to property and equipment (1,549,878) (3,018,810) (4,535,268)
Cost of patents (144,928) (61,410) (71,069)
Decrease (increase) in deposits, net 388,922 362,654 (101,744)
Advances to officers (44,560) (174,240) (63,201)
Decrease (increase) in note receivable, net --- 811,980 (1,136,345)
Increase in other assets, net (198,418) (105,001) (35,038)
------------------ ------------------ ------------------
Net cash used by investing activities (1,548,862) (2,184,827) (5,942,665)
------------------ ------------------ ------------------
Cash flows from financing activities:
Net (payments) borrowings under note payable (19,127) 1,960,518 444,781
Principal payments on long-term debt
and capital lease obligations (1,945,014) (1,565,613) (2,262,051)
Proceeds from equipment financings --- 302,418 ---
Proceeds from long-term borrowings --- --- 1,341,004
Net proceeds from sales of stock 4,384,835 159,050 6,356,444
------------------ ------------------ ------------------
Net cash provided by financing activities 2,420,694 856,373 5,880,178
------------------ ------------------ ------------------
Net (decrease) increase in cash (50,959) (1,241,357) 603,472
Cash at beginning of period 109,093 1,350,450 746,978
------------------ ------------------ ------------------
Cash at end of period $ 58,134 $ 109,093 $ 1,350,450
================== ================== ==================
Cash paid for interest $ 1,093,648 $ 965,25 $ 563,991
================== ================== ==================
</TABLE>
Non-cash investing and financing activities:
Capital lease obligations of $590,069, $3,238,840 and $3,640,085 were incurred
in Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively, when the Company
entered into capital lease agreements to purchase machinery and equipment.
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
BPI PACKAGING TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
BPI Packaging Technologies, Inc. (the "Company") develops,
manufactures, markets and sells plastic bags known as "T-shirt sacks," to
grocery, convenience, retail and drug store chains and plastic film to food
service, commercial and industrial users. The Company operates three
wholly-owned subsidiaries: RC America, Inc., which purchases surplus inventory
from manufacturers of consumer products and markets and sells the products to
mass merchandise retailers and other retail chains; BPI Packaging (UK) Limited,
which markets and sells the Company's products in Europe; and Market Media,
Inc., which sells and markets in-store advertising promotion programs. BPI
Packaging, Inc., which was established to purchase, sell and market plastic bag
products manufactured by another bag manufacturer, is a non-operating, wholly
owned subsidiary of the Company.
SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company utilizes a 52-53 week Fiscal year. The fiscal year ended
February 28, 1997, consisted of 53 weeks and fiscal years ended February 23,
1996, and February 24, 1995, consisted of 52 weeks.
Cash
The Company's cash accounts are maintained substantially with one
financial institution. The concentration of credit risk with respect to cash is
all amounts on hand at the financial institution in excess of the federally
insured limits.
Inventories
The Company values its inventories at the lower-of-cost, determined
using the first-in, first-out (FIFO) method, or market. Cost includes material
and conversion costs.
Property and Equipment
Property and equipment are recorded at cost which includes costs of
assets constructed or purchased, related delivery and installation costs and
interest incurred on significant capital projects during their construction and
installation periods. Property under capital leases is
F-7
recorded at the lower of the present value of future minimum rental payments or
the fair value of the property at the beginning of the lease term. Maintenance
and repairs that do not extend the useful life of the asset or improve capacity
are charged to expense when incurred. Machinery and equipment are depreciated
using the straight-line method over a period of eleven years. Leasehold
improvements consist of costs relating to buildings and equipment under lease
and are amortized using the straight-line method over the remaining life of the
lease.
Property and equipment recorded at cost includes interest on funds
borrowed to finance the acquisition, construction and installation of major
capital additions. Such interest amounted to $ 0, $100,045 and $247,178 in
Fiscal 1997, 1996 and 1995, respectively.
Patents
Costs associated with obtaining patents are capitalized as incurred and
amortized on a straight-line basis over the shorter of the legal term of 17
years or the estimated economic life of the patent.
Other Assets
Other assets consist primarily of goodwill and long-term prepaid rent.
Goodwill representing the excess of cost over the fair value of net assets
acquired, is amortized on a straight line basis over a period of 10 years.
Long-term prepaid rent, representing the excess of cash paid over the expense
accrued for certain operating leases, is amortized on a straight line basis over
the life of the respective lease.
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. This method requires the recognition of deferred tax assets and
liabilities for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. In addition, it requires the recognition of future
tax benefits, such as net operating loss carryforwards, to the extent that
realization of such benefits is more likely than not to occur.
Revenue Recognition and Concentration of Credit Risk
The Company recognizes revenues on an accrual basis when the products
are shipped. Concentration of credit risk with respect to accounts receivable is
limited due to the number and diversity of customers comprising the Company's
customer base. The Company maintains reserves for potential credit losses and
such losses, in the aggregate, have not exceeded management's expectations.
