<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO .
-------------- -------------
COMMISSION FILE NUMBER: 0-19561
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BPI PACKAGING TECHNOLOGIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2997486
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(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
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of
the Act:
TITLE OF CLASS
----------------
Common Stock, $.01 par value
Series A Convertible Preferred Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 60 days. Yes X No
----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The aggregate market value of the Registrant's voting stock issued and
outstanding as of March 22, 1999 was $3,224,343 for the Common Stock and
$193,358 for the Series A Convertible Preferred Stock.
As of March 22, 1999, 21,495,621 shares of Common Stock, $.01 par value
per share, were outstanding and 193,358 shares of Series A Convertible Preferred
Stock, $.01 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-------------------------------------
Portions of the definitive proxy statement to be filed prior to April
30, 1999, pursuant to Regulation 14A of the Securities Exchange Act of 1934, are
incorporated by reference into Part III of this Form 10-K.
<PAGE>
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.
2
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PART I
ITEM 1. BUSINESS
--------
GENERAL
BPI Packaging Technologies, Inc. (the "Company") converts commercially
available high molecular weight high density polyethylene ("HMWHDPE") resins
into thin film, which is either sold directly into industrial or packaging
applications or converted in-house into carryout bags of "T-shirt sack" design
for supermarkets, convenience stores and other retail markets. The Company
utilizes advanced, high quality extrusion, printing and bag making equipment,
which was installed between 1990 and 1997.
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 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 operated two wholly-owned subsidiaries: RC America, Inc.,
which purchased surplus inventory from manufacturers of consumer products and
markets and sold the products to mass merchandise retailers and other retail
chains, and Market Media, Inc., which sold and marketed in-store advertising and
promotion programs. On June 27, 1998, the Company suspended funding operations
of its two wholly-owned subsidiaries; the Company also terminated the employment
of Ronald V. Caulfield, the Chief Executive Officer and President of RC America,
Inc. Unless otherwise indicated, the term "Company" hereafter, refers to BPI
Packaging Technologies, Inc.
RECENT FINANCING
On January 27, 1999, the Company entered into a Securities Purchase
Agreement (the "Agreement") with an investor, DGJ, L.L.C., a Delaware limited
liability company ("DGJ"), whereby the Company agreed to issue and sell to DGJ,
and DGJ agreed to purchase from the Company the following:
1. a Promissory Note in the aggregate principal amount of
$3,200,000;
2. a Common Stock Purchase Warrant for the purchase of up to
80,000,000 shares of the Company's common stock, $.01 par value per share (the
"Common Stock"), at an exercise price of $0.04 per share, exercisable until
January 27, 2009; and
3. 1,629,930 shares of Series C Preferred Stock of the Company.
In addition, certain members of the Company's management invested
$300,000 in the Company's warrants. The Common Stock represented by the warrants
cannot be issued until approval for an increase in the Company's authorized
shares of Common Stock is obtained at the next annual meeting of stockholders.
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In conjunction with this financing, the Company entered into agreements
with most of its unsecured creditors that provided a discounted payment in
February 1999 or a non-interest bearing agreement to pay the entire balance over
a three-year period. The unsecured creditor agreements, together with the
financing referred to above, allowed the Company to restructure trade notes
payable of $584,000 and accounts payable of $6,597,000, or a total of
$7,181,000, compared to $1,874,000 of current accounts payable and $1,426,000 of
long-term debt, or a total of $3,300,000 after refinancing.
A factoring agreement with a company related to DGJ now provides the
Company with $2,000,000 of financing secured by the Company's accounts
receivable and $1,000,000 secured by its inventory. The term for both the
accounts receivable and inventory financing is six months, subject to automatic
renewal unless the Company gives at least 90 days written notice of termination.
The financing bears interest at the prime rate plus 5% on the outstanding
balance on the inventory loan and the prime rate plus 2% on all accounts
receivable submitted for financing. The Company may borrow up to 85% of its
qualified accounts receivable and 33% of its qualified inventory. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Note Payable."
The Company's equipment, capital and operating leases are now funded by
a new equipment lease with DGJ. Current obligations of $3,800,000 and accrued
lease obligations of $1,643,000 were retired and $1,679,000 of equipment
previously under operating leases was added to the property and equipment
accounts. The new lease carries no debt reduction obligation and is treated as
long-term debt. The combined monthly payments under the retired leases were
reduced from approximately $305,000 per month to $102,000 per month under the
new lease agreement. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Equipment Purchases and Lease Financings."
The plan to restructure the Company's operations and management, which
began in the third quarter of 1998, to satisfy past due trade creditors and past
due operating and capital lease balances, is progressing.
PRODUCTS AND MARKETS
Direct competition refers to competition for 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:
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1999
ANNUAL MARKET PATENT
(MILLIONS) STATUS COMPETITION
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HANDI-SAC(TM) $37 U.S. PATENT DIRECT: SONOCO T-SACK ROLL
CONVENIENCE, HARDWARE/AUTOMOTIVE AND ISSUED 1993 BAG
DRUG INDIRECT: PAPER AND
FLAT T-SACKS
- ---------------------------------------------------------------------------------------------------------------------
FRESH-SAC(R) $63 U.S. PATENT DIRECT: CROWN POLY, SEALED
T-SHIRT PRODUCE BAG ISSUED 1993 AIR AND BETTER BAG
INDIRECT: PRODUCE BAG
ON A ROLL
- ----------------------------------------------------------------------------------------------------------------------
INSULATION OVERWRAP $15 PROCESS TECHNOLOGY DIRECT:
VANGUARD PLASTICS
NO INDIRECT
- ---------------------------------------------------------------------------------------------------------------------
HIGH PERFORMANCE PRINTED UNDER EVALUATION PROCESS TECHNOLOGY DIRECT: EXXON FILMS
TISSUE OVERWRAP FILM NO INDIRECT
- ---------------------------------------------------------------------------------------------------------------------
T-SHIRT CARRYOUT BAG $850 U.S. PATENT ISSUED DIRECT: VANGUARD, SONOCO
1989 AND INTEGRATED BAGGING
SYSTEMS
INDIRECT: KRAFT PAPER BAGS
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
HANDI-SAC(TM) is a T-shirt bag sold in a patented dispensing mechanism.
The patented system allows the retailer to effectively store and dispense
T-shirt bags in a limited space under the check-out counter, which is important
to convenience, drug, retail and hardware stores. HANDI-SAC(TM) is installed in
approximately 11,000 convenience, drug, retail and hardware stores. The annual
market potential for HANDI-SAC(TM) is estimated at approximately $37 million.
The market is split approximately 70% plastic and 30% paper.
FRESH-SAC(R) is a thin T-shirt produce bag sold in a patented
dispensing mechanism. This program is presently being sold to approximately 600
supermarkets directly and through distributors. Management estimates the annual
market potential for the FRESH-SAC(R) Produce Profit Builder Program to be $63
million.
A thin, clear mono-layer HMWHDPE film specifically designed for printed
tissue overwrap (i.e., paper towels and bathroom tissue) is being tested as a
replacement for traditional film more than twice its gauge. The market size for
this product is under evaluation. The Company's five year purchase agreement
with Printpack, Inc. ("Printpack") was terminated on October 7, 1998. The
Company received no revenue under the Printpack purchase agreement but has trial
orders from Printpack in-house.
Two films have been specifically developed for the encapsulation of
glass fibre insulation mats for the private housing and the industrial buildings
industry, respectively. The latter one is flame retardant and passed the
required tests of United Laboratories. It is expected that this new film
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application is going to grow in North America. The market size is estimated to
be at $15 million annually.
Since the above applications will not fill the Company's current
conversion capacity of 40 million pounds of HMWHDPE resin in the near future,
the Company re-entered the standard grocery T-shirt bag business, which resulted
in significant marginal contributions to fixed costs starting in the third
quarter of 1998.
On June 27, 1998, the Company discontinued funding operations of its
two wholly-owned subsidiaries, RC America, Inc. and Market Media, Inc., as they
were not generating revenues and thus, creating a cash drain on the Company.
Other significant reductions of plant overhead and selling and administrative
expenses were made throughout 1998. Marginal contributions from the standard
T-shirt bag business, together with expense reductions, significantly improved
the performance of the Company during the second half of 1998.
COMPETITION
The plastic film and bag markets are highly competitive. There are high
barriers of entry into the plastic bag and film markets due to significant
capital requirements. The Company's capacity is estimated at approximately 40
million pounds annually, depending on product mix.
In the patented products, HANDI-SAC(TM) has direct competition from
Sonoco Products Company's T-sack roll bag product and flat T-sacks provided by
Sonoco Products Company, Vanguard Plastics and others; as well as paper bags.
FRESH-SAC(R) has direct competition from: Crown Poly and Sealed Air, which
manufacture plastic roll bags in a patented dispensing system; Better Bag, which
manufactures flat produce bags; and indirect competition from a variety of
traditional plastic low-cost bag-on-a-roll manufacturers.
The Company has direct competition for its thin, clear film used for
tissue overwrap from Exxon Films, which has a similar thin film. However,
management believes that Exxon Films has an exclusive five year supply agreement
with a consumer packaged goods company that prohibits it from supplying other
companies and, therefore, Exxon Films is not presently considered to be a
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.
In the traditional plastic grocery T-shirt bag market, which the
Company exited during the 10 month period ended December 31, 1997 and re-entered
in the third quarter of 1998, the Company's competitors include large companies:
i.e., Sonoco Products Company, Interplast Corporation and Vanguard Plastics.
PROPRIETARY PROCESSES, PATENTS AND OTHER RIGHTS
The Company has developed patents related to T-shirt bags. The Company
owns a patent issued in 1989 for its T-shirt carryout bag. In 1993, the Company
was issued a U.S. patent for the dispensing system used in conjunction with its
FRESH-SAC(R) and HANDI-SAC(TM) products. The Company has a registered trademark
in the United States for FRESH-SAC(R). In 1996, the Company was issued a U.S.
patent for its FRESH-SAC(R) advertising vehicle called the Fresh Focus
CartridgeTalker(TM).
