SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Transition Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
For the transition period from March 1, 1997 to December 31, 1997
Commission file number 0-19561
BPI PACKAGING TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2997486
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 Somerset Avenue, North Dighton, Massachusetts 02764
(Address of principal executive offices) (Zip Code)
(508) 824-8636
(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
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 Exhange 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___.
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 amendment to this Form
10-K. X
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 April 30, 1998 was approximately $24,949,845 for the Common Stock and
$213,583 for the Series A Convertible Preferred Stock. As of April 30, 1998,
21,025,396 shares of Common Stock, $.01 par value per share, were outstanding
and 213,583 shares of Series A Convertible Preferred Stock, $.01 par value per
share, were outstanding.
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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 and 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 of 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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<PAGE>
PART I
Item 1. Business
General
BPI Packaging Technologies, Inc., (the "Company") develops,
manufactures, markets and sells: (i) proprietary high performance thin, clear
plastic film used for tissue overwrap (paper towel and bathroom tissue), which
provide cost savings, to consumer packaged goods companies and other proprietary
plastic film used in insulation products to industrial companies; (ii) plastic
carryout bags of "T-shirt sack" design Handi-Sac (TM) and Fresh-Sac (R) made
from various plastic film products manufactured by the Company in patented
dispensing systems for use in supermarket, convenience, retail and drug store
chains and (iii) in-store advertising and promotion products to increase sales
in-store at the point of purchase. These products are Fresh-Sac (R) Produce
Profit Builder (TM), a marketing program for produce, for use in supermarkets
and Floor Focus Ad-Tile (TM), an in-floor advertising system referred to as a
billboard on the floor, for use in supermarket, convenience, retail and
drugstore chains and as a vehicle for anti-smoking advertising directed at youth
in public schools.
The Company's plastic film and T-shirt carryout bags are manufactured
in a new, state-of-the art plant located in North Dighton, Massachusetts,
utilizing some of the world's most advanced and highest quality printing,
extrusion and bag making equipment which was installed during the period June
1991 to February 1997. The manufacturing facility has the estimated capacity to
support sales of up to $80 million annually. During this period, the Company
also developed patented and proprietary bag and plastic film products and
developed and acquired in-store advertising and promotion products. The Company
has now completed significant investments in developing and marketing the
Company's products and beginning January 1, 1998 the Company has begun the sales
and marketing stage. Management's sales goal is to have its existing
manufacturing capacity fully utilized by the end of 1999.
Management believes that Calendar Year 1998 will be a transition year
leading to future profitability. The Company's strategy to achieve its sales
goal is to focus its resources to: (i) use the platform of proprietary high
performance plastic films together with the March 31, 1998 contract with an
international company to capture a large share of the estimated $0.8 billion
annual worldwide printed tissue overwrap (paper towel and bathroom tissue)
market, (ii) use the platform of proprietary bag Handi-Sac (TM) and Fresh-Sac
(R) and related in-store marketing programs Fresh-Sac (R) Produce Profit Builder
(TM) to capture a large share of the supermarket and convenience store markets
estimated at $0.6 billion annually and (iii) use Floor Focus Ad-Tile (TM) to
sell in-store advertising and promotion products to supermarkets and
hypermarkets in France with a coordinated program with Coca-Cola(R) France and
to sell anti-smoking advertising directed at youth in public schools and other
institutions.
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On March 31, 1998, the Company entered into a Five-year Purchase
Agreement to sell exclusively to an international company thin, clear plastic
film for tissue overwrap in North America and in certain foreign countries.
Under the terms of the Purchase Agreement, the Company has agreed to supply up
to $25 million of thin, clear film in each of the five years during the term of
the agreement and to increase the Company's capacity to produce thin, clear film
for tissue overwrap beyond $25 million annually upon prior reasonable notice.
The international company must purchase at least $5 million in the first year
and $10 million in each of the next four years of the agreement to maintain its
exclusive rights. The international company has also agreed to immediately
terminate its research and development program for thin film for tissue
overwrap. The first shipment of thin, clear film under the agreement was made on
April 9, 1998.
The new proprietary high performance thin, clear plastic film to
overwrap paper towels and bathroom tissue referred to in the preceding paragraph
has passed pre-production qualification tests at one of the top three consumer
packaged goods companies and engineering tests performed by CasMatic, the
leading worldwide manufacturer of tissue overwrap equipment. In the third
quarter of the 10 month period ended December 31, 1997, the thin, clear plastic
film to overwrap tissue products was released to the North American market and
initial marketing began in the European market. Management estimates the annual
market size for the thin, clear printed plastic film for tissue overwrap is $200
million in the U.S., $200 million in Europe and $400 million in the rest of the
world.
The Company has entered the in-store advertising and promotion market
with two new products: (i) Fresh-Sac (R) Produce Profit Builder (TM), which
incorporates the Company's established Fresh-Sac (R) T-shirt produce bag and
patented dispenser used by approximately 1,000 supermarkets, into a new in-store
advertising and promotion vehicle for supermarkets by adding to the patented
dispenser, the patented Cartridge Talker (TM) (a device that is integrated into
the patented bag dispenser and is an attractive cover for the dispenser on which
various advertising messages can be displayed) and (ii) the new patented Floor
Focus Ad-Tile (TM) system, which is a semi-permanent floor tile which contains
full color advertising messages manufactured into it and is installed in the
floor in strategic locations throughout the store. The objective of the
Fresh-Sac (R) Produce Profit Builder (TM) 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 as of December 31, 1997. The
in-store test results reported material increases in sales of program products.
In February 1998, one of the five largest supermarket chains in the
United States decided to use the Fresh-Sac (R) Produce Profit Builder (TM)
marketing program after successful in-store testing and annual sales potential
for this chain is estimated at $7.5 million. The Fresh-Sac (R) Produce Profit
Builder (TM) sales and marketing campaign began in December 1996, and presently
there are 17 other supermarket chains, with potential sales of $21 million
annually in various stages of in-store testing, and it is anticipated that sales
from this program will begin to increase in Calendar Year 1998. It is
anticipated that Coca-Cola(R) France will proceed in Calendar Year 1998 with a
planned eight week 8 in-store test for Floor Focus Ad-Tile (TM) in
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several hypermarkets (referred to as Superstores in the U.S.). It is believed
that the test will be successful, based on previous test results in the U.S.,
and that sales of Floor Focus Ad-Tile (TM) advertising to Coca-Cola(R) France
and others will begin in France in Calendar Year 1998. Floor Focus Ad-Tile (TM)
Anti-Smoking "billboard on floor" advertising and promotion will be installed in
one of the largest public school systems in the U.S. (150 public schools) in
Calendar Year 1998. It is anticipated that this installation will be the subject
of national media attention and be the critical mass to launch the Anti-Smoking
program nationally.
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 ("HMWHDPE") 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 two 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, and Market Media, Inc., which sells and
markets in-store advertising and promotion programs. Unless otherwise indicated,
the term "Company" includes BPI Packaging Technologies, Inc., its predecessor
Beresford-U.S., and its two 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>
1997
ANNUAL MARKET PATENT
$ MILLIONS STATUS COMPETITION
---------- ------ ----------------
<S> <C> <C> <C>
HIGH PERFORMANCE PRINTED TISSUE $200 - U.S. Process Technology No Direct
OVERWRAP FILM $200 - Europe Indirect: Exxon Films
$400 - Other
HANDI-SAC TM $120 U.S. Patent No Direct
Convenience & Auto Stores Issued 1993 Indirect: Paper and
Sonoco T-Sack Roll Bag
FRESH-SAC (R) $264 U.S. Patent No Direct
T-Shirt Produce Bag Issued 1993 Indirect: Produce Bag
on a roll
SUB TOTAL $1,184
CAUSE MARKETING $150 Anti-Smoking schools U.S. Patent No Direct
(Floor Billboard Advertising issued 1993
For Schools & Others) (Exclusive License)
IN STORE ADVERTISING AND PROMOTION PRODUCTS:
FLOOR FOCUS AD-TILE (TM)
(Floor Billboard Advertising) $100 Hypermarkets France
FRESH SAC(R) CARTRIDGE TALKER(TM) $235 U.S. Patent No Direct
ADVERTISING (Sold with Fresh-Sac (R) Issued 1996 Indirect: Catalina
Marketing; Act Media
SUB TOTAL $485
GRAND TOTAL $1,669
</TABLE>
High Performance Tissue Overwrap Film is anticipated by management to
contribute significantly to the Company's proprietary plastic film sales over
the next several years.
On March 31, 1998, the Company entered into a Five-year Purchase
Agreement to sell exclusively to an international company thin, clear plastic
film for tissue overwrap (paper towels and bathroom tissue) in North America and
in certain foreign countries. Under the terms of the Purchase Agreement, the
Company has agreed to supply up to $25 million of thin, clear film in each of
the five years during the term of the agreement and to increase the Company's
capacity to produce thin, clear film for tissue overwrap beyond $25 million
annually upon prior reasonable notice. The international company must purchase
at least $5 million in the first year and $10 million in each of the next four
years of the agreement to maintain its exclusive rights. The international
company has also agreed to immediately terminate its research and development
program for thin film for tissue overwrap. The first shipment of thin, clear
film under the agreement was made on April 9, 1998.
The new proprietary high performance thin, clear plastic film to
overwrap paper towels and bathroom tissue referred to in the preceding paragraph
has passed pre-production qualification tests at one of the top three consumer
packaged goods companies and
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engineering tests performed by CasMatic, the leading worldwide manufacturer of
tissue overwrap equipment. In the third quarter of the 10 month period ended
December 31, 1997, the thin, clear plastic film to overwrap tissue products was
released to the North American market and initial marketing began in the
European market. The primary benefit of the tissue overwrap film is a cost
savings of approximately 20% . The major consumer package goods companies
typically have annual purchases of $45 to $90 million annually for existing
tissue overwrap. Consequently, cost savings are estimated to range from $9
million to $18 million annually. (Cost savings are greater in countries that
have high environmental taxes based on the plastic's weight as in Germany and
Austria.) Additional advantages are increased production efficiency, less floor
space required for inventory, less working capital because of the cost savings
and direct savings on freight. Management estimates the annual market size for
the thin, clear printed plastic film for tissue overwrap is $200 million in the
U.S., $200 million in Europe and $400 million in the rest of the world.