F-8
Basis of Consolidation
The consolidated financial statements include the results of the
Company's wholly-owned subsidiaries, BPI Packaging, Inc., RC America, Inc., BPI
Packaging (UK) Limited and Market Media, Inc.
Loss Per Share
Loss per share is calculated based upon the weighted average common
shares outstanding during the period including dilutive employee stock options,
underwriter warrants, Class A and B warrants, and Series A and B Preferred
Stock. Common stock equivalents are not reflected in the calculation in periods
in which they would have an anti-dilutive effect.
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.
Fair Value of Financial Instruments
The Company's financial instruments are shown at fair value. The
carrying amounts of cash, accounts receivable, note receivable, deposits,
accounts payable and bank borrowings approximate fair value because of the short
maturity of those instruments.
Accounting for Stock-Based Compensation
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123"). SFAS 123 requires an entity to account for employee stock
compensation under a fair value based method. SFAS 123 also allows an entity to
continue to measure costs for employee stock based compensation plans using the
intrinsic value-based method of accounting under APB Opinion No. 25 "Accounting
for Stock Issued to Employees" ("APB 25"). The Company continues to account for
employee stock-based compensation under APB 25 and has made the pro forma
disclosures required under SFAS 123 (Note 20).
Adoption of SFAS No. 121
In Fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." The
statement requires the
F-9
recognition of an impairment loss for an asset held for use when the estimate of
undiscounted future cash flows expected to be generated by the asset is less
than its carrying amount. Measurement of the impairment loss is based on fair
value of the asset. Generally, fair value will be determined using valuation
techniques such as the present value of expected future cash flows. As more
fully described in Note 6 to these financial statements, adoption of this
statement resulted in recognition of an additional loss from continuing
operations.
NOTE 2: GOING CONCERN AND MANAGEMENT'S PLAN
As shown in the accompanying consolidated financial statements, the Company
has suffered recurring net losses and has net working capital and operating cash
flow deficiencies. Further, as discussed in Note 8, the Company's revolving
credit facility is renewable annually. While covenant violations have been
waived as of February 28, 1997, no assurances can be given that the lender will
renew the line on November 25, 1997. Furthermore, significant trade credit
balances are past due at the balance sheet date.
The Company's ability to continue as a going concern is dependent on its
ability to successfully implement its business and financing plans described
below. However, there can be no assurances the Company will be able to
successfully complete these plans. Other than those described in Notes 1 and 6,
the financial statements do not include any adjustments related to the
recoverability and the classification of recorded assets and liabilities that
might be necessary should the Company be unable to continue as a going concern.
The Company expects to exit the production of its traditional T-shirt bag
product lines during Fiscal 1998. Increased competition from large domestic and
overseas competitors with significant production economies of scale has caused
the Company to incur substantial losses on these products. During Fiscal 1998,
the Company plans to shift production to principally proprietary bag and
plastic film product lines which have higher profit margins. In addition, the
Company is negotiating to sell a private placement of $5 million of common stock
or senior subordinated notes with warrants.
NOTE 3: ACCOUNTS RECEIVABLE-TRADE
Accounts receivable-trade consist of the following:
February 28, February 23,
1997 1996
---- ----
Accounts receivable-trade $2,268,760 $2,273,132
Allowance for doubtful accounts (100,000) (35,000)
Allowance for credits (75,000) (60,000)
---------- ----------
$2,093,760 $2,178,132
========== ==========
F-10
NOTE 4: INVENTORIES
Inventories, net of valuation reserves, consist of the following:
February 28, February 23,
1997 1996
---- ----
Raw material $1,020,902 $1,480,667
Finished goods 3,513,551 2,446,930
----------- -----------
$4,534,453 $3,927,597
========== ===========
Raw material includes virgin high density, high molecular weight
polyethylene ("HMWPE") resin, re-processed HMWPE material, color inks and
additives, and post-industrial scrap generated during the manufacturing process.
NOTE 5: PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
February 28, February 23,
1997 1996
---- ----
Machinery and equipment $24,605,067 $26,671,579
Leasehold improvements 3,611,032 3,236,803
Office furniture and fixtures 303,731 253,805
Motor vehicles 19,900 19,900
------------ ------------
28,539,730 30,182,087
Less accumulated depreciation
and amortization 8,736,393 5,867,438
------------ ------------
$19,803,337 $24,314,649
============ ============
The Company leases certain property and equipment under capital leases.