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
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competitors. Even if a competitor's products were to infringe patents owned by
the Company, it could be costly for the Company to enforce its rights in an
infringement action and would divert funds and resources otherwise used in the
Company's operations. Furthermore, no assurance can be given that the Company
would be successful in enforcing such rights. No assurance can be given that the
Company's products will not infringe patents or rights of others.
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.
MANUFACTURING
All of the Company's plastic products are manufactured in its North
Dighton, Massachusetts facility. The plastic resin is delivered to the Company,
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 customer information using aqueous-based inks and shipped to
customers. If the film is to be used to manufacture bags, it is then slit-sealed
into bags, reviewed by quality control inspectors, boxed, and shipped to
customers. The Company retains customer design printing plates for future use.
The Company's manufacturing equipment consists of blown film extrusion
lines, printing presses, bag making machines and film slitting operations.
Additional slitting capacity was acquired in the first quarter of 1999.
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 year
ended December 31, 1998, 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 March 22, 1999 was $889,164, as
compared to $510,472 at March 26, 1998. The Company generally sells products on
an individual purchase order basis 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 reports that the first quarter of any year is traditionally
the slowest quarter for bag products marketed to the retail trade. There is no
apparent seasonality in the industrial film business.
MAJOR CUSTOMERS
For the year ended December 31, 1998, there were two customers that
each accounted for more than 10% of the Company's sales: Owens Corning at 10%
and Bunzl, a distributor of the Company's patented bag products to grocery and
convenience store retailers, at 20%. The Company's primary relationships are
with the decision makers at the retail level who chose Bunzl to redistribute the
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Company's products. Therefore, management does not believe that the loss of
Bunzl's business would have a material adverse effect on the Company's business
as the Company's products would be shipped either direct to the retailer or
through a different distributor.
EMPLOYEES
As of March 22, 1999, the Company had 112 full-time employees. 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 North Dighton, Massachusetts.
The premises are leased from an unaffiliated landlord under a lease which
expires on December 31, 2007, at a monthly rent of $31,738 effective August 1,
1997, and thereafter to be adjusted based on certain indices. The monthly rental
payment was reduced to $26,255 effective March 1, 1999 due to a reduction in
space. The Company is responsible for payment of real estate taxes, which are
approximately $52,000 per year, and maintenance costs which are approximately
$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
At December 31, 1998, the Company was involved in various pending
commercial legal proceedings with equipment lessors and trade suppliers because
of lease defaults and overdue trade accounts. The debt of the equipment lessors
was paid in conjunction with the January 27, 1999 financing on terms negotiated
between the Company and the lessors. See "Business - Recent Financing." The
Company now has no pending significant commercial legal proceedings with
equipment lessors or trade suppliers.
A notice of potential claim has been sent by a group of investors to
both the Company and its insurance carrier alleging that the Company's former
management made misrepresentations concerning registration rights attendant to
the securities purchased by them pursuant to Regulation D of the Securities and
Exchange Act of 1933, as amended. The Company believes that any settlement in
connection with this potential claim will not have a material effect on its
operations.
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 1998, 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 was traded on the National Association of
Securities Dealers Automated Quotation National Market System ("NASDAQ/NMS")
from October 12, 1992 through August 13, 1998. Since August 14, 1998, the
Company's Common Stock has been traded on the National Association of Securities
Dealers Automated Quotation Over-the-Counter Bulletin Board ("NASDAQ OTC"),
under the symbol, "BPIE."
As of March 22, 1999, the Company had 21,495,621 shares (271 holders)
of record for its Common Stock and 193,358 shares (37 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/NMS or NASDAQ OTC. Such quotations represent
inter-dealer quotations without adjustment for retail markups, markdowns or
commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK HIGH SALE LOW SALE
- ------------ --------- ---------
<S> <C> <C>
Fiscal Year 1997
First Quarter $ 4.25 $ 1.375
Second Quarter $ 3.625 $ 1.625
Third Quarter $ 3.6875 $ 1.8125
Fourth Quarter $ 2.315 $ 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 (through December 31, 1997)(1) $ 1.938 $ 1.063
1998
First Quarter $ 1.375 $ 0.688
Second Quarter $ 1.400 $ 0.844
Third Quarter $ 0.94 $ 0.20
Fourth Quarter $ 0.43 $ 0.14
1999
First Quarter (through March 22, 1999) $ 0.30 $ 0.15
</TABLE>
- ---------------------------
(1) In December 1997, the Company changed its fiscal year end from February 28
to December 31.
RECENT SALES OF UNREGISTERED SECURITIES
In June 1998, the Company completed a Rule 144A offering of private
placement units of $1,485,000. Each unit consisted of 100,000 shares of Common
Stock and a three-year warrant to purchase 100,000 shares of Common Stock at
$1.25 per share. The offering price was $90,000 per unit
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and the total offering was valued at $1,530,000. Under Regulation D, the
securities were initially sold within the United States to accredited investors
and qualified institutional buyers. Under Regulations S, the units were
initially sold outside the United Stated to non-U.S. investors. The proceeds of
the offering are being used as working capital. The securities sold in the
offering have not been registered under the Securities Act of 1933, but are
expected to be registered in the second quarter of 1999.
DIVIDENDS
The Company has not paid any cash dividends on its Common Stock since
inception. Section 7.12 of the Agreement and the Company's current revolving
line of credit loan arrangement prohibit the payment of dividends (in cash or
other property) on or in respect of any shares of any class of capital stock of
the Company's securities 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.
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.
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STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Ten Month Period Fiscal Years
Year Ended Ended Endend
December 31, December 31, February 28, February 23, February 24,
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales 10,382,819 $ 13,951,725 $ 30,810,037 $ 28,839,954 $ 25,254,645
Cost of goods sold 8,826,905 17,311,037 27,784,329 26,161,723 19,879,041
---------- ------------ ------------ ------------ ------------
Gross profit (loss) 1,555,914 (3,359,312) 3,025,708 2,678,231 5,375,604
Selling, general and
administrative expense 4,301,842 6,137,985 8,695,612 6,370,956 5,029,832
Bad debt expense -- 319,736 93,165 -- --
Write-down of impaired assets
and related expenses -- -- 5,385,000 -- --
Patent infringement settlement -- -- 512,648 -- --
operations (2,745,928) (9,817,033) (11,660,717) (3,692,725) 345,772
Allowance for officer loan (68,039) (586,978) -- -- --
Interest and other
expense (471,166) (984,064) (1,112,647) (865,206) (280,445)
Interest income 45,920 49,206 9,133 47,786 77,104
Non-recurring charges -- -- -- -- (989,917)
---------- ------------ ------------ ------------ ------------
Net loss (3,239,213) (11,338,869) (12,764,231) (4,510,145) (847,486)
Basic and diluted net loss per share (.16) (.73) (.96) (.38) (.08)
Shares used in computing basic and
diluted net loss per share 20,849,356 15,579,747 13,261,815 11,756,532 10,670,040
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
At At At At At
December 31, December 31, February 28, February 23, February 24,
1998 1997 1997 1996 1995
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total assets $ 17,751,965 $ 20,970,740 $ 29,247,231 $ 35,277,975 $ 35,341,925
Long term obligations $ -- $ -- $ 3,809,241 $ 5,441,057 $ 4,495,692
Redeemable preferred
stock $ -- $ -- $ -- $ 183,369 $ 183,369
Working capital (deficit) ($12,748,154) ($13,897,932) ($ 5,819,144) ($ 2,767,867) $ 3,909,634
Stockholders' equity $ 3,279,473 $ 5,115,535 $ 11,544,675 $ 19,768,971 $ 24,048,204
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE 10 MONTH PERIOD ENDED
DECEMBER 31, 1997
The Company was unable to accurately recast operating results to
provide for a 12 month period ending December 31, 1997 because monthly
accounting closings were not undertaken during the months in question. The
months of January and February are the lowest sales periods of the year under
normal seasonality trends. The results for a 12 month period ending December 31,
1997 probably would not have produced a lesser loss for the reporting period
than the loss as represented for the 10 month period ending December 31, 1997.
During the 10 month period ended December 31, 1997, the Company exited
the traditional plastic carryout bag market. Sales for the year ended December
31, 1998 were $10,382,819 compared to $13,951,725 in the 10 month period ended
December 31, 1997.
Sales of the Company's proprietary bag products, FRESH-SAC(R) T-shirt
sack produce bag and HANDI-SAC(TM), were $7,799,714 in the year ended December
31, 1998, compared to sales of
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$6,185,039 in the 10 month period ended December 31, 1997. Sales of traditional
products decreased to $1,595,010 in the year ended December 31, 1998 from
$6,739,028 in the 10 month period ended December 31, 1997. The Company exited
the traditional bag market during the 10 month period ending December 31, 1997
and had sales of $536,543 in the first nine months of such period compared to
sales of $1,058,467 in the last quarter of 1998, when the Company elected to
return to the traditional bag market. The sales of the Company's insulation
overwrap films were $988,095 in 1998 compared to $58,731 in the 10 month period
ended December 31, 1997, an increase of $929,364. RC America, Inc. had no sales
in 1998, compared to $968,927 in the 10 month period ended December 31, 1997.
In 1998, cost of goods sold was $8,826,905, or 85.0% of sales, as
compared to cost of goods sold in the 10 month period ended December 31, 1997 of
$17,311,037, or 124.1% of sales. Plans to reduce overhead in 1998 resulted in
significant savings beginning in the second quarter of 1998. Cost of goods sold
would have been approximately $303,000 greater in 1998 and approximately
$253,000 greater during the 10 month period ended December 31, 1997 had the
Company not recorded a write-down of plant and equipment during the year ended
February 28, 1997 ("Fiscal Year 1997").