Fresh-Sac (R) T-shirt produce bag is a thin, high clarity produce bag
manufactured from a proprietary plastic film developed by the Company and sold
in a patented dispensing mechanism. The product is presently sold to
approximately 1,000 supermarkets directly and through distributors. Fresh-Sac
(R) is being sold along with the patented Fresh-Sac (R) Cartridge Talker (TM)
potential for Fresh-Sac (R) Cartridge Talker (TM), exclusive of any third party
Fresh-Sac (R) Cartridge Talker (TM)advertising, is $264 million. The Company has
no direct competition in this market for the produce marketing program but has
indirect competition for the bag only from the traditional produce bag on a
roll.
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. Handi-Sac (TM) cost approximately two to three times more.
In-store advertising and promotion products are the Fresh-Sac (R)
Produce Profit Builder (TM), which consists of (i) the Fresh-Sac (R) T-shirt
sack produce bag in a patented dispensing system and (ii) the patented Fresh-Sac
(R) Cartridge Talker (TM), an attachment to the patented dispensing system,
which is utilized as an advertising and promotion vehicle and the Floor Focus
Ad-Tile (TM), an in-floor advertising system (billboard on the floor). 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.
Fresh-Sac (R) Produce Profit consists of the Fresh-Sac (R) t-shirt
produce bag and the patented Fresh-Sac (R) Cartridge Talker (TM) (a device that
is integrated into the patented bag dispenser and is an attractive cover for the
dispenser on which various advertising messages can be displayed). The
supermarket industry does not have any national in-store advertising and
promotion products for the produce section, which is the highest margin
department in the supermarket. The Fresh-Sac (R) Produce Profit Builder (TM)
Program has the potential of becoming the national marketing program for
produce. In February 1998, one of the five largest supermarket chains in the
United States decided to use the Fresh-Sac (R) Produce Profit Builder (TM)
marketing program after successful-in-store testing and the annual sales
potential for this chain is estimated at $7.5 million. Presently, there are 17
other supermarket chains, with estimated sales potential of $21 million annually
in various stages of in-store testing. The Fresh-Sac (R) Cartridge Talker (TM)
used as a platform to sell third party in-store advertising has an annual sales
potential estimated at $235 million.
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<PAGE>
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.
The sale of national in-store advertising to U.S. consumer package
goods companies requires a critical mass of 5,000 to 8,000 supermarkets that
reach 40% of the U.S. population each week. The sale of third party in-store
advertising to the consumer package goods companies would require a large
investment in sales and marketing resources and the Company does not intend to
pursue this market without a joint venture partner that already has national
in-store advertising and promotion capacity.
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(R)France in using Floor Focus Ad-Tile
(TM) advertising in the 1,056 hypermarkets in France, have resulted in the
decision to focus sales marketing resources for this product in France.
Coca-Cola(R) France plans an eight week in-store test for Floor Focus
Ad-Tile (TM) in hypermarkets (referred to as Superstores in the U.S.) in
Calendar 1998. Coca-Cola(R) France plans to have Floor Focus Ad-Tiles (TM)
advertising Coca-Cola(R) products installed in each test hypermarket. The
Company has not yet entered into the retailer agreements with the hypermarkets
which are necessary for the in-store test. Upon the successful completion of the
eight week in-store test, Coca-Cola(R) 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(R) 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.
Market Media plans to use Educational Ad-Tile (TM) to support a
national anti-smoking advertising and promotion program for the youth of the
nation in public schools. The anti-smoking program was officially launched by
United States Senator, John Kerry, on June 6, 1997.
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. The Company is exploring selling RC
America, Inc. to its management or reducing its ownership to make available
other adequate resources to fund its expansion opportunities.
Competition
The plastic film and bag and in-store advertising and promotion markets
are highly competitive. The Company does not have any direct competition for its
thin, clear film for tissue overwrap but does have indirect competition from
Exxon Films, which has a similar thin film for tissue overwrap. However, it is
believed that Exxon Films has an exclusive five year supply agreement with a
consumer package goods company that prohibits it from supplying other companies
and therefore, it is not presently considered to be a
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competitor. The Company competes with the major manufacturers of flexible
packaging and other companies that manufacture thick plastic films for tissue
overwrap. The Company believes that its tissue overwrap film is more cost
effective than any competitive product.
The Company's Fresh-Sac (R) t-shirt sack produce bag does not have any
direct competition but has indirect competition from the produce bag on a roll,
which is manufactured by companies that are both larger and smaller than the
Company. There are high barriers of entry into the plastic bag market due to the
significant capital requirements. The Company's capacity is estimated at 3.3 to
4.8 billion bags annually depending on product mix and the minimum investment
required for this capacity is presently estimated at approximately $49.5
million. In the traditional plastic grocery t-shirt market, which the Company
exited in the 10 month period ended December 31, 1997, the Company's competitors
included divisions of large multinational companies i.e., Tenneco, Inc., and
Sonoco Products Company.
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 owns a patent issued in 1989 for its T-shirt carryout bag
and patents for its HANDI-SAC (TM) dispensing system used in conjunction with
its Fresh-Sac (R) and HANDI-SAC (TM) products. The Company filed a patent
application in the United States for its tissue overwrap film but subsequently
withdrew the application and is relying on trade secrets. The Company was issued
a United States patent for its Fresh Sac(R)Cartridge Talker (TM) in 1996. 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. 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.
No assurance can be given 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. Similarly, no assurance can be given that the Company's
products will not infringe patents or rights of others.
Manufacturing
All of the Company's plastics products are manufactured in its Dighton,
Massachusetts, facility. The plastic 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
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the customer's information using non-toxic inks and shipped to customers. If the
film is to be used to manufacture bags, it 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.
Raw Materials
HMWHDPE resin comprises the principal raw material in the Company's
products, the principal component of which is ethylene, a derivative of natural
gas. HMWHDPE resin is currently available from several sources. During the 10
month period ended December 31, 1997 , as in some prior fiscal years, resin
prices fluctuated significantly, a trend the Company expects will continue.
Backlog
The Company's backlog of firm orders at April 30, 1998, was $413,767 as
compared to $791,602 at April 30, 1997. 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.
Major Customers
For the 10 month period ended December 31, 1997, there was no single
customer that accounted for more than 10% of the Company 's sales.
Employees
As of April 30, 1998, the Company had 77 full-time employees, including
its four executive officers, of whom 7 are employed in general and
administrative activities, 19 are involved in sales and marketing, and 51 are
involved in production. None of the Company's employees are represented by a
union.
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 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
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manufacture of plastic carry-out 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 various pending commercial legal proceedings
with equipment lessors and trade suppliers because of lease defaults and overdue
trade accounts. Management believes these legal proceedings will be settled by
negotiation; however, the failure to settle these proceedings by negotiation
could have material adverse effects on the Company 's business.
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 10 month period ended December 31, 1997, through the
solicitation of proxies or otherwise.
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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").
On April 29, 1998, the Company was informed by NASDAQ that its Common
Stock will be delisted from the NASDAQ National Market System on May 6, 1998
based on certain deficiencies asserted by the NASDAQ staff. The Company has
requested and been granted a hearing for a review of the staff's findings and,
although no assurance can be given, believes that all of such "deficiencies"
have been corrected as of the filing of this Form 10-K.
As of April 30, 1998, the Company had 21,025,396 Shares (243 holders)
of record for its Common Stock and 213,583 Shares (33 holders) 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/NNM. Such quotations represent inter-dealer
quotations without adjustment for retail markups, markdowns or commissions and
may not represent actual transactions.
High Sale Low Sale
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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
10 Month Period Ended December 31, 1997
First Quarter $ 1.96875 $ 1.5625
Second Quarter $ 1.875 $ 1.031
Third Quarter $ 2.313 $ 1.031
Fourth Quarter (1 month December 31, 1997)(1) $ 1.938 $ 1.063
Calendar Year 1998
First Quarter $ 1.375 $ 0.688
Second Quarter (through April 30, 1998) $ 1.565 $ 1.031
(1) Year end changed from February 28th to December 31, 1997
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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 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 of any covenants of its loan agreement at the time of such payments.
Item 6. Selected Financial Data
The following tables set forth summary financial information for the
periods indicated. This information should be read in conjunction with the
Company's consolidated financial statements (including the notes thereto)
included herein.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA
Ten Month Period Ended Fiscal Years Ended
---------------------- ------------------------------------------------------------
December 31, February 28, February 23, February 24, February 25,
1997 1997 1996 1995 1994
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 13,951,725 $ 30,810,037 $ 28,839,954 $ 25,254,645 $ 16,754,056
Cost of goods sold 18,113,514 29,254,754 26,161,723 19,879,041 12,831,497
------------ ------------ ------------ ------------ ------------
Gross profit (4,161,789) 1,555,283 2,678,231 5,375,604 3,922,559
Selling, general and
administrative expense 5,655,244 7,318,352 6,370,956 5,029,832 3,746,227
Write-down of impaired assets
and related expenses -- 5,897,648 -- -- --
Income (loss) from
operations (9,817,033) (11,660,717) (3,692,725) 345,772 176,332
Allowance for officer loan (586,978) -- -- -- --
Interest and other
expense (984,064) (1,112,647) (865,206) (280,445) (166,843)
Other income 49,206 9,133 47,786 77,104 --
Non-recurring charges -- -- -- (989,917) --
Income (loss) before
minority interest (11,338,869) (12,764,231) (4,510,145) (847,486) 9,489
Minority interest in
net loss of
consol. subsidiaries -- -- -- -- (10,092)
Net loss (11,338,869) (12,764,231) (4,510,145) (847,486) (603)
Basic and diluted net loss per share (.73) (.96) (.38) (.08) 0.00
Shares used in computing basic and
diluted net loss per share 15,579,747 13,261,815 11,756,532 10,670,040 8,523,580
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
At At At At At
December 31, February 28, February 23, February 24, February 25,
1997 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total assets $ 20,970,740 $ 29,247,231 $ 35,277,975 $ 35,341,925 $ 25,222,929
Long term obligations $ -- $ 3,809,241 $ 5,441,057 $ 4,495,692 $ 2,183,939
Redeemable preferred
stock -- $ -- $ 183,369 $ 183,369 $ 183,369
Working capital (deficit) $(13,897,932) $ (5,819,144) $ (2,767,867) $ 3,909,634 $ 2,048,842
Stockholders' equity $ 5,115,535 $ 11,544,675 $ 19,768,971 $ 24,048,204 $ 17,618,729
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
For the 10 Month Period Ended December 31, 1997 Compared to Fiscal Year 1997
During the 10 month period ended December 31, 1997, the Company exited
the traditional plastic carry-out bag market before its proprietary high
performance tissue overwrap film and Fresh-Sac (R) Produce Profit Builder (TM),
two major growth products for Calendar Year 1998 and beyond, were ready to make
the transition from marketing to sales. Sales for the 10 month period ended
December 31, 1997 were $13,951,725 compared to $30,810,037 in Fiscal Year 1997,
a decrease of 55%.