Most equipment leases contain bargain purchase options exercisable at the end of
the original lease. The
F-11
following is a schedule of the future minimum payments under these leases,
together with the present value of the net minimum payments as of February 28,
1997:
Fiscal Year
-----------
1998........................ $2,585,304
1999........................ 2,316,489
2000........................ 1,599,836
2001........................ 333,391
2002........................ 11,391
------------
Total minimum lease payments 6,846,411
Less amount representing interest 927,452
------------
Total future principal payments of lease
obligations $5,918,959
============
Assets recorded under capital leases, exclusive of installation costs
and leasehold improvements, were as follows:
February 28, February 23,
1997 1996
----------- -----------
Machinery and equipment $13,041,270 $12,451,201
Less accumulated amortization 2,870,403 1,711,654
----------- -----------
$10,170,867 $10,739,547
=========== ===========
Depreciation and amortization expense relating to fixed assets was
$3,216,189, $2,452,131 and $1,703,608 for the years ended February 28, 1997,
February 23, 1996 and February 24, 1995, respectively, of which $1,158,749,
$893,908 and $443,051, respectively, related to amortization of equipment held
under capital leases.
In accordance with SFAS No. 121, the Company wrote-down machinery and
equipment to fair value, which resulted in a non-recurring charge of $3,335,070,
which is included in the $5.9 million write-down of impaired assets and related
expenses (Note 6).
NOTE 6: WRITE-DOWN OF IMPAIRED ASSETS
During the fourth quarter of Fiscal 1997, the Company adopted SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of." The initial application of SFAS No. 121 caused the Company
to recognize a non-cash charge of $5.9 million to write down to fair value
certain long-lived assets consisting principally of machinery and equipment,
patents and goodwill, together with other related expenses. The method used to
determine fair value was a discounted cash flow approach. The assets consist of
those related to the manufacture of the traditional bag product lines which the
Company has decided to exit in Fiscal 1998 (Note 2).
Included in the $5.9 million charge are $512,000 representing
settlement and defense costs incurred in connection with the resolution of a
patent infringement suit.
NOTE 7: NOTE RECEIVABLE AND NON-RECURRING CHARGE
At February 24, 1995, Plasco East Partnership, a Massachusetts general
partnership of Corporations ("Plasco") owed the Company $1,824,917 for
manufacturing equipment it sold or leased to Plasco. A reserve of $989,917 was
established in Fiscal Year 1995 resulting in a non-recurring charge for $989,917
and a net note receivable balance of $835,000. In April 1995, the Company,
through an independent auctioneer, conducted an auction of the equipment
originally sold to Plasco and received proceeds of $650,000. An additional
$65,000 was received in December 1995, from a third party guarantor. The
remaining loan balance, plus additional
F-12
costs incurred during Fiscal Year 1996, were offset against the reserve
resulting in an additional loss of $140,504 for Fiscal 1996, which is included
in selling, general and administrative expenses.
NOTE 8: PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets are comprised of the
following:
February 28, February 23,
1997 1996
---- ----
Spare parts and supplies $ 1,117,338 $ 879,854
Prepaid insurance and
other expenses 270,486 205,404
----------- -----------
$1,387,824 $1,085,258
=========== ===========
NOTE 9: PATENTS
The Company owns two patents and has applied for several other U.S.
patents and certain foreign patents. A total of $0 and approximately $61,000 and
$71,000 of costs have been capitalized relating to these patent applications
during Fiscal 1997, 1996, and 1995, respectively. Amortization expense of
approximately $87,000, $85,000 and $76,000 had been recorded in Fiscal 1997,
1996 and 1995, respectively, with a total accumulated amortization balance of $0
at February 28, 1997 and $313,000 at February 23, 1996.
The $0 accumulated amortization at February 28, 1997, results from the
write-off of all patent costs and associated accumulated amortization which
amounted to a charge of $1,045,000 which is included in the caption "Write-down
of impaired assets and related expenses" in the accompanying Statement of
Operations. As more fully described in Note 6, this charge is the result of the
Company's decision to exit the traditional T-shirt product lines.
NOTE 10: NOTE PAYABLE
On November 25, 1996 the Company refinanced its line of credit with a
new lending institution. The new revolving line of credit is $8,000,000 secured
by accounts receivable and inventory and all other assets except for equipment.
Availability of borrowings under the line of credit is determined by calculation
of the borrowing base, as specifically defined in the loan and security
agreement, but generally means 85% of qualifying accounts receivable and 40% of
eligible inventories, less the aggregate amount of all outstanding commercial
and standby letters of credit. The line of credit bears interest at 1.5% above
the variable interest rate quoted by Norwest Bank of Minnesota with a minimum
rate of 8.0% (9.75% at February 28, 1997) and provides for a 1/2 of 1% unused
line fee. The credit line is for 5 years and is subject to renewal annually. At
February 28, 1997, the balance under the line of credit is $3,733,477 which is
the maximum available. The line of credit includes certain financial covenants
that the Company must maintain to avoid a default including current ratio, debt
to equity, maintaining a net worth of $14 million, limitation of capital
spending, and profitability. At February 28, 1997 the Company failed to meet
several of the financial
F-13
covenants. The lender waived the condition of default for the financial
covenants that were not met.
Previously, the Company had a $4,000,000 revolving line of credit with
a commercial bank that was secured by accounts receivable and inventory.