Selling, general and administrative expense for 1998 was $4,301,842, or
41.4% of sales, as compared to selling, general and administrative expense of
$6,137,985 in the 10 month period ended December 31, 1997, or 44.0% of sales.
Overhead reductions, including the closing of operations of its two
subsidiaries, were mainly responsible for the decrease.
In 1998, interest expense decreased to $471,166, or 4.5% of net sales,
as compared to $984,064 in the 10 month period ended December 31, 1997, or 7.1%
of net sales. Interest decreased due to lower debt balances outstanding under
the Company's credit lines.
The Company had a net loss of $3,239,213 in 1998 compared to a net loss
of $11,338,869 in the 10 month period ended December 31, 1997. The non-cash
expenses of depreciation and amortization were $2,538,880 for 1998, compared to
$2,186,621 for the 10 month period ended December 31, 1997. The major reasons
for the decrease in the net loss can be attributed to the planned reductions in
plant and sales, general and administrative costs, and discontinued operations
of the two subsidiaries in the second quarter of 1998. The losses for 1998 and
the 10 month period ended December 31,1997 would have been greater by
approximately $303,000 and $253,000 respectively, if the Company had not
recorded a write-down of plant and equipment in Fiscal Year 1997.
The Company incurred a loss of $0.16 per share in 1998 as compared
to a loss of $0.73 per share in the 10 month period ended December 31, 1997.
12
<PAGE>
Operating profits (loss) for the various business units are as follows:
<TABLE>
<CAPTION>
Year Ended 10 Month Period ended
December 31, 1998 December 31, 1997
----------------- ---------------------
<S> <C> <C>
Proprietary, traditional and film products ($ 1,004,120) ($ 7,878,610)
RC America, Inc. (130,345) (34,584)
BPI Packaging Technologies, Inc. (7,353) (119)
Market Media, Inc. (122,136) (391,853)
Unallocated corporate overhead (1,481,974) (1,511,867)
Operating profit (loss) ($ 2,745,928) ($ 9,817,033)
Allowance for officer loan (68,039) (586,978)
Interest expense, net (425,246) (934,858)
Net loss ($ 3,239,213) ($11,338,869)
------------- -------------
------------- -------------
</TABLE>
10 MONTH PERIOD ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR 1997
The Company was unable to accurately recast operating results to
provide for a 12 month period ending December 31, 1997 because monthly closing
of the records were not undertaken during the months in question. The months of
January and February are the lowest sales periods of the year under normal
seasonality trends. The results for a 12 month period ending December 31, 1997
probably would not have produced a lesser loss for the reporting period than the
loss as represented for the 10 month period ending December 31, 1997.
For the 10 month period ended December 31, 1997, the Company had sales
of $13,951,725, as compared to sales of $30,810,037 for Fiscal Year 1997.
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
$6,185,039 in the 10 month period ended December 31, 1997, compared to sales of
$12,035,704 in Fiscal Year 1997. Sales of traditional products decreased to
$6,739,028 in the 10 month period ended December 31, 1997 from $16,571,656 in
Fiscal Year 1997. The Company also had sales of insulation overwrap of $58,731
during the 10 month period ended December 31, 1997. 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. Market Media, Inc. recorded no sales in the 10
month period ended December 31, 1997, compared to sales of $134,932 during
Fiscal Year 1997.
In the 10 month period ended December 31, 1997, cost of goods sold was
$17,311,037 or 124.1% of sales, as compared to cost of goods sold in Fiscal Year
1997 of $27,784,329, or 90.2% of sales. Selling, general and administrative
expense for the 10 month period ended December 31, 1997 was $6,137,985, or 44.0%
of sales, as compared to selling, general and administrative expense of
$8,695,612 in Fiscal Year 1997, or 28.2% of sales. Additional depreciation of
approximately $253,000 would have been recorded in the 10 month period ended
December 31, 1997, if the Company had not recorded the write-down of plant and
equipment during Fiscal Year 1997.
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.
13
<PAGE>
The net loss of $11,338,869 in the 10 month period ended December 31,
1997, as compared to a net loss of $12,764,231 in Fiscal Year 1997. The non-cash
expenses of depreciation and amortization were $2,186,621 for the 10 month
period ended December 31, 1997, compared to $3,417,849 for Fiscal Year 1997. The
loss reported for the 10 month period ending December 31, 1997 would have been
$253,000 greater if the Company had not recorded the write-down of plant and
equipment during Fiscal Year 1997.
The Company incurred a loss of $0.73 per share in the 10 month period
ended December 31, 1997 as compared to a loss of $0.96 per share in Fiscal Year
1997.
Operating profits (loss) for the various business units are as follows:
<TABLE>
<CAPTION>
10 Month Period Ended
December 31, 1997 Fiscal Year 1997
--------------------- ----------------
<S> <C> <C>
Proprietary, traditional and film products ($ 7,878,610) ($ 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>
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 financings
and cash from operations.
NOTE PAYABLE
At August 10, 1998, the Company entered into a new revolving line of
credit arrangement with a lender providing for the borrowing of up to $2,000,000
against eligible accounts receivable. Part of the proceeds were used to repay a
line of credit with Foothill Capital Corporation and the balance was used as
general working capital. On October 16, 1998, the Company negotiated an increase
in the advance on its receivable from 70% to 75% of eligible receivables. The
Company paid a fee of 2% of its monthly invoices and interest at prime plus 6%.
The agreement was secured by purchased receivables, general intangibles,
contract rights and all inventory. As of December 31, 1998, the Company was in
default under the terms of the agreement by being late on rent payments to the
Company's landlord.
On January 27, 1999, the Company entered into a Factoring Agreement
(the "Factoring Agreement") with Franklin Capital Corporation ("Franklin"), an
entity affiliated with Gary Edidin, one of the Company's directors, whereby the
Company, with full recourse, assigned and sold to Franklin its entire interest
in all of its present and future accounts, instruments, contractual rights,
chattel paper, documents and general intangibles arising from sales of goods
and/or rendition of services, and proceeds thereof and all security and
guarantees therefor, now existing or hereinafter created (the "Receivables")
14
<PAGE>
The Company pays Franklin a factoring fee in an amount equal to 2% of the gross
amount of such Receivables; provided, however, that the minimum commission for
any Receivable shall be $5.00.
Under the Factoring Agreement, Franklin may advance to the Company up
to 85% of the purchase price of the Receivables as they are created, subject to
a maximum advance at any time outstanding of $2,000,000. Interest is charged for
the number of days that advances of the purchase price of the Receivables are
made to the Company prior to the date they are paid and for the number of days
that the advances from Franklin's account remain outstanding at the prime rate
plus 2% per annum, except that the interest shall in no event be less than 8%
per annum. The Factoring Agreement matures in July 1999 and is renewed
automatically unless notice not to renew is given. The Company has sent a letter
of cancellation to Franklin regarding the Franklin Agreement and is currently
pursuing alternative financing sources.
Pursuant to the terms of the Factoring Agreement, the Company has
granted Franklin a security interest in all of the Company's present and future
accounts, instruments, contract rights, chattel paper, documents, equipment
inventory, deposit accounts, investment property and general intangibles
(whether arising before or after termination of the Factoring Agreement) and all
returned, repossessed and reclaimed goods and records relating thereto; and all
proceeds of the foregoing collateral, to secure all of the obligations of the
Company arising pursuant to the Factoring Agreement.
On January 27, 1999, the Company issued a demand revolving note to
Franklin in the principal sum of $1,000,000 (the "Revolving Note") at an
interest rate of 5% above the prime rate; provided, however, that the interest
rate charged will not be less than a minimum annual fixed rate of 12-3/4%. After
demand is made for payment of the principal and interest due on the Revolving
Note, interest shall accrue on the entire unpaid principal balance calculated at
a variable rate per annum equal to 10% above the prime rate. The Company also
agreed to pay Franklin a late charge on all payments made pursuant to the
Revolving Note equal to 5% of the late payment.
The Revolving Note is secured by a Security Agreement entered into by
the Company and Franklin on January 27, 1999 (the "Franklin Security Agreement),
granting Franklin a continuing security interest in the Company's right, title
and interest in the Company's present and future accounts, inventory, equipment
and other property. Further, pursuant to the terms of the Franklin Security
Agreement, the amount eligible to be advanced under the Revolving Note is
limited to the lesser of: (i) $1,000,000; and (ii) the sum of (x) 50% of
eligible inventory consisting of finished goods covered by firm purchase orders
or contracts, and (y) 50% of eligible inventory consisting of raw materials
comprised of resins.
SALES OF SECURITIES
The Company received net proceeds from the privately placed sale of
Common Stock from January 1, 1998 to June 30, 1998, described in Item 5, of
$1,282,951. The proceeds were used for general corporate purposes.
EQUIPMENT PURCHASES AND LEASE FINANCINGS
From March 1994 through August 1997, the Company acquired, through
purchase or lease, approximately $19,700,000 of 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.
Certain of the Company's capital leases contained provisions that gave
the lessors the right to accelerate lease payments in the event of default and
each of the Company's capital lessors had filed suit
15
<PAGE>
because of defaults. All of the Company's capital leases, operating leases and
real-estate leases were in default as of December 31, 1998.
Pursuant to the Agreement, the Company entered into an Equipment Lease
with DGJ (the "Equipment Lease"), whereby the Company agreed to lease certain
equipment for $1,224,000 per year, payable in equal monthly installments. The
term of the Equipment Lease is for one year and is renewable for successive one
year periods. The Equipment Lease replaced the existing equipment leases,
described above, which have been terminated, in which the Company was in default
or which were subject to judgments due to past due payments owed by the Company.