Sales of the Company's proprietary bag products Fresh-Sac (R) T-shirt
sack produce bag, HANDI-SAC(TM) and film products were $6,395,800 in the 10
month period ended December 31, 1997 compared to sales of $12,035,704 in Fiscal
Year 1997, an decrease of 46.9%. (Fiscal Year 1997 sales included $1,645,000
sales for Maxi-Sac and this product line was discontinued in the 10 month period
ended December 31, 1997). Sales of traditional products decreased to $6,586,998
as planned in the 10 month period ended December 31, 1997 from $16,571,656 in
Fiscal Year 1997, a decrease of 60.3%. RC America, Inc.'s net sales were
$968,927 in the 10 month period ended December 31, 1997 compared to $2,067,746
in Fiscal Year 1997, a decrease of 53%. RC America, Inc.'s. sales may fluctuate
significantly from year to year due to the nature of its business and the timing
of transactions. However, for the 10 month period ended December 31, 1997, the
Company did not have adequate working capital to fund its operations and sales
were materially negatively impacted. Market Media, Inc. recorded no sales in the
10 month period ended December 31, 1997 compared to $134,932 in Fiscal Year
1997.
In the 10 month period ended December 31, 1997, cost of goods sold was
$18,113,514 or 129.8% of sales, as compared to cost of goods sold in Fiscal Year
1997 of $29,254,754 or 95.0% of sales. The increase in cost of goods sold as a
percentage of sales is due primarily to the Company's inability to absorb fixed
costs during periods of lower sales volume. Additionally, expenses of $1,643,377
related to defaults on capital and operating leases were charged to cost of
goods sold during the fourth quarter of the 10 month period ended December 31,
1997.
Selling, general and administrative expense for the 10 month period
ended December 31, 1997 was $5,655,244 or 40.5% of sales as compared to selling,
general and administrative expense of $7,318,352 in Fiscal Year 1997, or 23.7%
of sales. Fixed expenses remained stable and were offset by a decline in
variable expenses primarily attributable to freight and commission expense due
to the reduction in sales volume.
For the 10 month period ended December 31, 1997 interest expense
decreased to $984,064 or 7.1% of net sales as compared to $1,112,647 in Fiscal
Year 1997 or 3.6% of net sales. An allowance for officer loan totaling $586,978
was charged to other expense for the 10 month period ended December 31, 1997.
-14-
<PAGE>
The net loss of ($11,338,869) in the 10 month period ended December 31,
1997 compared to a loss of ($12,764,231) in Fiscal Year 1997. The non-cash
expense of depreciation and amortization was $2,715,319 for the 10 month period
ended December 31, 1997 compared to $3,417,849 for the previous year.
The Company incurred a loss of ($ .73) per share in the 10 month period
ended December 31, 1997 as compared to a loss of ($.96) per share in Fiscal Year
1997.
<TABLE>
<CAPTION>
Operating profits (loss) for the various business units are as follows:
For the 10 Month Period ended Fiscal Year
December 31, 1997 1997
----------------------------- -------------
<S> <C> <C>
Proprietary, traditional and film products ($ 8,801,100) ($ 9,079,854)
RC America, Inc. (34,584) 53,591
BPI Packaging, Inc. (119) (2,205)
Market Media, Inc. (391,853) (809,199)
Unallocated corporate overhead (1,511,867) (1,823,050)
------------ ------------
Operating profit (loss) ($9,817,033) ($11,660,717)
Allowance for officer loan (586,978) --
Interest expense, net (934,858) (1,103,514)
------------ ------------
Net loss ($11,338,869) ($12,764,231)
============ ============
</TABLE>
Fiscal Year 1997 Compared to Fiscal Year 1996
For the year ended February 28, 1997 ("Fiscal Year 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 Year 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 Year 1997 compared to $26,439,203 in Fiscal Year 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 Year 1997 compared to sales of $9,412,415 in Fiscal Year
1996, an increase of 27.9%. Sales of traditional products decreased to
$16,571,656 in Fiscal Year 1997 from $17,026,788 in Fiscal Year 1996, a decrease
of 2.7%. BPI Packaging, Inc. did not have any sales of products purchased from
Integrated Bagging Systems Corporation in Fiscal Year 1997 compared to sales of
$416,255 in Fiscal Year 1996. RC America, Inc.'s net sales were $2,067,746 in
Fiscal Year 1997 compared to $1,984,496 in Fiscal Year 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 Year 1997.
In Fiscal Year 1997, cost of goods sold was $29,254,754 or 95.0% of
sales, as compared to cost of goods sold in Fiscal Year 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.
-15-
<PAGE>
Selling, general and administrative expense for Fiscal Year 1997 was
$7,318,352 or 23.7% of sales as compared to selling, general and administrative
expense of $6,370,956 in Fiscal Year 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.
Fiscal Year 1997 interest expense increased to $1,112,647 or 3.6% of
net sales as compared to $865,206 in Fiscal Year 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 Year 1997 as compared to a loss
of $4,510,145 in Fiscal Year 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 Year 1997 compared to $2,643,138 for Fiscal Year 1996.)
The Company incurred a loss of ($.96) per share in Fiscal Year 1997 as
compared to a loss of ($.38) per share in Fiscal Year 1996.
Operating profits (loss) for the various business units are as follows:
Fiscal Year 1997 Fiscal Year 1996
---------------- ----------------
Proprietary, traditional and film products ($ 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)
============ ============
-16-
<PAGE>
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.
Note Payable
As of December 31, 1997, the Company had an $8,000,000 revolving line
of credit secured by accounts receivable and inventory. Borrowings under the
line of credit are subject to 80% of qualifying accounts receivable and 35% of
qualifying inventories, less the aggregate amount utilized under all commercial
and standby letters of credit and bank acceptances. The line of credit bears
interest at 5.0% above the variable interest rate quoted by Norwest Bank of
Minnesota with a minimum rate of 8.0% (13.5% at December 31, 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 in November. At December 31, 1997, the balance under the
line of credit was $1,162,349. The line of credit includes certain financial
covenants that the Company must maintain to avoid a default, including current
ratio, debt to equity ratio, maintaining a net worth of $14 million, limitation
on capital spending, and profitability. At December 31, 1997 the Company was in
default under the financial covenants. The lender waived these conditions of
default at December 31, 1997. Subsequent to December 31, 1997, the lender
informed the Company that it wanted repayment of the revolving line of credit
and the Company has agreed to repayment by June 30, 1998. As of April 28, 1998,
the balance under the line of credit was $438,640. The Company is negotiating a
new revolving line of credit with another lending institution.
Sales of Securities
In the second, third and fourth quarters of the 10 month period ended
December 31, 1997, the Company received net proceeds from the sale of Common
Stock of $1,879,011, $1,665,800 and $859,180 respectively, bringing the total
net proceeds from the sale of Common Stock from June through December 31, 1997
to $4,800,071. The Company received net proceeds from the Sale of Common stock
from January 1, 1998 to April 30, 1998 of $1,066,200. The Company may sell
additional equity or debt securities in Calendar Year 1998. However, the Company
has no commitments for such financing, and no assurance can be given that
additional financing will be successfully completed or that such financing will
be available on terms favorable to the Company, if at all.
During Fiscal Year 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.
Equipment Purchases and Lease Financings
From March 1994 through August 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 lines. The equipment was financed from the sale of equity securities,
equipment lease financing and bank loans.
The Company currently has outstanding commitments to purchase an
additional $275,000 in machinery and equipment.
Capital leases contain provisions that give the lessor the right to
accelerate lease payments in the event of default and all lessors have filed
suit because of defaults. All capital leases, operating leases and real-estate
leases were in default as of and for the 10 month period ended December 31, 1997
and are still in default as of April 30, 1998. Restructuring agreements have
been reached with three lessors. Restructuring agreements are expected to be
negotiated with other lessors to cure any defaults. Management believes that all
leases will be restructured without any further litigation but any such
litigation could have a materially adverse effect on the Company.
Cash Flow
During the 10 month period ended December 31, 1997, the Company had non
cash charges of $2,186,621 relating to depreciation and amortization and
$4,800,071 from the sale of Common Stock. The Company raised $209,020 from an
increase in accounts
-17-
<PAGE>
payable and $1,197,521 from a reduction in accounts receivable. The Company used
$212,144 to purchase equipment and for plant improvements and $1,492,754 to make
principal payments on capital lease obligations. At December 31, 1997,
stockholders' equity was $5,115,535 as compared to $11,544,675 at February 28,
1997. The Company's current ratio was 0.12:1 at December 31, 1997 compared to
0.50:1 at February 28, 1997. The net book value of property and equipment was
$17,828,860 at December 31, 1997 compared to $19,803,337 at February 28, 1997.
To date, the Company has generated cash flows from operations including
depreciation, financing activities, including sales of equity securities, lines
of credit, term loan facilities, equipment leasing arrangements and loans from
raw material suppliers. Management believes that completing negotiations for a
new revolving line of credit and term loan to buyout the capital leases together
with the anticipated proceeds of $2.0 to $3.0 million from the exercise of
warrants and options in Calendar Year 1998 and anticipated cash from operations
will be sufficient to fund the Company's current operations. However, the
Company may require additional debt or equity 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.
Impairment of Long-Lived Assets
The Company exited the traditional plastic grocery carry-out bag market
in the 10 month period ended December 31, 1997. This market is highly
competitive and margins remained low for several years, covering variable
manufacturing costs, but making little contribution to manufacturing overhead,
SG&A, interest or profit. As discussed in Notes 1 and 6 to the Company's
consolidated financial statements, the Company adopted Statement of Financial
Accounting Standard 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.
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 Year 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 from intense competition,
approximately $1,165,000 of inventory reserves were established in the fourth
quarter of Fiscal Year 1997 to properly state the traditional T-shirt bag
product line inventory at net realizable value.