Borrowings under the line of credit were subject to 80% of qualifying accounts
receivable and from 35% to 50% of qualifying inventories (up to a maximum
inventory loan of $2,500,000), less the aggregate amount utilized under all
commercial and standby letters of credit and bank acceptances. The line of
credit bore interest at the bank's prime rate plus 1% (9.25% at February 23,
1996), and provided for a 1/8th of 1% unused line fee and was subject to renewal
annually. At February 23, 1996, the balance under the line of credit was
$3,752,604 which was the maximum availability under the line of credit. The line
of credit included certain financial covenants that the Company had to maintain,
including debt service coverage, capital base and debt equity covenants.
NOTE 11: CAPITAL LEASE OBLIGATIONS
The Company's capital lease obligations at February 28, 1997 and
February 23, 1996 consisted of the following:
February 28, February 23,
1997 1996
----------- -----------
Obligations under capital leases (Note 4) $5,918,959 $7,273,904
Less amounts due within one year 2,109,718 1,832,847
----------- -----------
Long-term portion $3,809,241 $ 5,441,057
=========== ===========
The following is a schedule by years of the combined aggregate amount
of maturities for all capital lease obligations:
February 28,
Fiscal year 1997
----------- ----
1998............................... $ 2,109,718
1999............................... 2,046,081
2000............................... 1,458,347
2001............................... 293,513
2002............................... 11,300
------------
$ 5,918,959
============
F-14
NOTE 12: MANDATORILY REDEEMABLE PREFERRED STOCK
The Company is authorized to issue up to an aggregate of 2,000,000
shares of $.01 par value preferred stock. In October 1990, the Company issued
36,674 shares of Series C Mandatorily Redeemable Preferred stock. The stock is
6% non-cumulative, non-voting and redeemable in two equal amounts of $183,369 on
March 1, 1991 and March 1, 1992. The first payment of $183,369, for the
redemption of 18,337 shares, was made in October 1992. The second payment of
$183,369 for redemption of 18,337 shares, was made on February 14, 1997, by the
issuance of 92,308 Regulation S shares of the Company's Common Stock. The Series
C Mandatorily Redeemable Preferred Stock had a liquidation preference over the
Series A Preferred Stock at a rate of $10.00 per share plus any declared but
unpaid dividends (Note 13). At February 28, 1997, and February 23, 1996, there
were 0 and 18,337 shares of Series C Mandatorily Redeemable Preferred Stock
issued and outstanding, respectively.
NOTE 13: STOCKHOLDERS' EQUITY
The Board of Directors has designated two classes of preferred stock
included within stockholders' equity as follows:
Series A, 8.5% Non-Cumulative, Redeemable, Convertible Preferred Stock
("Series A Preferred Stock"), convertible at the holder's option into
one share of common stock of the Company at any time prior to
redemption. At the Company's option, the stock is redeemable at $4.00
per share after not less than 30 nor more than 60 days written notice
at any time beginning June 13, 1992 provided the closing bid price of
the Company's common stock averages in excess of $9.00 per share for 30
consecutive trading days ending within five days of the notice of
redemption. The Series A Preferred Stock votes with the common stock as
a single class. At February 28, 1997, and February 23, 1996, there were
347,146 and 303,946 shares issued and outstanding, respectively.
Series B, 6% Non-Cumulative, Non-Voting Convertible Preferred Stock
("Series B Preferred Stock"), redeemable and convertible at any time at
$10 per share. Such stock retains a liquidation preference over the
Series A Preferred Stock at a rate of $10 per share plus any declared
but unpaid dividends. At February 28, 1997, and February 23, 1996,
there were 146,695 shares of Series B Preferred Stock issued and
outstanding.
The Company issued to the underwriter of its second public offering, a
warrant to purchase up to 50,000 units with each unit consisting of two shares
of Series A Preferred Stock, one share of Common Stock and one Class A
Redeemable Common Stock Purchase warrant ("Class A Warrant"). The units subject
to the underwriter's warrant were identical to the units sold to the public,
except that the Series A Preferred Stock and the Class A Warrant were not
subject to redemption by the Company and the exercise price of the unit was
$13.75 per unit and the exercise price for the Class A Warrant underlying this
underwriter's warrant was $6.50. The underwriter's warrants were exercisable for
1.06 shares of Common Stock from June 13, 1992
F-15
through June 13, 1996. In May 1996, the exercise price of the underwriter's
warrant and the underlying Class A Warrant were reduced to $2.25. These warrants
were exercised in May 1996 and an aggregate of 153,000 shares of Common Stock
and 50,000 shares of Series A Preferred Stock were issued.
On October 7, 1992, the Company completed a third public offering of
1,400,000 units (plus an additional 126,000 units subsequently purchased as a
partial exercise of the underwriter's over-allotment option) at $5.00 per unit.