In February 1999, the Company borrowed approximately $219,000 from DGJ
to purchase an additional piece of equipment. This loan bears interest at a rate
of 18% per annum and matures in September 1999.
LIQUIDITY
The Company's cash flow was enhanced by $2,538,880 from depreciation
and amortization non-cash charges in 1998. Inventory was reduced by $630,453
during 1998. The current asset ratio was 0.12:1 at December 31, 1998 and 0.66:1
after a financial restructuring that occurred on January 27, 1999. See "Business
- - Recent Financing." The debt-to-equity ratio was 4.4:1 at December 31, 1998 and
2.8:1 after the January 27, 1999 financial restructuring.
IMPAIRMENT OF LONG-LIVED ASSETS AND PATENT INFRINGEMENT SETTLEMENT
During the fourth quarter of Fiscal Year 1997, the Company made the
decision to exit the traditional T-shirt bag business. The application of
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," caused
the Company to recognize a non-cash charge of $5,385,000 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 business.
Description of impaired assets, patents, goodwill and plant assets
relating to bag making facilities:
<TABLE>
<S> <C>
Patents $1,044,577
Goodwill 620,353
Plant equipment 3,335,070
Reserve for agreement with bag-making
equipment vendor 285,000
Write-off of rubber plates used
In bag-making equipment 100,000
----------
Total $5,385,000
----------
----------
</TABLE>
Fair value of all assets, except plant equipment, was determined to be
zero based upon the Company's decision to exit the traditional T-shirt bag
business. Fair value of the plant equipment was determined based upon projected
future cash flows for the remaining useful life, present book value and residual
value of assets at the end of its useful life, with cash flows both discounted
at 14% per year (average cost of secured debt financing).
16
<PAGE>
A patent infringement suit settlement of $512,648, including legal
defense costs, was recorded during Fiscal Year 1997.
IMPACT OF INFLATION
Inflation during the year ended December 31, 1998 did not have any
impact on operating results nor did it have any impact on the last three fiscal
periods.
YEAR 2000
The Company implemented a Year 2000 compliance project in June 1998,
which addresses the internal risk, requirements and budgets for becoming Year
2000 compliant. The Company has completed an inventory of all of its internal
operations and currently is addressing Year 2000 compliance from its suppliers
and other constituents. In 1998, the Company did not have any costs associated
with Year 2000 compliance.
As a result of the Year 2000 compliance project, the Company is
upgrading its financial and accounting system at an investment of approximately
$25,000, and is funding the upgrade out of working capital. The finance and
accounting system upgrade is currently in process and is expected to be
completed by May 31, 1999. In manufacturing, the Company has completed
approximately 65% of the review process. The Company has not found, and does not
presently expect to find, any case in which the failure of a piece of operating
equipment to be Year 2000 compliant would materially affect the operation of
such equipment. The Company does not expect that the cost of making any
operating equipment Year 2000 compliant to be material.
The balance of the Year 2000 compliance review and contingency plan
project is anticipated to be completed by June 30, 1999. This portion of the
plan includes reviewing compliance for the Company's weight scales, telephone
and alarm systems, fax and copy machines, utilities, insurance providers,
banking institutions and key suppliers. The additional costs of achieving full
Year 2000 compliance are expected to be $25,000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required of the Company at this time.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 below and the Index therein for a listing of the financial
statements and supplementary data filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On July 6, 1998, the Company reported on Form 8-K the resignation of
PricewaterhouseCoopers LLP as the Company's independent accountants. In
connection with the audits of the Company's financial statements for the 10
month period ended December 31, 1997 and the years ended February 28, 1997 and
February 23, 1996, and during the subsequent interim period through July 6,
1998, there were no disagreements between the Company and PricewaterhouseCoopers
LLP relative to accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused
PricewaterhouseCoopers LLP to make reference to the matter in its reports on the
financial statements for such periods.
17
<PAGE>
On July 29, 1998, the Company reported on Form 8-K the engagement of
Livingston & Haynes, P.C. as the Company's independent accountants. The decision
to engage Livingston & Haynes, P.C. was approved by the Company's Audit
Committee.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The section entitled "Directors and Executive Officers" located in the
Registrant's Definitive Proxy Statement, to be filed on or before April 30,
1999, pursuant to Regulation 14A for its Annual Meeting of Stockholders (the
"Annual Meeting Proxy Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Annual Meeting
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners
and Management" in the Annual Meeting Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions"
in the Annual Meeting Proxy Statement is incorporated herein by reference.
19
<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:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants -- Livingston & Haynes, P.C. F-1
Report of Former Independent Accountants - PricewaterhouseCoopers LLP F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the year ended December
31, 1998, the 10 month period ended December 31, 1997, and for the
fiscal year ended February 28, 1997 F-5
Consolidated Statements of Changes in Stockholders' Equity for the
year ended December 31, 1998, the 10 month period ended
December 31, 1997 and the fiscal year ended February 28, 1997 F-6
Consolidated Statements of Cash Flows for the year ended December
31, 1998, the 10 month period ended December 31, 1997 and the
fiscal year ended February 28, 1997 F-8
Notes to Consolidated Financial Statements F-10
(a)(2) FINANCIAL STATEMENT SCHEDULES. The financial statement schedules
required to be filed by Item 8 herewith is as
follows:
Schedule II Valuation and Qualifying Accounts S-1
</TABLE>
(a)(3) EXHIBITS:
(a) The following exhibit, required by Item 601 of Regulation
S-K, is filed herewith:
EXHIBIT NO. TITLE
----------- ------
27 Financial Data Schedule.
(b) The following exhibit was filed as part of the Company's
Current Report on Form 8-K, dated March 31, 1999 and filed with
the Commission on March 31, 1999, and is incorproated herein by
reference:
10 Form of Employment Agreement between the
Company and Peter W. Blackett.
(c) The following exhibits were filed as part of the Company's
Current Report on Form 8-K, dated January 27, 1999, and filed with
the Commission on February 11, 1999, and are incorporated herein
by reference:
20
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
------------- --------
<S> <C>
4.1 Common Stock Purchase Warrant issued by the Company to
Global Financial Services, Inc. ("Global").
4.2 Common Stock Purchase Warrant issued by the Company to DGJ, L.L.C. ("DGJ").
4.3 Common Stock Purchase Warrant issued by the Company to Brantrock.
99.1 Press Release, dated January 28, 1999.
99.2 Securities Purchase Agreement between the Company and DGJ.
99.3 Factoring Agreement between the Company and Franklin Capital Corporation
("Franklin").
99.4 Revolving Note issued by the Company to Franklin.
99.5 Security Agreement between the Company and Franklin.
99.6 Employment Agreement between the Company and C. Jill Beresford.
99.7 Employment Agreement between the Company and James Koehlinger.
99.8 Employment Agreement between the Company and Richard H. Nurse, Ph.D.
99.9 Employment Agreement between the Company and Hanspeter Schulz, Ph.D.
99.10 Consulting Agreement between the Company and Ivan J. Hughes.
</TABLE>
(d) The following exhibits were filed as part of the Company's
Schedule 13D filed with the Commission on February 2, 1999, and
are incorporated herein by reference:
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
----------- -----
<S> <C>
1 Securities Purchase Agreement, dated as of January 27, 1999, between
the Company and DGJ.
2 Agreement, dated January 27, 1999, among DGJ, Ivan J. Hughes and C. Jill Beresford.
3 Closing Agreement, dated as of January 27, 1999, by and among the Company, DGJ,
and C. Jill Beresford.
4 Pledge Agreement, dated as of January 27, 1999, between DGJ and C. Jill Beresford.
</TABLE>
21
<PAGE>
<TABLE>
<S> <C>
5 Form of Common Stock Purchase Warrant.
6 Certificate of Designation of Series C Preferred Stock.
7 Joint Filing Agreement.
8 Power of Attorney.
</TABLE>
(e) The following exhibit was filed as part of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998 and filed with the Commission on November 16, 1998, and is
incorporated herein by reference:
EXHIBIT NO. TITLE
----------- -----
10.1 Invoice Purchase and Sale Agreement, dated
August 19, 1998.
(f) The following exhibits were filed as part of the Company's
Current Report on Form 8-K with the Commission on July 14, 1998,
and are incorporated herein by reference:
EXHIBIT NO. TITLE
----------- -----
16 Letter from PricewaterhouseCoopers LLP to
the Securities and Exchange Commission.
99 Press Release of the Company issued July 7,
1998.
(g) The following exhibits were filed as part of the Company's
Annual Report on Form 10-K for the 10 month period ended December
31, 1997 and filed with the Commission on May 27, 1998, 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, Inc. to Foothill.
10c Pledge and Security Agreement by and between
the Company and Foothill.
10d Continuing Guarantee 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.
22
<PAGE>
10i* Settlement Agreement by and between the
Company and Mobil Oil Corporation, dated
December 10, 1996.
(h) The following exhibits were filed as part of the Company's
Quarterly Report on Form 10-Q for the quarter ended November 22,
1996 and filed with the Commission on January 7, 1997, and are
incorporated herein by reference:
EXHIBIT NO. TITLE
----------- -----
10a Loan and Security Agreement by and among the
Company, RC America, Inc. and Foothill
Capital Corporation ("Foothill").
10b Secured Promissory Note from the Company and
RC America to Foothill.
10c Pledge and Security Agreement by and between
the Company and Foothill.
10d Continuing Guaranty of Market Media, Inc.
10e Continuing Guarantee of BPI Packaging (UK)
Limited.
10f Security Agreement by and between Market
Media, Inc. and Foothill.
10g Security Agreement by and between BPI
Packaging (UK) Limited and Foothill.
10i* Settlement Agreement by and between the
Company and Mobil Oil Corporation, dated
December 10, 1996.
27 Financial Data Schedule.
(i) 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.
EXHIBIT NO. TITLE
----------- -----
10** 1996 Stock Option Plan.