Going Concern and Management's Plan
The Company has suffered recurring net losses and has net working
capital and operating cash flow deficiencies. Additionally, significant trade
credit balances are past due and operating and capital lease obligations are in
default at the balance sheet date. Further, as discussed in Note 11 to the
Company's consolidated financial statements, the Company's revolving credit
facility is renewable annually. Subsequent to December 31, 1997, the lender
informed the Company that it wanted repayment of the revolving line of credit
and the company has agreed to repayment by June 30, 1998.
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. 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.
-18-
<PAGE>
The Company exited the production of its traditional T-shirt bag
product lines during the 10 month period ended December 31, 1997. Increased
competition from large domestic and overseas competitors with significant
production economies of scale caused the Company to incur substantial losses on
these products during the past several years. The Company has shifted its
resources to the production of proprietary bag and plastic film product lines
which have the potential to have higher profit margins. In February 1998, one of
the five largest supermarket chains in the United States decided to use the
Fresh-Sac (R) Produce Profit Builder (TM) marketing program after successful
in-store testing and presently there are 17 other supermarket chains in various
stages of in-store testing. On March 31, 1998, the Company entered into a
Five-year Purchase Agreement to sell exclusively to an international company
thin, clear plastic film for tissue overwrap in North America and in certain
foreign countries. Additionally, the Company is negotiating a new revolving line
of credit and term loan with another lending institution. The Company also plans
to continue raising additional equity and anticipates proceeds of $2.0 to $3.0
million from the exercise of warrants and options in Calendar Year 1998.
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. For the 10 month
period ended December 31, 1997, no shares of Common Stock were issued. 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 Year 1996 and Fiscal Year 1995, 2,550 and 17,400 shares,
respectively of the 100,000 shares of Common Stock were issued to Mr. Ronald
Caulfield.
Impact of Inflation
Inflation during the 10 month period ended December 31, 1997, and the
last two fiscal years has not had a significant effect on the Company's
activities.
Year 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations are a known risk. The
Company has not addressed this risk as to the availability and integrity of
financial systems and the reliability of operational systems. The cost of
achieving Year 2000 conversion has not been determined as of the date of this
filing.
Item 8. Financial Statements and Supplementary Data
See Item 14 below and the Index therein for a listing of the financial
statements and supplementary date filed as part of this report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There has been no change in the Company's independent accountants nor
did any disagreements occur on any matter of accounting principles or practices
for financial statement disclosure that would be required to be reported on a
Form 8-K.
-19-
<PAGE>
PART III
Item 10. Directors and Executive Officers of Registrant
Directors and Executive Officers
The directors and executive officers of the Company, their positions
held in the Company, and their ages are as follows:
Name Age Position
- ---- --- --------
Dennis N. Caulfield 58 Chairman of the Board of
Directors, Chief
Executive Officer and Chief
Financial Officer
C. Jill Beresford 43 President, Treasurer and Director
Stephen J. St. Louis 44 Vice President and
Chief Accounting Officer
Ronald V. Caulfield 55 Chief Executive Officer and President of
RC America, Inc.
David N. Laux 69 Director
Dennis N. Caulfield, the Company's Chief Executive Officer and Ronald
V. Caulfield, President of RC America, Inc., are brothers. Except for such
relationship, no director or executive officer is related by blood, marriage or
adoption to any such 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 is classified as Class I director and serves until the 1998
Annual Meeting; David N. Laux and C. Jill Beresford are Class II directors and
serve until the 2000 Annual Meeting. The two Class III directors positions have
not yet been filled. 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 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.
-20-
<PAGE>
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. Mr. Caulfield assumed the additional
position of Chief Financial Officer on December 31, 1997. 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.
Stephen J. St. Louis. Mr. St. Louis has been the Company's Vice
President and Chief Accounting Officer since April 1998. Mr. St. Louis was
controller for Quadrax Corporation from 1995 to 1998. From 1991 through 1994 he
was the cost accounting manager for Pacific Scientific, Fisher Pierce Division.
Mr. St. Louis has served in various accounting positions since 1979 and is an
accounting professional with over 20 years of manufacturing accounting
experience. Mr. St. Louis received a B.A. degree from Thiel College in 1975 with
a major in Accounting and Business Administration.
Ronald V. Caulfield. 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.
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
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<PAGE>
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.
Officers
Name Age Position
---- --- --------
Michael Deery 52 Vice President Manufacturing
Tracy L. McGrath 32 Vice President, Marketing
Richard H. Nurse, Ph.D. 52 Vice President of Technical
Development
Alex F. Vaicunas 70 Vice President, Film Sales
Michael Deery. Mr. Deery has been the Company's Vice President of
Manufacturing since March 1998. From 1992 to 1998, Mr. Deery was Director,
International Manufacturing Operations for Tambrands, Inc. He was responsible
for all international manufacturing functions and facilities in the United
Kingdom, Ireland, France, Ukraine, Russia and China. From 1988 to 1992, Mr.
Deery was Vice President International Manufacturing for Augat, Inc. and from
1983 to 1988 was Director, Camera Manufacturing for Polaroid Corporation. Mr.
Deery graduated from the University of Surrey in Scotland and received a B.S.
Degree in Physics with honors.
Tracy L. McGrath. Ms. McGrath has been the Company's Vice President of
Marketing since December 1997 and prior to that was 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.
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 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.
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
experience in the marketing and sales of flexible film packaging.
-22-
<PAGE>
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
periods ended December 31, 1997, February 28, 1997, and February 23, 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
(a) (b) (c) (d) (g) (i)
Securities
Underlying All Other
Name and Principal Position Period Salary(1) Bonus(2) Options(#) Compensation
--------------------------- ------ --------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Dennis N. Caulfield 1997 $266,666 $ 0 $ 0 $ 36,923(3)
Chairman of the Board 1997 $320,000 $ 0 $ 0 $122,220(3)
Chief Executive Officer 1996 $320,000 $ 0 $ 0 $ 36,174(3)
Chief Financial Officer
C. Jill Beresford 1997 $150,000 $ 0 $ 0 $ 2,769(4)
President and Treasurer 1997 $180,000 $ 0 $ 0 $ 22,978(4)
1996 $180,000 $ 0 $ 0 $ 13,989(4)
<FN>
(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 the 10 month period ended December 31, 1997 and
Fiscal Years 1996-1997, the Company made no awards of restricted stock.
(2) Effective July 1, 1993, Mr. Caulfield and Ms. Beresford 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 $750,000 in the aggregate in any fiscal
year beginning with Fiscal 1995. No bonuses have been paid under the bonus program.
(3) Effective December 15, 1993, the Company pays for two (2) personal term life insurance policies
for Mr. Caulfield and for a disability policy effective February 7, 1994. The Company also
makes automobile and insurance payments for an automobile for Mr. Caulfield. These payments and
paid unused vacation represented other compensation for the 10 month period ended December 31,
1997 and Fiscal Years 1997 and 1996.
(4) Effective December 15, 1993, the Company pays for a personal term life insurance policy for Ms.
Beresford and for a disability policy that became effective February 7, 1994. Effective
November 1, 1995, the Company also makes automobile and insurance payments for an automobile
for Ms. Beresford. These payments represented other compensation for the 10 month period ended
December 31, 1997 and Fiscal Years 1997 and 1996.
</FN>
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES
AND OPTION VALUES FOR THE 10 MONTH PERIOD ENDED DECEMBER 31, 1997
(a) (b) (c) (d) (e)
--- --- --- --- ---
Number of
Securities
Underlying Unexercised
Unexercised Value of
Options In-the-Money
Value at FY-End Options
Shares Acquired Realized Exercisable/ Unexercisable
Name on Exercise ($) Unexercisable ($)(1)
---- --------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Dennis N. Caulfield 0 0 238,707/ 26,523 0 / 0
C. Jill Beresford 0 0 146,902 / 16,322 0 / 0
<FN>
(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 December 31, 1997, the fair market value
of the Company's Common Stock underlying the options (as determined by the last sale price quoted
on NASDAQ/NNM) was $1.125. Since the exercise price of all of the options reflected in this table
is greater than $1.125, the options held by these individuals are not In-the-Money and are
therefore not included in this calculation.
</FN>
</TABLE>
Audit Committee
The Board of Directors established an Audit Committee on December 31,
1992. The one member of the Audit Committee is David N. Laux, the sole outside
director of the Company. 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, and any transactions which may involve a potential
conflict of interest, and internal control systems.
Compensation of Directors
All outside Directors of the Company are paid $1,875 each per calendar
quarter. No other directors receive any compensation. In June 1992 and March
1996, David N. Laux, currently the Company's sole outside director, 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 Mr. Laux were
converted into 1,035 shares of the Company's Common Stock, based on the closing
bid price of the Company's Common Stock on April 25, 1997 of $1.875 as reported
by NASDAQ/NMS. In January 1998, Mr. Laux received options to purchase a total of
25,000 shares of common stock at a purchase price of $1.25 per share through
December 31, 2003.
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 and Mr.
Vaicunas. Base salaries for Mr. Caulfield, Ms. Beresford and Mr. Vaicunas are
$320,000, $180,000 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
-24-
<PAGE>
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 has also entered into
non-competition and confidentiality agreements with certain other employees.
Compensation Committee Interlocks and Insider Participation
The Board of Directors established a Compensation Committee on December
31, 1992. The one member of the Compensation Committee is David N. Laux, the
sole outside Director 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 Beneficial Owners and Management
Principal Stockholders
The following table sets forth, as of December 31, 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. As of December 31, 1997, there were
19,513,496 shares of Common Stock outstanding.
<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 8.43%
Dennis N. Caulfield(3)(7)(8) 854,506 4.43%
Ronald V. Caulfield(9) 95,230 0.49% *
741 Boston Post Road, Suite 101
Guilford, Connecticut 06437
David N. Laux(10) 11,572 0.06% *
1726 M Street, N.W., Suite 601
Washington, DC 20036
All Officers and Directors
as a Group (5 persons)(3)(4)(5)(6)
(7)(8)(9)(10) 2,588,557 13.42%
<FN>
* 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.
-25-
<PAGE>
(2) Except as otherwise noted, does not give effect to the issuance of: (i) up to 472,178 shares of
Common Stock issuable upon conversion of Series A and Series B Convertible Preferred Stock;
(ii) up to 109,822 shares issuable upon exercise of warrants issued to the placement agent in
the Company's December private placement of Common Stock; (iii) up to 1,933,750 shares issuable
upon exercise of options granted or available for grant under the Company's 1990, 1993 and 1996
Stock Option Plans (906,159 options have been granted) and (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").