Each unit consisted of one share of Common Stock, one Class A Redeemable Warrant
and one Class B Redeemable Warrant. Each Class A Redeemable Warrant initially
entitled the registered holder thereof to purchase one share of Common Stock at
$5.00 per share at any time through October 6, 1994. In September 1994, the
terms of the Class A Redeemable Warrants were modified. As modified, each Class
A Warrant entitled the registered holder thereof to purchase one share of Common
Stock at a reduced price of $4.00 per share through October 28, 1994. The period
of time to exercise the Class A Warrants was extended from October 6, 1994 to
5:00 p.m. (EST) on October 28, 1994. For each Class A Warrant exercised on or
before October 28, 1994 at the reduced exercise price of $4.00, the
warrantholder was entitled to extend the period of exercise for a second class A
Warrant held by the warrantholder for a period through March 31, 1995, at the
original exercise price of $5.00 (the "50% Option"). The expiration date of
March 31, 1995, was subsequently extended to June 15, 1995. An aggregate of
40,950 Class A Redeemable Warrants were exercised at the original price of
$5.00. An aggregate of 1,124,435 Class A Redeemable Warrants were exercised at
the reduced price of $4.00, of which 272,100 were exercised pursuant to the 50%
Option. Of the 272,100 Class A Redeemable Warrants exercised pursuant to the 50%
Option, an aggregate of 48,725 warrants were exercised at the reduced price of
$3.75 on or before June 15, 1995.
Each Class B Redeemable Warrant ("Class B Warrant") from the third
public offering initially entitled the holder thereof to purchase one share of
common stock at $9.00 per share at any time through October 7, 1996. In
connection with certain private placements by the Company to overseas investors
and accredited investors, the exercise price and shares purchasable upon the
exercise of the Class B warrants were adjusted three times. As a result of the
first adjustment, each Class B Warrant entitled the holder to purchase 1.04
shares of Common Stock at $8.65 per share at any time through October 6, 1996.
As a result of the second adjustment, each Class B Warrant intitled the holder
to purchase 1.12 shares of Common Stock at $8.04 per share at anytime through
October 6, 1996. In October 1996, the exercise price of each Class B Warrant was
lowered to $2.80 per share exercisable at any time through October 6, 1996. An
aggregate of 456,931 Class B Warrants were exercised at the reduced price of
$2.80 per warrant. The balance of Class B Warrants expired on October 6, 1996.
The warrants were subject to redemption at $.05 per warrant, on 30 days written
notice, provided the last sale price of the common stock as reported on the
NASDAQ National Market System for 10 consecutive trading days ending within 25
days of the notice of redemption, averaged at least $14.00 per share for
redemption of the Class B Redeemable Warrants.
In addition, the Company issued to the underwriter in the third public
offering, a warrant to purchase up to 140,000 units. The units subject to the
underwriter's warrant are identical to the units sold to the public, except that
the exercise price of the units will be $5.78 per unit, each
F-16
unit consisting of one share of Common Stock, one Class A Warrant and one Class
B Warrant. The Class A Warrants underlying the underwriter's Warrant II expired
in October 1994. The exercise price of the underlying Class B Warrants was
$11.25 per share. The underwriter's warrants were exercisable from October 7,
1993 through October 7, 1997. In May 1996, the exercise price of the
underwriter's warrants and the underlying Class B Warrants were each reduced to
$2.25. As a result of certain anti-dilutive adjustments, the number of shares
issuable upon exercise of the underwriter's warrant was adjusted from 1.0 to
1.05 shares, and the shares issuable upon exercise of the underlying Class B
Warrants were adjusted from 1.0 to 1.09 shares. These warrants were exercised in
May 1996 and an aggregate of 299,600 shares of Common Stock were issued.
In May 1996, the Company issued warrants to financial consultants to
purchase an aggregate of 200,000 shares of Common Stock at an exercise price of
$4.25 per share. These warrants expire on December 31, 1997 and contain
anti-dilution protection for events such as stock splits, mergers and
reorganizations. The shares of Common Stock underlying these warrants were
registered on a Form S-3 registration statement, which was declared effective by
the Securities and Exchange Commission on July 19, 1996.
The Company has reserved 3,472,536 shares of common stock for issuance
upon exercise of outstanding warrants and employee stock options granted or
available for grant (Note 20), upon the conversion of preferred stock and in
connection with the agreement with RC America, Inc. On May 23, 1995, an
additional 17,400 shares of common stock were issued based on the operating
results of RC America, Inc. for Fiscal Year 1995. Based on the operating results
of RC America, Inc. for Fiscal 1996 and Fiscal 1997, an additional 2,550 and
2,640 shares were issued in May 1996 and May 1997, respectively.
Holders of the Series A Preferred Stock are entitled to receive, in
each fiscal year in which the Company attains net earnings after tax, as
defined, non-cumulative dividends at the annual rate of $0.34 per share. Such
dividends will be payable in cash if net earnings after tax exceed 150% of the
amount necessary to pay the dividends and in cash, common stock, or any
combination thereof if such net earnings are less than such amount. Dividends on
the Series B Preferred Stock are payable before any dividends are paid or
declared for the Series A Preferred Stock and the common stock. The holders of
the Series B Preferred Stock are entitled to receive non-cumulative dividends at
an annual rate of $.60 per share payable in cash.