(j) The following exhibits were filed as part of the Company's
Annual Report on 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.
23
<PAGE>
(k) The following exhibits were filed as part of the Company's
Quarterly Report on Form 10-Q for the quarter ended November 24,
1995 and filed with the Commission on January 8, 1996, and are
incorporated herein by reference:
EXHIBIT NO. TITLE
----------- -----
3a Certificate of Incorporation of the Company,
as amended.
3b By-laws of the Company, as amended.
(l) The following exhibit was 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 is
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.
(m) 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:
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.
(n) 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.
(o) 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:
24
<PAGE>
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.
(p) 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.
(q) The Financial Statement Schedules filed as part of the
Company's Form 10-K for the 10 month period ended December 31,
1997 and for the fiscal years ended February 28, 1997, February
23, 1996 and February 24, 1995 as filed with the Securities and
Exchange Commission on May 27, 1998, June 13, 1997, June 7, 1996
and May 26, 1995, respectively, and are incorporated herein by
reference.
- -------------------------------
* Certain formation withheld and filed separately with the Commission pursuant
to a request for confidential treatment.
** These exhibits relate to executive compensation plans and arrangements.
(b) REPORTS ON FORM 8-K: No reports on Form 8-K were filed during the
fourth quarter of 1998 by the Company.
25
<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: March 31, 1999
By: /S/ HANSPETER SCHULZ
-----------------------------
Hanspeter Schulz, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------- ------ ------
<S> <C> <C>
/S/ HANSPETER SCHULZ President and Director March 31, 1999
- --------------------
/S/ IVAN J. HUGHES Chairman of the Board March 31, 1999
- ------------------
/S/ RICHARD H. NURSE Vice President of Manufacturing March 31, 1999
- --------------------
/S/ C. JILL BERESFORD Vice President of Marketing March 31, 1999
- ---------------------
/S/ JAMES F. KOEHLINGER Chief Financial Officer, March 31, 1999
- ----------------------- Principal Accounting Officer and
Treasurer
/S/ DAVID N. LAUX Director March 31, 1999
- -----------------
/S/ GARY R. EDIDIN Director March 31, 1999
- ------------------
/S/ ALLEN S. GERRARD Director March 31, 1999
- --------------------
</TABLE>
26
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants -- Livingston & Haynes, P.C. F-1
Report of Former Independent Accountants - PricewaterhouseCoopers LLP F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the year ended December 31, 1998, the 10-
month period ended December 31, 1997 and the fiscal year ended February 28, 1997 F-5
Consolidated Statements of Stockholders' Equity for the year ended December 31,
1998, the 10-month period ended December 31, 1997 and the fiscal year ended
February 28, 1997 F-6
Consolidated Statements of Cash Flows for the year ended December 31, 1998, the
10-month period ended December 31,1997 and the fiscal year ended February 28, 1997 F-8
Notes to Consolidated Financial Statements F-10
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS - LIVINGSTON & HAYNES, P.C.
March 22, 1999
To the Board of Directors and Stockholders
of BPI Packaging Technologies, Inc.
We have audited the accompanying consolidated balance sheet of BPI
Packaging Technologies, Inc., (the "Company") and subsidiaries as of December
31, 1998 and the related consolidated statements of operations, stockholders'
equity, cash flows and Schedule 2, Valuation and Qualifying Accounts for the
year then ended. 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 audit. The 1997 financial statements were
audited by other auditors whose report dated May 22, 1998, on those statements,
included an explanatory paragraph describing conditions that raised substantial
doubt about the Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
and subsidiaries as of December 31, 1998 and the results of their operations,
their changes in stockholders' equity and cash flows for the year then ended are
in conformity with generally accepted accounting principles.
/s/ Livingston & Haynes, P.C.
Livingston & Haynes, P.C.
Wellesley, Massachusetts
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS -- PRICEWATERHOUSECOOPERS 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 27 present fairly, in all material respects, the
financial position of BPI Packaging Technologies, Inc. and its subsidiaries
at December 31, 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 the year ended February 28, 1997, in conformity
with generally accepted accounting principles. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from
operations and has net working capital and operating cash flow deficiencies.
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 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/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
F-2
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
Consolidated Balance Sheet
Assets
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Current assets:
Cash $ 73,116 $ 125,220
Accounts receivable, net 882,389 721,239
Inventories, net 717,413 1,057,866
Prepaid expenses 51,420 52,948
------------- -------------
Total current assets 1,724,338 1,957,273
------------- -------------
Property and equipment, net 15,290,305 17,828,860
------------- -------------
Deposits - leases and equipment purchases 149,851 141,284
Loans to officers, net 6,072 5,416
Other assets, net 581,399 1,037,907
------------- -------------
737,322 1,184,607
------------- -------------
$ 17,751,965 $ 20,970,740
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an
integral part of these consolidated
financial statements.
F-3
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
Consolidated Balance Sheet
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Current liabilities
Note payable $ 814,311 $ 1,162,349
Trade notes payable 584,433 584,433
Capital lease obligations due within one year 3,800,286 4,426,205
Accounts payable 6,597,223 6,714,870
Accrued expenses 2,676,239 2,967,348
--------- ---------
Total current liabilities 14,472,492 15,855,205
---------- ----------
Commitments and contingencies
Stockholders' Equity
Series B convertible preferred stock, $.01 par value 1,466,954 1,466,954
Series A convertible preferred stock, $.01 par value 674,032 1,126,932
Common stock, $.01 par value; shares authorized --
60,000,000 at December 31, 1998 and 1997
Shares issued and outstanding - 21,495,621 and
19,513,496 at December 31, 1998 and 1997,
respectively
214,956 195,135
Capital in excess of par value 44,912,833 43,076,603
Accumulated deficit (43,989,302) (40,750,089)
---------- ----------
3,279,473 5,115,535
--------- ---------
$ 17,751,965 $ 20,970,740
---------------- --------------
---------------- --------------
The accompanying notes are an
integral part of these consolidated
financial statements.
F-4
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
Consolidated Statement of Operations
10 Month period
Fiscal Year Ended Ended Fiscal Year Ended
December 31, 1998 December 31, 1997 February 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net sales $ 10,382,819 $ 13,951,725 $ 30,810,037
Cost of goods sold 8,826,905 17,311,037 27,784,329
--------- ---------- ----------
Gross profit (loss) 1,555,914 (3,359,312) 3,025,708
Operating expenses:
Selling, general and administrative 4,301,842 6,137,985 8,695,612
Bad debt expense --- 319,736 93,165
Write-down of impaired assets and
related expenses --- --- 5,385,000
Patent infringement settlement --- --- 512,648
----------------- --------------- -------
Loss from operations (2,745,928) (9,817,033) (11,660,717)
Other (expense) income:
Allowance for officer loan (68,039) (586,978) ---
Interest expense (471,166) (984,064) (1,112,647)
Interest income 45,920 49,206 9,133
------ ------ -----
Net loss ($3,239,213) ($11,338,869) ($12,764,231)
----------- ------------ ------------
----------- ------------ ------------
Basic and diluted net loss per share ($0.16) ($0.73) ($0.96)
Shares used in computing basic and
diluted net loss per share 20,849,356 15,579,747 13,261,815
</TABLE>
The accompanying notes are an
integral part of these consolidated
financial statements.
F-5
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
Consolidated Statement of Changes in Stockholders' Equity
For the Year Ended December 31, 1998, the 10 Month Period Ended
December 31, 1997 and for the Fiscal Year Ended February 28, 1997
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
------------ --------------- ---------------
CAPITAL IN ACCUMU-
EXCESS OF LATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAR VALUE DEFICIT
------ ------ ------ ------ ------ ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
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
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
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
Issuance of common
stock based on RC
America's FY96
results 2,550 26 5,074
Issuance of 92,308
Regulation S common
shares in exchange
for Series C redeemable
preferred stock 92,308 923 149,077
Net loss for the year
ended February 28, 1997
Balance at February 28,
1997 14,074,428 140,745 347,146 1,213,584 146,695 1,466,954 38,134,612 (29,411,220)
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
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
</TABLE>
<TABLE>
<CAPTION>
TOTAL
-----
<S> <C>
Balance at February 23, 19,768,971
1996
Sale of common stock
pursuant to
Regulation S and
Regulation D private
placement offerings,
net of issuance costs 2,206,8689
Sale of common and
preferred stock
pursuant to partial
exercise of
underwriter's warrants
from prior public
offerings, net of
issuance costs 1,080,050
Conversion of Series
A convertible
preferred stock to
common stock --
Sale of common stock
pursuant to exercise of
class B warrants from
the Company's third
public offering, net of
issuance costs 1,097,917
Issuance of common
stock based on RC
America's FY96
results 5,100
Issuance of 92,308
Regulation S common
shares in exchange
for Series C redeemable
preferred stock 150,000
Net loss for the year
ended February 28, 1997
Balance at February 28,
1997 11,544,675
Conversion of Series A
convertible preferred
stock to common stock --
Issuance of common
stock based on RC
America FY 97 results 8,579
Sale of common stock
pursuant to Regulation
S and Regulation D
private placement
offerings, net of
issuance costs 4,403,991
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
------------ --------------- ---------------
CAPITAL IN ACCUMU-
EXCESS OF LATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAR VALUE DEFICIT
------ ------ ------ ------ ------ ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock in exchange
for commission on
private placement
offerings 387,500 3,875 383,626
Issuance of common
stock in exchange
for consulting
services 33,500 335 33,165
Warrants granted to
consultants 76,158
Net loss for the 10
month period ended
December 31, 1997 (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)
Sale of Stock
pursuant to
Regulation D private
offerings, net of
issuance costs 1,868,900 18,689 1,264,262
Warrants granted for
lease extension 120,200
Conversion of Series
A Convertible
Preferred 113,225 1,132 (113,225) (452,900) 451,768
Net loss for the
year ended December
31, 1998 (3,239,213)
Balance at December 31,
1998 21,495,621 $214,956 212,258 $674,032 146,695 $1,466,954 $44,912,833 ($43,989,302)
---------- -------- ------- -------- ------- ---------- ----------- ------------
---------- -------- ------- -------- ------- ---------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
TOTAL
-----
<S> <C>
Issuance of common
stock in exchange
for commission on
private placement
offerings 387,501
Issuance of common
stock in exchange
for consulting
services 33,500
Warrants granted to
consultants 76,158
Net loss for the 10
month period ended
December 31, 1997 (11,338,869)
Balance at December 31,
1997 5,115,535
Sale of Stock
pursuant to
Regulation D private
offerings, net of
issuance costs 1,282,951
Warrants granted for
lease extension 120,200
Conversion of Series
A Convertible
Preferred --
Net loss for the
year ended December
31, 1998 (3,239,213)
Balance at December 31,
1998 $3,279,473
----------
----------
</TABLE>
The accompanying notes are an
integral part of consolidated
financial statements.