(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 by Ms. Beresford.
(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.
(10) 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 and 25,000 shares of Common Stock issuable upon
exercise of an option at a purchase price of $1.25 per share through December 31, 2007.
</FN>
</TABLE>
-26-
<PAGE>
Item 13. Certain Relationships and Related Transactions
In November 1990, the Company established an officer's loan receivable
to Dennis N. Caulfield, its Chairman for $132,197. The balance of the loan, as
of December 31, 1997 was $586,978 which included interest at 9.5% of $48,832 for
the period and net additional advances of $61,657 received by Mr. Caulfield in
the 10 month period ended December 31, 1997. The note was amended in April 1998
and the interest rate changed to 6% effective from November 1990 and is now
payable on or before January 1, 2001. The reduced interest results in a
reduction to the officer's loan of approximately $107,000 from the period of
inception through December 31, 1997. Mr. Caulfield has agreed to apply any bonus
payments received under the Company's executive bonus plan to reduce the amounts
outstanding under the loan. As the Company has suffered recurring net losses and
operating cash flow deficiencies, a reserve of $586,978 has been established for
this loan as of December 31, 1997. In addition the Company paid, on behalf of
the Chairman, approximately $36,000 of a $200,000 levy and established an
interest bearing note due on or before June 30, 1998.
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. For the 10 month
period ended December 31, 1997, no shares of Common Stock were issued. As a
result of RC America's earnings for Fiscal Year 1997 and Fiscal Year 1996 ,
2,640 and 2,550 shares, respectively, of the 100,000 shares of Common Stock were
issued to Mr. Ronald Caulfield.
-27-
<PAGE>
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:
Page
Report of Independent Accountants - Price Waterhouse LLP F-1
Consolidated Balance Sheets as of December 31, 1997 and
February 28, 1997 F-2
Consolidated Statements of Operations for the ten month
period ended December 31, 1997, and for the Fiscal
Years ended February 28,1997 and February 23, 1996 F-4
Consolidated Statements of Changes in Stockholders' Equity
for the ten month period ended December 31, 1997,
and for the Fiscal Years ended February 28, 1997
and February 23, 1996 F-5
Consolidated Statements of Cash Flows for the ten month
period ended December 31, 1997, and for the Fiscal
Years ended February 28, 1997 and February 23, 1996 F-6
Notes to Consolidated Financial Statements F-7
(a)(3) Exhibits:
(a) The following exhibits, required by Item 601 of Regulation S-K, are
filed herewith:
-28-
<PAGE>
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 of 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.
-29-
<PAGE>
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 Ave., 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 Incorporate 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:
-30-
<PAGE>
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 (No. 33-39463) declared effective by the Commission on
June 13, 1991 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** 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.
(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.
-31-
<PAGE>
(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.
(l) Reports on Form 8-K.
Issuance of Common Stock
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.
Change in Fiscal Year
On December 2, 1997, the Board of Directors of the Company adopted a
change of fiscal year, effective immediately, from a 52-53 week fiscal year
ending on the Friday closest to February 28 to a calendar year ending on
December 31. The Company's last fiscal year ended February 28, 1997 and the
Company's current accounting period ended December 31, 1997. As a result of the
change, the Company will file a transition report on Form 10-K for the 10 month
period ended December 31, 1997.
Sale of Equity Securities pursuant to Regulation S
From December 2, 1997 through December 17, 1997, the Company sold an
aggregate of 872,000 shares of its common stock, $.01 par value per share (the
"Common Stock") to four non-US accredited investors (the Reg 5 Purchasers") in
reliance upon the transaction exemption afforded by Regulation S ("Regulation
S") as promulgated by the Securities and Exchange Commission ("SEC"), under the
Securities Act of 1933, as amended, (the Act"). In conjunction with the sale of
Common Stock, each Reg S purchaser signed a subscription agreement confirming
its compliance with Rule 902 and 903 of Regulation S. In addition, the Company
sold 222,223 shares of Common Stock to one accredited U.S. investor (the Reg D
Purchaser") in reliance upon the transaction exemption afforded by Regulation D
("Regulation D") as promulgated by the SEC under the Act. The Reg D Purchaser
signed an agreement confirming its status as an accredited investor. The Company
received gross proceeds totaling $1,004,800 from the sale of the Common Stock to
the Purchasers.
Newport Capital Partners (the "Placement Agent"), of Newport, Rhode
Island, was the placement agent in connection with the offering and received an
aggregate of $126,620 in commissions and expense allowances. The Placement Agent
also received 109,422 warrants to purchase Common Stock at the rate of one
warrant for every 10 shares sold in the offering. The warrants will be
exercisable for five years at $1.10, a price equal to 120% of the price at which
the Common Stock was sold.
-32-
<PAGE>
Five-Year Purchase Agreement
On March 31, 1998, the Company entered into a Five-year Purchase
Agreement to sell exclusively to an international company thin, clear plastic
film for tissue overwrap (paper towels and bathroom tissue) in North America and
in certain foreign countries. Under the terms of the Purchase Agreement, the
Company has agreed to supply up to $25 million of thin, clear film in each of
the five years during the term of the agreement and to increase the Company's
capacity to produce thin, clear film for tissue overwrap beyond $25 million
annually upon prior reasonable notice. The international company must purchase
at least $5 million in the first year and $10 million in each of the next four
years of the agreement to maintain its exclusive rights. The international
company has also agreed to immediately terminate its research and development
program for thin film for tissue overwrap. The first shipment of thin, clear
film under the agreement was made on April 9, 1998.
-33-
<PAGE>
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: May 22, 1998
By: /s/ Dennis N. Caulfield
Dennis N. Caulfield, Chairman
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.
Name Capacity Date
- ---- -------- ----
/s/ Dennis N. Caulfield Chairman of the Board of Directors, May 22, 1998
Chief Executive Officer
and Chief Financial Officer
/s/ C. Jill Beresford President, Treasurer and Director May 22, 1998
/s/ David N. Laux Director May 22, 1998
-34-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS - PRICE WATERHOUSE LLP
May 22, 1998
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) on page 28 present fairly, in all material respects, the financial
position of BPI Packaging Technologies, Inc. and its subsidiaries at December
31, 1997 and February 28, 1997, and the results of their operations, their
changes in stockholders' equity and their cash flows for the 10 month period
ended December 31, 1997 and for each of the years ended February 28, 1997 and
February 23, 1996, 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. In addition,
the Company is in default on its capital lease obligations and its note payable.
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 6 to the financial statements, the Company adopted
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to the Disposed of," for
the year ended February 28, 1997.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
F-1
<PAGE>
BPI Packaging Technologies, Inc.
Consolidated Balance Sheet
Assets
December 31, February 28,
1997 1997
------------ -----------
Current assets
Cash $125,220 $58,134
Accounts receivable, net 721,239 2,093,760
Inventories, net 1,057,866 4,534,453
Prepaid expenses 52,948 270,486
----------- -----------
Total current assets 1,957,273 6,956,833
----------- -----------
Property and equipment, net 17,828,860 19,803,337
----------- -----------
Deposits - leases and equipment purchases 141,284 128,461
Loans to officers, net 5,416 479,797
Other assets, net 1,037,907 1,878,803
----------- -----------
1,184,607 2,487,061
----------- -----------
$20,970,740 $29,247,231
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
BPI Packaging Technologies, Inc.
Consolidated Balance Sheet
Liabilities and Stockholders' Equity
December 31, February 28,
1997 1997
----------- -----------
Current liabilities
<S> <C> <C>
Note payable $1,162,349 $3,733,477
Trade notes payable 584,433 --
Capital lease obligations due within one year 4,426,205 2,109,718
Accounts payable 6,714,870 7,090,283
Accrued expenses 2,967,348 959,837
----------- -----------
Total current liabilities 15,855,205 13,893,315
------------ -----------
Capital lease obligations-long-term portion -- 3,809,241
----------- -----------
Stockholders' Equity
Series B convertible preferred stock, $.01 par value 1,466,954 1,466,954
Series A convertible preferred stock, $.01 par value 1,126,932 1,213,584
Common stock, $.01 par value; shares authorized - 60,000,000
at December 31, 1997 and 30,000,000 at February 28, 1997;
shares issued and outstanding - 19,513,496 at
December 31, 1997 and 14,074,428 at February 27, 1997 195,135 140,745
Capital in excess of par value 43,076,603 38,134,612
Accumulated deficit (40,750,089) (29,411,220)
----------- -----------
5,115,535 11,544,675
----------- -----------
Commitments and contingencies
$20,970,740 $29,247,231
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
BPI Packaging Technologies, Inc.
Consolidated Statement of Operations
Ten Month
period ended -----Fiscal Year Ended------
December 31, February 28, February 23,
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 13,951,725 $ 30,810,037 $ 28,839,954
Cost of goods sold 18,113,514 29,254,754 26,161,723
------------ ------------ ------------
Gross profit (loss) (4,161,789) 1,555,283 2,678,231
Operating expenses:
Selling, general and administrative 5,655,244 7,318,352 6,370,956
Write-down of impaired assets and related expenses -- 5,897,648 --
------------ ------------ ------------
Loss from operations (9,817,033) (11,660,717) (3,692,725)
Other (expense) income:
Allowance for officer loan (586,978) -- --
Interest expense (984,064) (1,112,647) (865,206)
Interest income 49,206 9,133 47,786
------------ ------------ ------------
Net loss ($11,338,869) ($12,764,231) ($ 4,510,145)
============ ============ ============
Basic and diluted net loss per share ($0.73) ($0.96) ($0.38)
Shares used in computing basic and diluted
net loss per share 15,579,747 13,261,815 11,756,532
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
BPI Packaging Technologies, Inc.