From February 26, 1994, through February 24, 1995, a total of 626,470
shares were issued in a private placement with net proceeds of $2,134,755.
During Fiscal 1996 and Fiscal 1997, covering the period February 25, 1995
through February 28, 1997, there were no private placements.
F-17
NOTE 14: INCOME TAXES
Due to the taxable loss incurred and the availability of net operating
losses, there was no tax provision or benefit recorded in Fiscal 1997.
Accordingly, the effective tax rate is zero percent as compared to the Federal
statutory rate of 34%.
Cumulative temporary differences under SFAS 109 are as follows:
February 28, February 23,
1997 1996
------------ -----------
Deferred tax assets:
Reserves $ 90,666 $ 44,264
Inventory accounts 532,583 61,969
Investment tax credit 598,446 398,276
Fixed assets 1,339,220 ---
Net operating loss 9,831,374 7,021,155
------------ -----------
Total deferred tax assets $12,392,289 $ 7,525,664
============ ===========
Deferred tax liabilities:
Fixed assets --- 182,911
Accrued rent 179,895 71,903
Patent costs --- 442,790
------------- -----------
Total deferred tax liabilities $ 179,895 $ 697,604
============= ===========
Net deferred tax asset before valuation
allowance 12,212,394 6,828,060
Less: valuation allowance 12,212,394 6,828,060
------------- -----------
Net deferred tax asset $ --- $ ---
============= ===========
A valuation allowance is required to be established for deferred tax
assets if, based on the weight of available evidence, it is more likely than not
that some portion or all of the deferred tax asset will not be realized. The
Company has determined that a valuation allowance is required since it is not
certain that the results of future operations will generate sufficient taxable
income to realize the deferred tax asset. The deferred tax asset and related
valuation reserves will be reviewed as management's actions, such as exiting the
traditional T-shirt bag product lines and shifting production to proprietary bag
and plastic film product lines, take effect and produce favorable results.
At February 28, 1997, the Company had available for federal and state
income tax purposes unused net operating loss (NOL) carryforwards approximating
$24,884,000 and $21,865,000, respectively. The federal carryforwards expire in
various amounts beginning in the year 2003, and the state carryforwards expire
in various amounts from 1998 through 2003. The Company has available state
investment tax credit carryforwards of approximately $445,000 expiring in
various amounts from 1998 to 2003, and approximately $113,000 in carryforwards
with unlimited expirations.
F-18
A substantial change in the Company's ownership, as defined in section
382 of the Internal Revenue Code, may significantly limit the future utilization
of the federal NOL carryforwards incurred prior to an ownership change. In
Fiscal 1994 and 1991 a substantial change in ownership did occur; however,
management believes that such limitations will not significantly restrict future
annual utilization of the Company's federal NOL carryforwards. Significant stock
transactions occurred in Fiscal 1997, 1996 and 1995 that may result in a
substantial change in ownership and therefore may further limit future annual
utilization of the Company's federal NOL carryforwards.
NOTE 15: OPERATING LEASES AND COMMITMENTS
The Company's lease agreement for its Dighton facilities was
renegotiated effective January 1, 1996 and runs for a period of twelve years.
The Company has entered into various operating leases for certain manufacturing
equipment expiring on various dates through 2007.
The future minimum rental commitments under noncancelable operating
leases as of February 28, 1997 are as follows:
Operating
Fiscal Year Leases
----------- ------
1998............................ $1,265,000
1999............................ 1,248,000
2000............................ 1,130,000
2001............................ 823,000
2002............................ 448,000
Thereafter .................. 2,237,000
----------
$7,151,000
==========
Rent expense under operating leases was $1,646,000, $1,583,000 and
$1,404,000 for the years ended February 28, 1997, February 23, 1996, and
February 24, 1995, respectively.
NOTE 16: MAJOR CUSTOMERS
For Fiscal 1997, sales to one customer represented approximately 16% of
total sales. For Fiscal 1996 and Fiscal 1995 sales to two customers represented
approximately 15% and 10% and 12% and 13% of total sales, respectively.
NOTE 17: RELATED PARTY TRANSACTIONS
Loans made to an officer totaled $476,489 at February 28, 1997, and
$362,649 at February 23, 1996, and bear interest at the rate the Company is
charged by its bank. The loans were due and payable February 28, 1997. Payment
terms have not been extended. However,
F-19
the officer has agreed to apply any bonus payments received under the Company's
executive bonus plan (the "Bonus Plan") to reduce the amounts outstanding under
the loan.
Loans made to another officer totaled $3,308 at February 28, 1997, and
$105,957 at February 23, 1996, and bear interest at the rate the Company is
charged by its bank.