F-7
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
10 Month period
Fiscal Year Ended ended Fiscal Year Ended
December 31, 1998 December 31, 1997 February 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss ($3,239,213) ($11,338,869) ($12,764,231)
---------- ----------- -----------
Adjustments to reconcile net loss to net cash
provided (used) by operating
activities:
Depreciation and amortization 2,538,880 2,186,621 3,417,849
Write-down of impaired assets and related
expenses -- -- 5,897,648
Inventory reserve (290,000) (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:
(Increase) Decrease in accounts receivable-trade (161,150) 1,197,521 84,372
(Increase) Decrease in inventories 630,453 4,401,587 (1,821,856)
(Increase) Decrease in prepaid expenses 1,528 217,538 (302,566)
Increase (Decrease) in other assets, net 456,508 840,896 (198,418)
(Decrease) Increase in accounts payable (117,647) 209,020 3,218,584
(Decrease) Increase in other accrued expenses (291,109) 364,134 132,409
---------- ---------- -----------
Total Adjustments 2,767,463 11,007,330 11,643,022
--------- ---------- -----------
Net cash used by operating activities (471,750) (331,539) (1,121,209)
---------- ---------- -----------
Cash flows from investing activities:
Additions to property and equipment (325) (212,144) (1,549,878)
Cost of patents -- -- (144,928)
Decrease (increase) in deposits, net (8,567) (12,823) 388,922
Advances to officers (656) (112,597) (44,560)
---------- ---------- -----------
Net cash used by investing activities (9,548) (337,564) (1,350,444)
---------- ---------- -----------
Cash flows from financing activities:
Net (payments) borrowings under note payable (348,038) (2,571,128) (19,127)
Principal payments on long-term debt and capital
lease obligations (625,919) (1,492,754) (1,945,014)
Net proceeds from sales and issuances of stock 1,403,151 4,800,071 4,384,835
---------- ---------- -----------
Net cash provided by financing activities 429,194 736,189 2,420,694
---------- ---------- -----------
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
10 Month period
Fiscal Year Ended ended Fiscal Year Ended
December 31, 1998 December 31, 1997 February 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net (decrease) increase in cash (52,104) 67,086 (50,959)
Cash at beginning of period 125,220 58,134 109,093
-------- -------- ----------
Cash at end of period $ 73,116 $125,220 $58,134
-------- -------- ----------
-------- -------- ----------
Cash paid for interest $471,166 $900,855 $1,093,648
-------- -------- ----------
-------- -------- ----------
Non-cash investing and financing activities:
</TABLE>
Capital lease obligations of $590,069 were incurred in Fiscal 1997 when
the Company entered into capital lease agreements to purchase machinery and
equipment.
During the 10 month period ended December 31, 1997, two trade payables,
totaling $584,433, were converted into trade notes payable (Note 10).
The accompanying notes are an integral part
of these consolidated financial statements
F-9
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
BPI Packaging Technologies, Inc. (the "Company") converts commercially
available high molecular weight, high density polyethylene ("HMWHDPE") resins
into thin film, which is either sold directly into industrial or packaging
applications or converted in-house into carryout bags of "T-shirt sack" design
for supermarkets, convenience stores and other retail markets. The Company
utilizes advanced, high quality extrusion, printing and bag making equipment,
which was installed between 1990 and 1997. The Company operated two wholly-owned
subsidiaries: RC America, Inc., which purchased 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. Operations of these two subsidiaries
ceased during the year ended December 31, 1998.
SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company changed its fiscal year during the period ended December
31, 1997 to coincide with the calendar year, resulting in a 10 month period. In
the previous year, the Company's fiscal year ended February 28, 1997.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
The Company recognizes revenues on an accrual basis upon shipment of
products and passage of title to the Company's customers. 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.
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-10
<PAGE>
The carrying value of property and equipment is periodically reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying values may not be recoverable.
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 carry-forwards, 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 $42,127, $113,478 and $309,316 for the year ended
December 31, 1998, the 10 month period ended December 31, 1997 and for the
fiscal year ended February 28, 1997.
BASIS OF CONSOLIDATION
The consolidated financial statements include the results of the
Company's wholly-owned subsidiaries, RC America, Inc., and Market Media, Inc.
Operations of these two subsidiaries ceased during the year ended December 31,
1998. All inter-company 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 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 year ended December 31, 1998, the 10
month period ended December 31, 1997 and the fiscal year ended February 28, 1997
computation include 649,557, 783,117 and 773,830 common shares, respectively,
issuable upon the exercise of stock options. Antidilutive potential common
shares excluded from the year ended December 31, 1998, the 10 month period ended
December 31, 1997 and the fiscal year ended February 28, 1997 computation also
included 358,953, 472,178 and 493,841 common shares issuable upon the conversion
of redeemable convertible preferred stock. Antidilutive potential common shares
excluded from the 10 month period
F-11
<PAGE>
ended December 31, 1997 computation included 109,323 issuable upon the exercise
of warrants. Antidilutive potential common shares excluded from the year ended
December 31, 1998 computation included 120,200 common shares 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 20).
IMPAIRMENT OF LONG-LIVED ASSETS
In Fiscal Year ended February 28, 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
On January 27, 1999, the Company entered into a Securities Purchase
Agreement (the "Purchase Agreement") with an investor, DGJ, L.L.C., a Delaware
limited liability company ("DGJ"), whereby the Company agreed to issue and sell
to DGJ, and DGJ agreed to purchase from the Company the following:
F-12
<PAGE>
1. a Promissory Note in the aggregate principal amount of $3,200,000;
2. a Common Stock Purchase Warrant for the purchase of up to 80,000,000
shares of the Company's common stock, $.01 par value per share (the "Common
Stock"), at an exercise price of $0.04 per share, exercisable until January 27,
2009; and
3. 1,629,930 shares of Series C Preferred Stock of the Company.
The $3,200,000 subordinated note with a term of payment due February 1,
2004 or earlier: if the Company enters into a merger, into a public offering in
excess of $10,000,000, defaults on the payment of interest or sell 50% or more
of its shares in the Company to a shareholder not previously an investor in the
Company. The note has an interest rate of 6% per annum payable monthly in
arrears. The note is secured by all assets of the Company.
In addition, Company management invested $300,000 in warrant exercises
that appear as subscribed stock on the Pro Forma Balance Sheet. The Common Stock
represented by the warrants cannot be issued until approval for an increase in
the authorized shares outstanding is obtained at the next annual meeting of
stockholders.
A factoring agreement with a company related to DGJ now provides the
Company with $2,000,000 of financing secured by the Company's accounts
receivable and $1,000,000 secured by its inventory. The term for both accounts
receivable and inventory financing is six months, subject to automatic renewal
unless the Company gives at least 90 days written notice of termination. The
financing bears interest at prime rate plus 5% on the outstanding balance on the
inventory loan and the prime rate plus 2% on all accounts receivable submitted
for financing. The Company may borrow up to 85% of its qualified accounts
receivable and 33% of its qualified inventory.
In conjunction with the financing, the Company entered into agreements
with most of its unsecured creditors that provided for a discounted payment in
February 1999 or a non-interest bearing agreement to pay the entire balance over
a three-year period. The unsecured creditor agreements, together with the
financing referred to above, allowed the Company to restructure trade notes
payable of $584,000 and accounts payable of $6,597,000, or a total of
$7,181,000, compared to $1,874,000 of current accounts payable and $1,426,000 of
long-term debt, or a total of $3,300,000 after refinancing.
The Company's equipment, capital and operating leases were funded by
the new equipment lease with DGJ. Current obligations of $3,800,000 and accrued
lease obligations of $1,643,000 were retired and $1,679,000 of equipment
previously under operating leases were added to the property and equipment
accounts. The new lease carries no debt reduction obligation and is treated as
long-term debt. The combined monthly payments under the retired leases were
reduced from approximately $305,000 per month to $102,000 per month under the
new lease agreement.
A note payable, warrants and Series C Preferred Stock purchased by
DGJ for $3,200,200 were valued at the discounted fair market value at an
assumed rate of 14%. Of the $3,200,000, $480,000 has been recorded as
additional capital in excess of par value related to the warrants. The Series
C Preferred Stock is determined to have no value separate from the warrants.
The Series C Preferred Stock is not convertible and has no preference in
liquidation, although, it has a voting preference.
The plan to restructure the Company's operations and management, which
began in the third quarter of 1998, to satisfy past due trade creditors and past
due operating and capital lease balances, is progressing.