Consolidated Statement of Changes in Stockholders' Equity
For the Ten Month Period Ended
December 31, 1997 and for the Fiscal Years Ended February 28, 1997 and February 23, 1996
Series A Convertible Series B Convertible
Common Stock Preferred Stock Preferred Stock Capital in
------------------------------------------------------------------ Excess of Accumulated
Shares Amount Shares Amount Shares Amount Par Value Deficit Total
---------- ---------- -------- --------- -------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at February 24,
1995 .................... 11,658,359 116,584 380,371 1,521,484 146,695 1,466,954 33,080,026 (12,136,844) 24,048,204
Issuance of shares based
on RC America's FY95
results ................. 17,400 174 71,688 71,862
Conversion of Series A
convertible preferred
stock to common stock ... 76,425 764 (76,425) (305,700) 304,936 --
Sale of common stock pursuant
to partial exercise of
Class A warrants, net of
issuance costs .......... 48,725 487 158,563 159,050
Net loss for the year ended
February 23, 1996 ....... (4,510,145) (4,510,145)
---------- ---------- -------- --------- -------- --------- ---------- ---------- ----------
Balance at February 23,
1996 .................... 11,800,909 118,009 303,946 1,215,784 146,695 1,466,954 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 ....... 1,207,500 12,075 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 .......... 402,600 4,026 100,000 225,000 851,024 1,080,050
Conversion of Series A
convertible preferred
stock to common stock ... 56,800 568 (56,800) (227,200) 226,632 --
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 1,092,799 1,097,917
Issuance of common stock
based on RC America's
FY96 results ............ 2,550 26 5,074 5,100
Issuance of 92,308
Regulation S common shares
in exchange for Series C
redeemable preferred
stock ................... 92,308 923 149,077 150,000
Net loss for the year
ended February 28, 1997.. (12,764,231)(12,764,231)
---------- ---------- -------- --------- -------- --------- ---------- ----------- ----------
Balance at February 28,
1997 .................... 14,074,428 140,745 347,146 1,213,584 146,695 1,466,954 38,134,612 (29,411,220) 11,544,675
Conversion of Series A
convertible preferred
stock to common stock ... 21,663 217 (21,663) (86,652) 86,435 --
Issuance of common stock
based on RC America FY 97
results ................. 5,280 52 8,527 8,579
Sale of common stock
pursuant to Regulation S
and Regulation D private
placement offerings, net
of issuance costs ....... 4,991,125 49,911 4,354,080 4,403,991
Issuance of common stock
in exchange for commission
on private placement
offerings ............... 387,500 3,875 383,626 387,501
Issuance of common stock
in exchange for consulting
services ................ 33,500 335 33,165 33,500
Warrants granted to
consultants.............. 76,158 76,158
Net loss for the 10 month
period ended December 31,
1997..................... (11,338,869)(11,338,869)
---------- ---------- -------- --------- -------- --------- ----------- ------------ -----------
Balance at December 31,
1997 .................... 19,513,496 195,135 325,483 1,126,932 146,695 1,466,954 $43,076,603 ($40,750,089) $5,155,535
========== ========== ======== ========= ======== ========= =========== ============ ==========
</TABLE>
The accompanying notes are an integral
part of consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
BPI Packaging Technologies, Inc.
Consolidated Statement of Cash Flows
Ten Month
Period Ended ---- Fiscal Year Ended -----
December 31, February 28, February 23,
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss ($11,338,869) ($12,764,231) ($4,510,145)
------------ ------------ ------------
Adjustments to reconcile netloss to net cash provided (used) by operating
activities:
Depreciation and amortization ...................................... 2,186,621 3,417,849 2,643,138
Write-down of impaired assets and related expenses ................. -- 5,897,648 --
Inventory reserve .................................................. (925,000) 1,215,000 --
Allowance for lease losses.......................................... 1,643,377 -- --
Allowance for officer loan ......................................... 586,978 -- --
Warrants and common stock granted to consultants.................... 109,658 -- --
Allowance for uncollectible trade receivables ...................... 175,000 -- --
Changes in assets and liabilities:
Decrease in accounts receivable - trade ........................ 1,197,521 84,372 339,333
(Increase) decrease in inventories ............................. 4,401,587 (1,821,856) 1,396,496
(Increase) decrease in prepaid expenses ........................ 217,538 (302,566) (404,603)
Increase in accounts payable ................................... 209,020 3,218,584 513,979
Increase in other accrued expenses ............................. 364,134 132,409 108,899
Increase (decrease) in other assets, net ....................... 840,896 (198,418) (105,001)
------------ ------------ ------------
Total adjustments .......................................... 11,007,330 11,643,022 4,492,241
------------ ------------ ------------
Net cash used by operating activities ...................... (331,539) (1,121,209) (17,904)
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment .................................. (212,144) (1,549,878) (3,018,810)
Cost of patents ...................................................... -- (144,928) (61,410)
Decrease (increase) in deposits, net ................................. (12,823) 388,922 362,654
Advances to officers ................................................. (112,597) (44,560) (174,240)
Decrease in note receivable, net .................................... -- -- 811,980
------------ ------------ ------------
Net cash used by investing activities ...................... (337,564) (1,350,444) (2,079,826)
------------ ------------ ------------
Cash flows from financing activities:
Net (payments) borrowings under note payable ......................... (2,571,128) (19,127) 1,960,518
Principal payments on long-term debt
and capital lease obligations ...................................... (1,492,754) (1,945,014) (1,565,613)
Proceeds from equipment financings ................................... -- -- 302,418
Net proceeds from sales and issuances of stock ....................... 4,800,071 4,384,835 159,050
------------ ------------ ------------
Net cash provided by financing activities .................. 736,189 2,420,694 856,373
------------ ------------ ------------
Net (decrease) increase in cash .......................................... 67,086 (50,959) (1,241,357)
Cash at beginning of period .............................................. 58,134 109,093 1,350,450
------------ ------------ ------------
Cash at end of period .................................................... $ 125,220 $ 58,134 $ 109,093
============ ============ ============
Cash paid for interest ................................................... $ 900,855 $ 1,093,648 $ 965,251
============ ============ ============
<FN>
Non-cash investing and financing activities:
Capital lease obligations of $590,069 and $3,238,840 were incurred in Fiscal 1997 and Fiscal 1996, respectively, when the
Company entered into capital lease agreements to purchase machinery and equipment.
During the ten month period ended December 31, 1997, two trade payables, totaling $584,433, were converted into trade
notes payable (Note 10).
</FN>
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
Note 1: Organization and Significant Accounting Policies
Organization
BPI Packaging Technologies, Inc. (the "Company") develops,
manufactures, markets and sells proprietary high performance unprinted and
printed plastic films to consumer packaged goods and industrial companies. The
Company also develops, manufactures, markets and sells proprietary plastic
carryout bags of "T-shirt sack" design (from various plastic film products
manufactured by the Company) in proprietary, value-added dispensing systems for
use in supermarket, convenience, retail and drug store chains. The Company
operates two 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; and Market
Media, Inc., which sells and markets in-store advertising and promotion programs
and Anti-Smoking advertising programs in public schools.
Significant Accounting Policies
Fiscal Year
The Company changed its fiscal year to coincide with the calendar year
ending December 31, 1997, resulting in a 10 month period. In previous years, the
Company's fiscal years ended February 28, 1997 and February 23, 1996,
respectively.
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 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 shorter of the life of the asset or the remaining
life of the lease.
F-7
<PAGE>
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.
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.
Advertising Costs
Advertising and trade show costs are expensed as incurred. Total
advertising expenses were $113,478, $309,316 and $85,454 for the 10 month period
ended December 31, 1997, and for Fiscal Years 1997 and 1996, respectively.
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.
Basis of Consolidation
The consolidated financial statements include the results of the
Company's wholly-owned subsidiaries, RC America, Inc., and Market Media, Inc.
All intercompany activity has been eliminated in consolidation.
Basic and Diluted Net Loss Per Share
In February 1997, the Financial Accounting Standards Boards issued SFAS
No. 128, "Earnings per Share", which supersedes Accounting Principles Board
Opinion No. 15 and specifies the computation, presentation and disclosure
requirements of earnings per share. SFAS No. 128 requires the presentation of
"basic" and "diluted" earnings per share. Basic earnings per
F-8
<PAGE>
share is computed by dividing the income available to common stockholders by the
weighted average number of common shares outstanding for the period. For the
purposes of calculating diluted earnings per share, the denominator includes
both the weighted average number of common shares outstanding and potential
dilutive common shares outstanding for the period. As required, the Company
adopted SFAS No. 128 in the fourth quarter of the 10 month period ended December
31, 1997. All prior periods earnings per share amounts have been restated to
comply with SFAS No. 128.
For each of the years presented the Company has recorded a net loss.
Therefore, basic and diluted earnings per share are the same due to the
antidilutive effect of potential common shares outstanding. Antidilutive
potential common shares excluded from the 10 month period ended December 31,
1997 and Fiscal Years 1997 and 1996 computation include 783,117, 773,830 and
795,630 common shares, respectively, issuable upon the exercise of stock
options. Antidilutive potential common shares excluded from the 10 month period
ended December 31, 1997 and Fiscal Years 1997 and 1996 computation also included
472,178, 493,841 and 450,641 common shares issuable upon the conversion of
redeemable convertible preferred stock. Antidilutive potential common shares
excluded from the 10 month period ended December 31, 1997 computation included
109,422 issuable upon the exercise of warrants.
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 comprised of cash, accounts
receivable, deposits, accounts payable and bank borrowings, all of which
approximate fair value.
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 allows an entity to account for employee stock
compensation under a fair value based method or 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"), supplemented by the
appropriate note disclosure. 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 21).
F-9
<PAGE>
Impairment of Long-Lived Assets
In Fiscal Year 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 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.
Reclassifications
Certain balances in the prior year financial statements have been
reclassified to conform to the current period presentation.
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. Additionally, significant trade credit
balances are past due and operating and capital lease obligations are in default
at the balance sheet date. Further, as discussed in Note 11, the Company's
revolving credit facility is renewable annually. Subsequent to December 31,
1997, the lender informed the Company that it wanted repayment of the revolving
line of credit and the company has agreed to repayment by June 30, 1998.
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. 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 exited the production of its traditional T-shirt bag
product lines during the 10 month period ended December 31, 1997. Increased
competition from large domestic and overseas competitors with significant
production economies of scale caused the Company to incur substantial losses on
these products during the past several years. The Company has shifted its
resources to the production of proprietary bag and plastic film product lines
which have the potential to have higher profit margins. In February 1998, one of
the five largest supermarket chains in the United States decided to use the
Fresh-Sac (R) Produce Profit Builder (TM) marketing program after successful
in-store testing and presently there are 17 other supermarket chains in various
stages of in-store testing. On March 31, 1998, the Company entered into a
Five-year Purchase Agreement to sell exclusively to an international company
thin, clear plastic film for tissue overwrap in North America and in certain
foreign countries. Additionally, the Company is negotiating a new revolving line
of credit and term loan to buyout capital leases. The Company also plans to
continue raising additional equity in Calendar Year 1998.