The Company acquired in Fiscal 1993 a 50.5% interest, in exchange for
$125,000, in a company (RC America, Inc.) founded and managed by the 49.5%
minority shareholder, Ronald Caulfield, a brother of the Company's president.
The accounts of RC America, Inc. are included in the Company's consolidated
financial statements (Note 1). On February 26, 1994, the Company entered into a
stock exchange agreement (the "Agreement") to exchange 200,000 shares of its
common stock at their estimated fair market value for Ronald Caulfield's 49.5%
minority interest in RC America, Inc. Effective February 26, 1994 Ronald
Caulfield exchanged his shares in accordance with the "Agreement." As a result,
RC America, Inc. is now a wholly owned subsidiary of the Company. The Agreement
also contains demand and piggy-back registration rights and provides for the
issuance to Ronald Caulfield of up to an additional 100,000 shares of the
Company's common stock over a five year period based on RC America, Inc.
attaining certain levels of pre-tax earnings. Based on the operating results of
RC America, Inc. for Fiscal 1997 and Fiscal 1996, a total of 2,640 and 2,550
shares, respectively were earned and were issued to Mr. Caulfield in April 1997
and May 1996, respectively. In Fiscal 1995, a total of 17,400 shares of common
stock were earned and were issued in May 1995. In addition, Ronald Caulfield
entered into a five year employment agreement with RC America, Inc. which
provides for certain bonus, severance and non-compete arrangements.
The value of the stock issued pursuant to the Agreement exceeded the
book value of the assets acquired and the Company has recognized goodwill of
$800,000 and is amortizing the goodwill pro-rata over ten years. Issuance of the
additional 2,550 and 17,400 shares of common stock resulted in $5,100 and
$71,862 of additional goodwill. At February 28, 1997, the Company wrote off
approximately $620,000 of Goodwill as part of its plan to exit the traditional
T-Shirt bag product lines (Note 6). At February 23, 1996, $789,402 of
unamortized goodwill related to these trasactions is included in Other Assets.
Ivan J. Hughes, a director of the Company, is President of the Plastics
Division Duro Bag Manufacturing Company ("Duro"). For Fiscal 1997 and Fiscal
1996, Duro accounted for approximately 16% and 10%, respectively, of the
Company's sales.
NOTE 18: EMPLOYMENT AGREEMENTS
In October 1993, the Company entered into employment agreements with
certain officers. Among other things, these agreements provide for minimum base
compensation of $750,000 in the aggregate plus incentive compensation based on
pre-tax profits and for severance payments which approximate two years of base
compensation. Each of these agreements will expire on June 30, 1998.
F-20
NOTE 19: COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in litigation arising from
the normal course of business. The outcome of such litigation is not expected to
have a material impact on the financial statements.
The Company entered into an operating lease in December 1994, that
required a letter of credit in the amount of $317,000. The letter of credit
expired in October 1996.
At February 28, 1997, the Company had commitments to purchase
approximately $275,000 of machinery and equipment.
NOTE 20: STOCK OPTION PLANS
In May 1990, the Company adopted a stock option plan and on October 25,
1993, the Board of Directors approved a stock option plan that provides certain
individuals the right to purchase up to 200,000 shares and 750,000 shares,
respectively, of common stock. In September 1996, the Company adopted a stock
option plan that entitles certain individuals the right to purchase up to
1,000,000 shares of common stock. The Board of Directors determines those
individuals who shall receive options, the time period during which the options
may be exercised, and the number of shares of common stock that may be purchased
and the exercise price (which can not be less than the fair market value of the
common stock on the date of grant). Options generally vest ratably over two to
three years. The Company may not grant employee incentive stock options with a
fair value in excess of $100,000 that is first exercisable during any one
calendar year. Options granted under the stock option plan generally expire ten
years from the date of grant.
There was no activity under the 1996 Stock Option Plan during the years
ended February 23, 1996 and February 28, 1997. Transactions under the 1990 and
1993 Stock Option Plans during the years ended February 28, 1997 and February
23, 1996 are summarized as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1997 February 23, 1996
----------------- -----------------
Weighted average Weighted average
Options Shares exercise price Shares exercise price
------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 795,630 $ 4.04 778,955 $ 4.07
Options granted whose exercise price
equal the market price of the stock
on grant date 12,500 2.40 26,000 4.00
Options granted whose exercise price
is greater than the market price of the
stock on grant date 9,200 2.40 21,000 5.40
F-21
Canceled (43,500) 3.49 (30,325) 5.64
------- --------
Outstanding at year end 773,830 3.98 795,630 4.04
======= ========
Options exercisable at period end 589,377 466,025
======= ========
Weighted average fair value of options
granted during the period $ 1.65 $ 2.95
======= =======
Year Ended
February 24, 1995
-----------------
Weighted average
Options Shares exercise price
------- ------- --------------
Outstanding at beginning of year 758,630 $ 4.05
Options granted whose exercise price
equal the market price of the stock
on grant date --- ---
Options granted whose exercise price
is greater than the market price of the
stock on grant date 32,000 4.44
Canceled (11,675) 5.82
--------
Outstanding at year end 778,955 4.07
========
Options exercisable at period end 267,704
========
Weighted average fair value of options
granted during the period $ ---
========
</TABLE>
In March of 1996, the Company granted 18,500 options with an exercise
price of $2.38. In January of 1997, the Company granted 3,200 options with an
exercise price of $2.50. In March of 1996, the Company changed the exercise
price for selected options, which were granted in fiscal 1993, from $6.25 to
$4.00, and selected options, which were granted in fiscal 1994, from $6.63 to
$4.00.