F-13
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
Pro Forma Balance Sheet
<TABLE>
<CAPTION>
As audited Pro Forma
December 31, 1998 December 31, 1998
----------------- -----------------
<S> <C> <C>
Current assets
Cash $ 73,116 $ 977,216
Accounts receivable, net 882,389 882,389
Inventories, net 717,413 717,413
Prepaid expenses 51,420 51,240
--------------- -------------
Total current assets 1,724,338 2,628,438
--------- ---------
Property and equipment, net 15,290,305 16,969,278
--------------- -------------
Deposits - leases and equipment purchases 149,851 73,911
Loans to officers, net 6,072 6,072
Other assets, net 581,399 1,219,703
--------------- -------------
737,322 1,299,686
--------------- -------------
$ 17,751,965 $ 20,897,402
--------------- -------------
--------------- -------------
Current liabilities
Note payable $ 814,311 $ 1,064,311
Trade notes payable 584,433 --
Capital lease obligations due within one year 3,800,286 --
Accounts payable 6,597,223 1,874,000
Accrued expenses 2,676,239 1,032,862
--------------- -------------
Total current liabilities 14,472,492 3,971,173
--------------- -------------
Capital lease obligations - long-term portion -- 6,800,000
--------------- -------------
Long-term debt - Accounts Payable -- 1,425,540
--------------- -------------
Notes payable -- 2,720,000
--------------- -------------
Stockholders' equity
Subscribed Stock -- 300,000
Series B convertible preferred stock, $.01 par value 1,466,954 1,466,954
Series A convertible preferred stock, $.01 par value 674,032 674,032
Series C redeemable preferred stock, $.01 par value -- 100
Common stock, $.01 par value; shares authorized -- 60,000,000
214,956 214,956
Capital in excess of par value 44,912,833 44,463,254
Accumulated deficit (43,989,302) (45,392,733)
---------------- --------------
3,279,473 5,980,689
--------------- -------------
$ 17,751,965 $ 20,897,402
--------------- -------------
--------------- -------------
</TABLE>
F-14
<PAGE>
NOTE 3: ACCOUNTS RECEIVABLE-TRADE
Accounts receivable-trade consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Accounts receivable-trade $ 1,066,841 $ 1,071,239
Allowance for doubtful accounts (109,452) (275,000)
Allowance for credits (75,000) (75,000)
-------------- --------------
$ 882,389 $ 721,239
-------------- --------------
-------------- --------------
</TABLE>
NOTE 4: INVENTORIES
Inventories, net of valuation reserves, consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Raw material $ 296,427 $ 285,058
Finished goods 420,986 1,062,808
Reserves -- (290,000)
-------------- --------------
$ 717,413 $ 1,057,866
-------------- --------------
-------------- --------------
</TABLE>
Raw material includes virgin high density, high molecular weight
polyethylene ("HDHMWPE") resin, re-processed HDHMWPE 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:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Machinery and equipment $ 24,817,161 $ 24,817,161
Leasehold improvements 3,611,407 3,611,082
Office furniture and fixtures 303,731 303,731
Motor vehicles 19,900 19,900
-------------- --------------
28,752,199 28,751,874
Less accumulated depreciation and
amortization (13,461,894) (10,923,014)
-------------- --------------
$ 15,290,305 $ 17,828,860
-------------- --------------
-------------- --------------
</TABLE>
F-15
<PAGE>
Assets recorded under capital leases and included in property and
equipment were as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Machinery and equipment $ 13,041,270 $ 13,041,270
Less accumulated amortization (5,478,653) (4,055,971)
--------- ---------
$ 7,562,617 $ 8,985,299
-------------- --------------
-------------- --------------
</TABLE>
Depreciation and amortization expense relating to fixed assets was
$2,538,880, $2,186,621 and $3,216,189 for the year ended December 31, 1998, the
10 month period ended December 31, 1997 and for the year ended February 28,
1997, respectively, of which $1,422,682, $1,185,568 and $1,158,749, related to
amortization of equipment held under capital leases, respectively.
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 AND PATENT INFRINGEMENT SETTLEMENT
During the fourth quarter of the fiscal year ended February 28, 1997,
the Company made the decision to exit the traditional T-shirt bag business. The
application of Statement of Financial Standard No. 121, "Accounting for the
Impairment of Ling-Lived Assets and Long-Lived Assets to be Disposed Of," caused
the Company to recognize a non-cash charge of $5,385,000 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 business.
Description of impaired assets; patents, goodwill and plant assets
relating to bag making facilities:
<TABLE>
<S> <C>
Patents $1,044,577
Goodwill 620,353
Plant equipment 3,335,070
Reserve for agreement with
bag-making equipment vendor 285,000
Write-off of rubber plates used
in bag-making equipment 100,000
----------
Total $5,385,000
----------
----------
</TABLE>
Fair value of all assets, except plant equipment, was determined to be
zero based upon the Company's decision to exit the traditional T-shirt bag
business. Fair value of the plant equipment was determined based upon projected
future cash flows for the remaining useful life, present book value and residual
value of assets at the end of its useful life, with cash flows both discounted
at 14% per year (average cost of secured debt financing).
A patent infringement suit settlement of $512,648, including legal
defense costs, was recorded during Fiscal Year 1997.
F-16
<PAGE>
Due to the increase in the Company's conversion capacity, the Company
re-entered the standard grocery T-shirt bag business in the third quarter of
1998 to realize marginal contributions to fixed costs.
NOTE 7: PATENTS
The Company owns several patents. No costs associated with patent
applications were capitalized during the year ended December 31, 1998, the 10
month period ended December 31, 1997 and fiscal year ended February 28, 1997.
Amortization expense of approximately $87,000 was recorded in the Fiscal Year
ended February 28, 1997.
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 ended February 28, 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:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Spare parts and supplies, net $ 334,703 $ 669,405
Other assets 246,696 368,502
-------------- --------------
$ 581,399 $ 1,037,907
-------------- --------------
-------------- --------------
</TABLE>
NOTE 9: ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Employee compensation and benefits $ 50,750 $ 207,283
Accrued lease expense 1,643,377 1,643,377
State taxes and penalties 299,096 550,000
Professional fees 47,000 140,000
Other 636,016 426,688
-------------- --------------
$ 2,676,239 $ 2,967,348
-------------- --------------
-------------- --------------
</TABLE>
NOTE 10: TRADE NOTES PAYABLE
The Company converted two trade payables into unsecured trade notes
payable which matured on March 15, 1998 and April 17, 1998 and bear fixed
interest rates of 10% and 8.5%. As of December 31, 1998, the Company was in
default on both of the above trade notes payable. These notes payable were
satisfied in connection with the financial restructuring, which occurred
subsequent to December 31, 1998 (Note 2).
NOTE 11: NOTE PAYABLE
At December 31, 1998, the Company had a $2,000,000 revolving line of
credit secured by accounts receivable. Borrowings under the line of credit were
subject to 70% of qualifying accounts
F-17
<PAGE>
receivable, less the aggregate amount utilized under all commercial and standby
letters of credit and bank acceptances. The line of credit bore interest at
prime plus 6% ( % at December 31, 1998). In addition, the Company paid 2%
interest on all new invoices submitted for financing. The credit line was for
one year and subject to renewal annually. At December 31, 1998, the balance
under the line of credit was $814,311, which was the maximum available based on
the qualifying accounts receivable. Subsequent to December 31, 1998, the Company
repaid this note payable in full in connection with its financial restructuring
(Note 2).
At 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 bore
interest at 5% above the variable interest rate quoted by Norwest Bank of
Minnesota with a minimum rate of 8% (13.5% at December 31, 1997) and provides
for a 1/2 of 1% unused line fee. The credit line was for 5 years and is subject
to renewal annually. At December 31, 1997, the balance under the line of credit
was $1,162,349, which was the maximum available based on the qualifying accounts
receivable and inventory balances. The line of credit included 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.
NOTE 12: CAPITAL LEASE OBLIGATIONS
The Company's capital lease obligations consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Total minimum lease payments $ 4,307,824 $ 5,006,262
Less amount representing interest 507,538 580,057
-------------- --------------
Obligations under capital leases 3,800,286 4,426,205
Less amounts due within one year 3,800,286 4,426,205
Long-term portion $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
As all capital leases were in default as of December 31, 1998 and 1997,
all future payments have been classified as current. Subsequent to December 31,
1998, these capital lease obligations were satisfied in connection with the
financial restructuring (Note 2).
NOTE 13: STOCKHOLDERS' EQUITY
As of December 31, 1998 the Company had 21,495,621 shares of common
stock outstanding. 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 $4,403,991. An additional 387,500 shares were
issued relating to the private placements from March 1, 1997 to December 31,
1997. During the year ended December 31, 1998, a total of 1,868,900 shares were
issued in a private placement with net proceeds of $1,282,951.
F-18
<PAGE>
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
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,
1998 and 1997, there were 212,258 and 325,483 shares issued and
outstanding, respectively.
Series B, 6% Non-Cumulative, Non-Voting Convertible Preferred Stock
("Series B Preferred Stock"), redeemable and convertible at any time at
$10 per share. Such stock retains a liquidation preference over the
Series A Preferred Stock at a rate of $10 per share plus any declared
but unpaid dividends. At December 31, 1998 and 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 20), upon the conversion of preferred stock and in
connection with the agreement with RC America, Inc. For the year ended December
31, 1998 and 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 14: 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 underwriters 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 underwriters 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 stockholders and the underwriters were exercised or expired.
F-19
<PAGE>
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.
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 year ended December 31, 1998, the Company issued 200,000
warrants with a three year life to purchase one share of common stock at $1.05
per share to 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).
All warrants issued in 1998 have been issued at the current market
price at date of issuance.