F-10
<PAGE>
Note 3: Accounts Receivable-Trade
Accounts receivable-trade consist of the following:
December 31, February 28,
1997 1997
------------ ------------
Accounts receivable-trade $ 1,071,239 $ 2,268,760
Allowance for doubtful accounts (275,000) (100,000)
Allowance for credits (75,000) (75,000)
----------- -----------
$ 721,239 $ 2,093,760
=========== ===========
Note 4: Inventories
Inventories, net of valuation reserves, consist of the following:
December 31, February 28,
1997 1997
------------ ------------
Raw material $ 285,058 $ 1,120,902
Finished goods 1,062,808 4,628,551
Reserves (290,000) (1,215,000)
----------- -----------
$ 1,057,866 $ 4,534,453
=========== ===========
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:
December 31, February 28,
1997 1997
------------ ------------
Machinery and equipment $24,817,161 $24,605,067
Leasehold improvements 3,611,082 3,611,032
Office furniture and fixtures 303,731 303,731
Motor vehicles 19,900 19,900
----------- -----------
28,751,874 28,539,730
Less accumulated depreciation
and amortization 10,923,014 8,736,393
----------- -----------
$17,828,860 $19,803,337
=========== ===========
F-11
<PAGE>
Assets recorded under capital leases were as follows:
December 31, February 28,
1997 1997
------------ ------------
Machinery and equipment $13,041,270 $13,041,270
Less accumulated amortization 4,055,971 2,870,403
----------- -----------
$ 8,985,299 $10,170,867
=========== ===========
Depreciation and amortization expense relating to fixed assets was
$2,186,621, $3,216,189 and $2,452,131 for the 10 month period ended December 31,
1997 and for the years ended February 28, 1997 and February 23, 1996,
respectively, of which $1,185,568, $1,158,749 and $893,908, respectively,
related to amortization of equipment held under capital leases.
During Fiscal Year 1997, in accordance with SFAS No. 121, the Company
wrote-down machinery and equipment to their estimated 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 Year 1997, the Company made the
decision to exit the traditional T-shirt bag product lines. The 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 T-shirt bag product lines.
Included in the $5.9 million charge is $512,000 representing settlement
and defense costs incurred in connection with the resolution of a patent
infringement suit.
Note 7: Patents
The Company owns patents and has applied for several other U.S. patents
and certain foreign patents. No costs associated with patent applications were
capitalized during the 10 month period ended December 31, 1997 and Fiscal Year
F-12
<PAGE>
1997. A total of approximately $61,000 of costs were capitalized relating to
patent applications during Fiscal Year 1996. Amortization expense of
approximately $87,000 and $85,000 were recorded in Fiscal Years 1997 and 1996,
respectively.
In conjunction with the write-down of impaired assets and related
expenses, the write-off of all patent costs and associated accumulated
amortization resulted in a charge of $1,045,000 to the Statement of Operations
in the Fiscal Year 1997. The total accumulated amortization balance at February
23, 1996 was approximately $313,000. As more fully described in Note 6, this
charge is the result of the Company's decision to exit the traditional T-shirt
bag product lines.
Note 8: Other Assets
Other assets are comprised of the following:
December 31, February 28,
1997 1997
------------ ------------
Spare parts and supplies, net $ 669,405 $1,117,338
Other assets 368,502 761,465
---------- ----------
$1,037,907 $1,878,803
========== ==========
Note 9: Accrued Expenses
Accrued expenses consist of the following:
December 31, February 28,
1997 1997
------------- ------------
Employee compensation and benefits $ 207,283 $ 126,693
Accrued lease expense 1,643,377 --
State taxes and penalties 550,000 216,682
Professional fees 140,000 80,000
Other 426,688 536,462
---------- ----------
$2,967,348 $ 959,837
========== ==========
Note 10: Trade Notes Payable
The Company converted two trade payables into unsecured trade notes
payable which mature on March 15, 1998 and April 17, 1998 and bear fixed
interest rates of 10% and 8.5%. As of December 31, 1997, $584,433 was
outstanding under these notes.
As of March 15, 1998 and April 17, 1998 the Company was in default on
both of the above trade notes payable.
Note 11: Note Payable
The Company has an $8,000,000 revolving line of credit secured by
accounts receivable and inventory. Borrowings under the line of credit are
subject to 80% of qualifying accounts receivable and 35% of qualifying
inventories, less the aggregate amount utilized under all commercial and standby
letters of credit and bank acceptances. The line of credit bears interest at
5.0% above the variable interest rate quoted by Norwest Bank of Minnesota with a
minimum rate of 8.0% (13.5% at December 31, 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 December 31, 1997, the balance under the line of credit is
$1,162,349, which was the maximum available based on the qualifying accounts
receivable and inventory balances. The line of credit includes certain financial
covenants that the Company must maintain to avoid a default, including current
ratio, debt to equity ratio, maintaining a net worth of $14 million, limitation
on capital spending, and profitability. As of and during the 10 month period
ended December 31, 1997 the Company failed to meet several of the financial
covenants. The lender waived the condition of default for the financial
covenants that were not met. Subsequent to December 31, 1997, the lender
informed the Company that it wanted repayment of the revolving line of credit
and the Company has agreed to repayment by June 30, 1998 (Note 24).
F-13
<PAGE>
Note 12: Capital Lease Obligations
The Company's capital lease obligations at December 31, 1997 and
February 28, 1997 consisted of the following:
December 31, February 28,
1997 1997
------------ -----------
Total Minimum lease payments $5,006,262 $6,846,411
Less amount representing interest 580,057 927,452
---------- ----------
Obligations under capital leases 4,426,205 5,918,959
Less amounts due within one year 4,426,205 2,109,718
---------- ----------
Long-term portion $ -- $3,809,241
========== ==========
As all capital leases were in default as of December 31, 1997, all
future payments have been classified as current (Note 23).
Note 13: 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 6%
non-cumulative, non-voting stock was 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 14).
Note 14: Stockholders' Equity
As of December 31, 1997 the Company had 19,513,496 shares of common
stock outstanding. During Fiscal Year 1996, covering the period February 26,
1995 through February 23, 1996, there were no private placements. During Fiscal
Year 1997, covering the period from February 24, 1996 to February 28, 1997, a
total of 1,207,500 shares were issued in a private placement with net proceeds
of $2,206,868. From March 1, 1997 to December 31, 1997, a total of 4,991,125
shares were issued in a private placement with net proceeds of $4,800,071. From
January 1, 1998 to April 30, 1998, a total of 1,400,000 shares were issued for
net proceeds of $1,066,200. An additional 387,500 shares were issued relating to
the private placements from March 1, 1997 to December 31, 1997.
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
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
F-14
<PAGE>
within five days of the notice of redemption. The Series A Preferred
Stock votes with the common stock as a single class. At December 31,
1997 and February 28, 1997, there were 325,483 and 347,146 shares
issued and outstanding, respectively. As of April 30, 1998 there were
213,583 shares issued and outstanding.
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 December 31, 1997 and February 28, 1997, there
were 146,695 shares of Series B Preferred Stock issued and outstanding.
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 21), upon the conversion of preferred stock and in
connection with the agreement with RC America, Inc. For the 10 month period
ended December 31, 1997, no shares of common stock were issued. Based on the
operating results of RC America, Inc. for Fiscal Year 1997 and Fiscal Year 1996,
an additional 2,640 and 2,550 shares were issued in May 1997 and May 1996,
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.
Note 15: Warrants to Purchase Securities of the Company
An aggregate of 153,000 shares of Common Stock and 50,000 shares of
Series A Preferred Stock were issued to the underwriter's of the second public
offering, at an exercise price of $2.25 in May, 1996 upon the exercise of Class
A Warrants which would have expired on June 13, 1996.
In conjunction with the third public offering, an aggregate of 48,725
Class A Warrants were exercised at $5.00 before the expiration date of June 15,
1995 and an aggregate of 456,931 Class B Warrants were exercised at $2.80 before
the expiration date of October 6, 1996. Additionally, an aggregate of 299,600
shares of Common Stock were issued to the underwriter's of the third public
offering at an exercise price of $2.25 in May, 1996 upon the exercise of Class B
Warrants which would have expired on October 7, 1997.
As of December 31, 1997 all Class A and Class B Warrants issued to the
public shareholders and the underwriters were exercised or expired.
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. The warrants expired on December 31, 1997 and were not
exercised.
F-15
<PAGE>
In December 1997, the Company issued 109,422 Warrants with a three year
life to purchase one share of Common Stock at $1.10 per share in connection with
a private placement of its common stock, net of costs in the amount of $109,658.
In April 1998, the Company issued 150,000 Warrants with a three year life to
purchase one share of Common Stock at $1.08 per share in connection with a
private placement of its securities.
During the period March 1, 1998 to April 30, 1998 the Company issued
400,000 Warrants with a three year life to purchase one share of Common Stock at
$1.25 per share to two lessors in connection with the restructuring of certain
Capital and Operating Leases that were in default as of December 31, 1997.
Settlement expense in the amount of $240,400 was recorded for the 10 month
period ended December 31, 1997 (Note 12).
Note 16: Income Taxes
Due to the taxable loss incurred and the availability of net operating
losses, there was no tax provision or benefit recorded for the 10 month period
ended December 31, 1997. Accordingly, the effective tax rate is zero percent as
compared to the Federal statutory rate of 34% because the Company has placed
a full valuation allowance on its net deferred tax assets.
Cumulative temporary differences under SFAS 109 are as follows:
December 31, February 27,
1997 1997
----------- -----------
Deferred tax assets:
Allowance for uncollectible accounts $ 377,322 $ 70,473
Net operating loss carryforward 12,825,784 9,831,374
Inventory 151,993 532,583
Write-down of fixed assets 1,226,450 1,343,033
Write-down of patents 400,031 --
Allowance for lease losses 685,606 --
Investment tax credit 528,200 598,446
Other items 489,712 20,193
----------- -----------
Total deferred tax assets $16,685,094 $12,396,102
=========== ===========
Deferred tax liabilities:
Excess depreciation $ 76,197 $ 3,813
Prepaid rent 143,281 179,895
----------- -----------
Total deferred tax liabilities $ 219,478 $ 183,078
=========== ===========
Net deferred tax assets $16,465,616 $12,213,024
Deferred tax asset valuation allowance (16,465,616) (12,213,024)
----------- -----------
-- --
=========== ===========
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 as it is not
certain that the results of future operations will generate sufficient taxable
income to realize the deferred tax asset.