The following table summarizes information about employee options outstanding at
February 28, 1997:
<TABLE>
<CAPTION>
Options outstanding
-------------------
Weighted
Number average Weighted
outstanding at remaining average
Range of exercise prices February 28,1997 contractual life xercise price
- ------------------------ ---------------- ---------------- -------------
<S> <C> <C> <C>
$2.38-3.00 50,700 5.75 $ 2.73
3.88-4.75 697,630 6.35 4.02
5.25-6.25 25,500 7.17 5.51
--------
773,830 6.34 3.98
========
F-22
Options exercisable
-------------------
Number Weighted
exercisable at average
Range of exercise prices February 28, 1997 exercise price
- ------------------------ --------------------- --------------
$2.38-3.00 38,500 $ 2.85
3.88-4.75 532,877 4.01
5.25-6.25 18,000 5.63
---------
589,377 3.98
=========
</TABLE>
Fair Value Disclosures
At February 28, 1997, the Company has three option plans, which are
described above. The Company applies APB Opinion 25 and related interpretations
in accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost for the Company's
three stock option plans been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of FASB Statement
123, the Company's net loss and loss per share would have been increased to the
pro forma amounts indicated below:
Year ended Year ended
February 28, 1997 February 23, 1996
---------------- ----------------
Net Loss As reported ($12,764,231) ($4,510,145)
Pro forma ($13,181,343) ($4,624,559)
Loss per share As reported ($0.96) ($0.38)
Pro forma ($0.99) ($0.39)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the applicable periods: dividend yield of
0.0% for both periods; risk free interest rates of 5.86% to 6.2% for options
granted and re-priced during the year ended February 28, 1997 and 6.2% for
options granted during the year ended February 23, 1996; a weighted average
expected option term of 5.33 to 10 years for options granted and re-priced
during the year ended February 28, 1997 and 10 years for options granted during
the year ended February 23, 1996; and expected volatility of 56,59% and 62.23%
for options granted and/or repriced during the years ended February 28, 1997 and
February 23, 1996, respectively.
NOTE 21. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of Fiscal 1997, management determined that,
due to continued intense competition in the traditional T-shirt bag product
lines which has resulted in a significant deterioration in gross margin, the
Company is exiting these product lines during Fiscal 1998. Accordingly, an
analysis of the fair value of assets related to these product lines was
performed during the fourth quarter of Fiscal 1997 which resulted in a
write-down of impaired assets and recognition of related expenses totaling
$5,897,648 (Note 6). The results for the fourth quarter ended February 28, 1997,
do not include any material amounts of year end adjustments that have not been
disclosed or any material amounts that should have been included in earlier
interim periods.
F-23
Schedule II
<TABLE>
<CAPTION>
Rule 12-09 Valuation and Qualifing Accounts and Reserves
Column A Column B Column C Column D Column E
Description Balance at Additions Deductions Balance at end
beginning of Charged to costs Accounts of period
period and expenses written off
<S> <C> <C> <C> <C> <C> <C>
Doubtful 2/26/94 20,000 36,075 26,075 30,000 2/24/95
Accounts 2/25/95 30,000 93,606 28,606 95,000 2/23/96
& Credits 02/24/96 95,000 158,165 78,165 175,000 02/28/97
</TABLE>
S-1
[INSERT CONSENT OF PRICE WATERHOUSE]
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> FEB-24-1997
<PERIOD-END> FEB-28-1997
<CASH> 58,134
<SECURITIES> 0
<RECEIVABLES> 2,268,760
<ALLOWANCES> 175,000
<INVENTORY> 4,534,453
<CURRENT-ASSETS> 8,074,171
<PP&E> 28,539,730
<DEPRECIATION> 8,736,393
<TOTAL-ASSETS> 29,247,231
<CURRENT-LIABILITIES> 13,893,315
<BONDS> 0
0
2,680,538
<COMMON> 140,745
<OTHER-SE> 8,723,392
<TOTAL-LIABILITY-AND-EQUITY> 35,277,975
<SALES> 30,810,037
<TOTAL-REVENUES> 30,810,037
<CGS> 29,254,754
<TOTAL-COSTS> 42,470,754
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,112,647
<INCOME-PRETAX> (12,764,231)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,764,231)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (0.96)
<EPS-DILUTED> 0
</TABLE>