F-16
<PAGE>
At December 31,1997 the Company had available for federal and state
income tax purposes unused net operating loss (NOL) carryforwards of
approximately $32,770,734 and $26,853,823, 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
$528,000 expiring in various amounts from 1998 to 2003, and approximately
$113,000 in carryforwards with unlimited expirations.
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 Years 1994 and 1991 substantial changes in ownership occurred. In
addition the Company has had a number of transactions subsequent to Fiscal Year
1994 which may have further limited the Company's ability to use its federal NOL
carryforwards.
Note 17: Major Customers
During the 10 month period ended December 31, 1997 no customer
represented more than 10% of total sales. In Fiscal Year 1997 sales to one
customer represented 16% of total sales. In Fiscal Year 1996 sales to two
customers represented approximately 15% and 10% of total sales.
Note 18: Related Party Transactions
Loans made to an officer totaled $586,979 at December 31, 1997, and
$476,486 at February 28, 1997, and bear interest at a rate of 9.5%. The loans
are due and payable January 1, 2001. The officer has agreed to apply any bonus
payments received under the Company's executive bonus plan to reduce the amounts
outstanding under the loan. As the Company has suffered recurring net losses and
operating cash flow deficiencies, a reserve of $586,978 has been established for
this loan as of December 31, 1997.
Loans made to another officer totaled $5,415 at December 31, 1997, and
$3,308 at February 28, 1997, and bear interest at a rate of 9.5%.
In March, 1998 the Company received a notice from the Massachusetts
Department of Revenue requiring the Company to garnish the wages of the Chairman
of the Company. The amount subject to the levy totaled approximately $200,000.
For the period through May 16, 1998 the Company did not comply with the terms of
the levy. Subsequently the Company paid, on behalf of the Chairman,
approximately $36,000 of the levy and established an interest bearing note due
on or before June 30, 1998. The Chairman and the Company have agreed that all
wages, salaries, bonuses and other compensation that may be earned by the
Chairman shall be forwarded to the Massachusetts Department of Revenue in
accordance with the terms of the levy, until such time that the Company is
advised that compliance with the levy is no longer required.
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 Chairman. 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. For the 10 month period ended December 31, 1997, no shares of Common
Stock were issued. Based on the operating results of RC America, Inc. for Fiscal
Year 1997 and Fiscal Year 1996, a total of 2,640 and 2,550 shares, respectively
were earned and were issued to Mr. Caulfield in May 1997 and May 1996,
respectively. 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.
F-17
<PAGE>
The value of the stock issued pursuant to the Agreement exceeded the
book value of the assets acquired and the Company has recorded goodwill of
$800,000, amortizing the goodwill pro-rata over ten years. Issuance of the
additional 2,640 and 2,550 shares of common stock resulted in an insignificant
amount of additional goodwill. At February 28, 1997, the Company wrote off
approximately $620,000 of goodwill as part of the impairment of long-lived
assets (Note 6). The total unamortized goodwill included in Other Assets and
related to these transactions at February 23, 1996 was $789,402.
Ivan J. Hughes, a director of the Company until his resignation from
the Board on February 17, 1998, is President of the Plastics Division Duro Bag
Manufacturing Company ("Duro"). For Fiscal Year 1997 and Fiscal Year 1996, Duro
accounted for approximately 16% and 10%, respectively, of the Company's sales.
Note 19: 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.
Note 20: Operating Leases and Commitments
The Company's lease agreement for its Dighton facility 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 December 31, 1997 are as follows:
Operating
Fiscal Year Leases
----------- ------
1998............................ $1,257,000
1999............................ 1,180,000
2000............................ 893,000
2001............................ 480,000
2002............................ 383,000
Thereafter ..................... 2,626,000
----------
$6,819,000
==========
F-18
<PAGE>
Expense under operating leases was $1,410,000, $1,646,000 and
$1,583,000 for the 10 month period ended December 31, 1997, February 28, 1997,
and February 23, 1996, respectively. All operating leases and real-estate leases
were in default as of December 31, 1997.
The Company is involved in litigation with equipment lessors and trade
vendors which is expected to be settled. However, if not settled, such
litigation could have a material impact on the financial statements.
At December 31, 1997, the Company had commitments to purchase
approximately $275,000 of machinery and equipment.
Note 21: 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
five 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 10
month period ended December 31, 1997 and the year ended February 28, 1997.
Transactions under the 1990 and 1993 Stock Option Plans during the 10 month
period ended December 31, 1997 and the year ended February 28, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
Ten Month Period Ended Year Ended
December 31, 1997 February 28, 1997
-------------------------- ----------------------------
Weighted average Weighted average
Options Shares exercise price Shares exercise price
------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 773,830 $ 3.98 795,630 $ 4.04
Options granted whose exercise price
equal the market price of the stock
on grant date 156,000 $ 1.75 12,500 2.40
Options granted whose exercise price
is greater than the market price of the
stock on grant date 9,200 2.40
Canceled (146,713) 3.98 (43,500) 3.49
-------- -------
Outstanding at year end 783,117 3.54 773,830 3.98
======== =======
Options exercisable at period end 629,317 589,377
======== =======
Weighted average fair value of options
granted during the period $ 1.75 $ 1.65
======= =======
</TABLE>
F-19
<PAGE>
Year Ended
February 23, 1996
-------------------------------
Weighted average
Options Shares exercise price
------- ------ --------------
Outstanding at beginning of year 778,955 $ 4.07
Options granted whose exercise price
equal the market price of the stock
on grant date 26,000 4.00
Options granted whose exercise price
is greater than the market price of the
stock on grant date 21,000 5.40
Canceled (30,325) 5.64
-------
Outstanding at year end 795,630 4.04
=======
Options exercisable at period end 466,025
=======
Weighted average fair value of options
granted during the period $ 2.95
=======
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
December 31, 1997:
Options outstanding
-------------------
Weighted
Number average Weighted
outstanding at remaining average
Range of exercise prices December 31,1997 contractual life exercise price
----------------------- ---------------- ---------------- --------------
$1.75-3.00 191,700 8.85 $ 1.93
3.88-4.75 568,917 5.50 4.00
5.50-6.25 22,500 7.10 5.65
-------
783,117 6.37 3.54
=======
Options exercisable
-------------------
Number Weighted
exercisable at average
Range of exercise prices December 31, 1997 exercise price
------------------------ ----------------- --------------
$ 1.75-3.00 43,100 $ 2.50
3.88-4.75 565,417 4.00
5.50-6.25 21,000 5.64
-------
629,517 3.96
=======
F-20
<PAGE>
Fair Value Disclosures
At December 31, 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:
Ten Month Period Ended Year ended
December 31, 1997 February 28, 1997
----------------- -----------------
Net Loss As reported ($11,338,869) ($12,764,231)
Pro forma ($11,468,958) ($13,181,343)
Basic and diluted As reported ($0.73) ($0.96)
net loss per share Pro forma ($0.74) ($0.99)
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 rate of 5.81% for options granted
during the 10 month period ended December 31, 1997 and 5.86% to 6.2% for options
granted and re-priced during the year ended February 28, 1997; a weighted
average expected option term of 10 years for options granted during the 10 month
period ended December 31, 1997, and 5.33 to 10 years for options granted and
re-priced for the year ended February 28, 1997; and expected volatility of
67.57% for options granted during the 10 month period ended December 31, 1997
and 56.59% and 62.23% for options granted and re-priced during the year ended
February 28, 1997.
Note 22: Retirement Savings Plan
The Company provides an employee retirement savings plan under Section
401(k) of the Internal Revenue Code (the "Plan") which covers substantially all
employees. Under the terms of the Plan, employees may contribute a percentage of
their salary, up to a maximum of 15%, which is then invested in one or more of
several mutual funds selected by the employee. The Company matches 100% of the
employee contribution up to a maximum of 2% of their salary. Contributions to
the plan were $47,604, $80,503 and $52,120 for the 10 month period ended
December 31, 1997, and Fiscal Years 1997 and 1996, respectively.
F-21
<PAGE>
Note 23: Significant Fourth Quarter Adjustments
All capital, operating and real estate leases were in default as of
December 31, 1997. All future capital lease payments have been classified as
current. As a result of these defaults and based on negotiations which began in
1997, total expenses of $1,643,400 were accrued as of December 31, 1997 for
interest, penalties and extension fees related to the default of the capital and
operating leases (Note 12 and 15).
Loans made to an officer totaled $586,979 at December 31, 1997 and bear
interest at a rate of 9.5%. The loans are due and payable January 1, 2001. The
officer has agreed to apply any bonus payments received under the Company's
executive bonus plan to reduce the amounts outstanding under the loan. As the
Company has suffered recurring net losses and operating cash flow deficiencies,
a reserve of $586,978 has been established for this loan as of December 31, 1997
(Note 18).
Management determined during the fourth quarter of Fiscal Year 1997,
due to continued intense competition in the traditional T-shirt bag product
lines which resulted in a significant deterioration of the gross margin, to exit
these product lines during the 10 month period ended December 31, 1997.
Accordingly, an analysis of the fair value of assets related to these product
lines was performed during the fourth quarter of Fiscal Year 1997 which resulted
in a write-down of impaired assets and recognition of related expenses totaling
$5,897,648 (Note 6).
Note 24: Subsequent Events
Subsequent to December 31, 1997, the lender informed the Company that
it wanted repayment of the revolving line of credit and the Company has agreed
to repayment by June 30, 1998 (Note 11).
F-22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 125,220
<SECURITIES> 0
<RECEIVABLES> 1,071,239
<ALLOWANCES> 350,000
<INVENTORY> 1,057,866
<CURRENT-ASSETS> 1,957,273
<PP&E> 28,751,874
<DEPRECIATION> 10,923,014
<TOTAL-ASSETS> 20,970,740
<CURRENT-LIABILITIES> 15,855,205
<BONDS> 0
0
2,593,886
<COMMON> 195,135
<OTHER-SE> 43,076,603
<TOTAL-LIABILITY-AND-EQUITY> 20,970,740
<SALES> 13,951,725
<TOTAL-REVENUES> 13,951,725
<CGS> 18,113,514
<TOTAL-COSTS> 5,655,244
<OTHER-EXPENSES> 586,978
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 984,064
<INCOME-PRETAX> (11,338,869)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,338,869)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,338,869)
<EPS-PRIMARY> (0.73)
<EPS-DILUTED> (0.73)
</TABLE>