NOTE 15: 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 year ended
December 31, 1998. 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 No. 109 are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Allowance for uncollectible accounts $ 310,655 $ 377,322
Net operating loss carryforward 13,270,876 12,825,784
Inventory 53,522 151,993
Write-down of fixed assets 1,114,955 1,226,450
Write-down of patents 367,862 400,031
Allowance for lease losses 685,606 685,606
Investment tax credit 528,200 528,200
Other items 482,291 489,712
-------------- --------------
Total deferred tax assets $ 16,813,967 $ 16,685,098
-------------- --------------
-------------- --------------
Deferred tax liabilities:
Excess depreciation $ 162,376 $ 76,197
Prepaid rent 99,345 143,281
-------------- --------------
Net deferred tax assets $ 16,552,246 $ 16,465,620
Deferred tax asset valuation allowance $ (16,552,246) $ (16,465,620)
</TABLE>
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-20
<PAGE>
At December 31, 1998 the Company had available for federal and state
income tax purposes unused net operating loss (NOL) carryforwards of
approximately $34,956,000 and $29,039,000, respectively. The federal
carryforwards expire in various amounts beginning in the year 2003, and the
state carryforwards expire in various amounts from 1999 through 2004. The
Company has available state investment tax credit carryforwards of approximately
$528,000 expiring in various amounts from 1999 to 2004, 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. The Company's ability to use its federal NOL carryforwards may be
further impacted by transactions subsequent to December 31, 1998 (Note 2).
NOTE 16: MAJOR CUSTOMERS
During the year ended December 31, 1998, sales to two customers
represented 20% and 10% of total sales. During the 10 month period ended
December 31, 1997, no customer represented more than 10% of total sales. In
Fiscal Year ended February 28, 1997, sales to one customer represented 16% of
total sales.
NOTE 17: RELATED PARTY TRANSACTIONS
Loans made to a former officer totaled $586,978 at December 31, 1997
and bear interest at a rate of 9.5%. The loans are due and payable January 1,
2001. The officer had 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 and 1998.
During the year ended December 31, 1998, additional payments totaling
$68,039 were made to and on behalf of this former officer. An additional reserve
of $68,039 has been established for this loan as of December 31, 1998. This
officer is in default of a note payable of $36,000, which represents a portion
of these above advances.
Loans made to another officer totaled $6,072 and $5,416 at December 31,
1998 and 1997, respectively, and bear interest at a rate of 9.5%.
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. became 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. RC America, Inc. ceased operations during the year ended December 31,
1998.
F-21
<PAGE>
For the year ended December 31, 1998 and 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 were
earned and were issued to Mr. Caulfield in May. In addition, Ronald Caulfield
entered into a five year employment agreement with RC America, Inc. which
provided for certain bonus, severance and non-compete arrangements. This
employment agreement has since terminated.
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).
Ivan J. Hughes, a director of the Company is President of the Plastics
Division Duro Bag Manufacturing Company ("Duro"). For the year ended December
31, 1998 and the 10 month period ended December 31, 1997, there were no sales to
Duro. For fiscal year ended February 28, 1997, accounted for approximately 16%
of the Company's sales.
NOTE 18: EMPLOYMENT AGREEMENTS
During the year ended December 31, 1998, the Company renewed an
employment agreement with an officer for an additional one year term expiring on
June 30, 1999. This agreement provides for minimum base compensation of
$180,000.
On January 27, 1999 and March 22, 1999, the Company entered into
employment agreements with certain officers. Among other provisions, these
agreements provide for a minimum base compensation of $650,000 in the aggregate
plus incentive compensation based on pre-tax profits and for severance payments.
These agreements expire on various dates from June 30, 2000 through March 2002.
NOTE 19: OPERATING LEASES AND COMMITMENTS
The Company's lease agreement for its North Dighton facility was
renegotiated effective January 1, 1996 and runs for a period of 12 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 non-cancelable operating
leases as of December 31, 1998 are as follows:
<TABLE>
OPERATING
FISCAL YEAR LEASES
----------- ------
<S> <C>
1999 1,180,000
2000 893,000
2001 480,000
2002 383,000
2003 383,000
Thereafter 2,243,000
----------
$5,562,000
----------
----------
</TABLE>
Expense under operating leases was $937,340, $1,410,000 and $1,646,000
for the year ended December 31, 1998, the 10 month period ended December 31,
1997 and the Fiscal Year ended February 28, 1997, respectively. All operating
leases and real-estate leases were in default as of
F-22
<PAGE>
December 31, 1997. Subsequent to December 31, 1998, the Company reached
agreement with all lessors as part of its financial restructuring. (Note 2).
At December 31, 1998, the Company had commitments to purchase
approximately $275,000 of machinery and equipment.
NOTE 20: STOCK OPTION PLANS
In May 1990, the Company adopted a stock option plan and on October 25,
1993, the Company 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>
Fiscal Year Ended Ten Month Period Ended
December 31, 1998 December 31, 1997
----------------- -----------------
Weighted Average Weighted Average
Options Shares Exercise Price Shares Exercise Price
------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 783,117 $3.54 773,830 $3.98
Options granted whose exercise price
equal the market price of the stock on
grant date 25,000 $1.25 156,000 $1.75
Options granted whose exercise price
is greater than the market price of the
stock on grant date
Canceled (424,430) $2.23 (146,713) $3.98
------- -------
Outstanding at year end 383,687 $2.70 783,117 $3.54
------- -------
------- -------
Options exercisable at period end 358,687 629,317
------- -------
------- -------
Weighted average fair value of options
granted during the period $1.25 $1.75
</TABLE>
F-23
<PAGE>
In April of 1997, the Company changed the exercise price for selected
options granted in prior periods from $6.25, $4.00, $3.88 and $3.00 to $2.50 per
share.
<TABLE>
<CAPTION>
Year Ended
February 28, 1997
-----------------
Weighted Average
Shares Exercise Price
------ --------------
Options
-------
<S> <C> <C>
Outstanding at beginning of year 795,630 $4.04
Options granted whose exercise price equal the market price of
the stock on grant date 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 (43,500) 3.49
-------
Outstanding at year end 773,830 3.98
-------
-------
Options exercisable at period end 589,377
-------
-------
Weighted average fair value of options granted during the period
$2.40
</TABLE>
In March 1996, the Company granted 18,500 options with an exercise
price of $2.38. In January 1997, the Company granted 3,200 options with an
exercise price of $2.50. In March 1996, the Company changed the exercise price
for selected options, which were granted in fiscal year 1993, from $6.25 to
$4.00, and selected options, which were granted in fiscal year 1994, from $6.63
to $4.00.
The following table summarizes information about employee options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Weighted Average
Range of Exercise Number Outstanding at Remaining Weighted Average
Prices December 31, 1998 Contractual Life Exercise Price
------ ----------------- ---------------- --------------
<S> <C> <C> <C>
$1.25 - 3.00 336,937 4.79 $2.42
3.88 - 4.75 24,250 4.78 4.13
5.50 - 5.75 22,500 6.10 5.58
-------
383,687 4.86 2.71
-------
-------
</TABLE>
F-24
<PAGE>
<TABLE>
<CAPTION>
Options Exercisable
-------------------
Range of Exercise Number Exercisable at Weighted Average
Prices December 31, 1998 Exercise Price
------ ----------------- --------------
<S> <C> <C>
$1.25 - 3.00 313,737 $2.51
3.88 - 4.75 22,450 4.14
5.50 - 5.75 22,500 5.58
-------
358,687 2.81
-------
-------
</TABLE>
FAIR VALUE DISCLOSURES
At December 31, 1998, the Company had three option plans, which are
described above. The Company applies APB 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:
<TABLE>
<CAPTION>
Ten Month Period
Fiscal Year Ended Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C> <C>
Net Loss As reported ($3,239,213) ($11,338,869)
Pro forma ($3,245,145) ($11,468,958)
Basic and diluted As reported ($0.16) ($0.73)
Net loss per share Pro forma ($0.16) ($0.74)
</TABLE>
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 5.16% for options granted
during the year ended December 31, 1998 and 5.81% for options granted and
re-priced during the 10 month period ended December 31, 1997; a weighted average
expected option term of 10 years for options granted during the year ended
December 31, 1998, and 10 years for options granted during the 10 month period
ended December 31, 1997; and expected volatility of 153.87% for options granted
during the year ended December 31, 1998 and 67.57% for options granted during
the 10 month period ended December 31, 1997.
NOTE 21: 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 $33,165, $47,604 and $80,503 for the year ended December 31, 1998,
10 month period ended December 31, 1997, and fiscal year ended February 28,
1997, respectively.
F-25
<PAGE>
NOTE 22: SEGMENT REPORTING
Effective January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SAFS No.
131 superseded SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS No. 131 establishes standards for reporting information about
operating segments, products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect the Company's results of operations
or financial position. The Company operates in one reportable segment under SFAS
No. 131.
NOTE 23: SIGNIFICANT FOURTH QUARTER ADJUSTMENTS TO THE TEN MONTH PERIOD ENDING
DECEMBER 31, 1997
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 19).
Loans made to a former 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 had 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.
Management decided to exit the traditional T-shirt bag business 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 1997 which resulted in a write-down of impaired assets and
recognition of related expenses totaling $5,897,648.
NOTE 24: LEGAL PROCEEDINGS
The Company has been notified by its insurance carrier of a potential
claim brought by a group of investors related to the registration of certain
securities. The Company believes that any settlement in connection with this
potential claim will not have a material effect on its operations.
F-26
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
Schedule II
Rule 12-09 Valuation and Qualifying Accounts and Reserves
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additional Deductions
Balance at Charged to Accounts Balance at end of Description of
Description 1/1/98 Expenses Written-Off Period Changes
----------- ---------- ----------- ------------ ----------------- --------------
<S> <C> <C> <C> <C> <C>
Reserve for 75,000 0 0 75,000
Accounts Receivable
Credits
Allowance for 275,000 0 (165,548) 109,452 Allowance was
Doubtful Accounts reduced based on
evaluation of
Accounts
Receivable at
12/31/98
Inventory Reserve 290,000 0 (290,000) 0 Inventory
reserved at
12/31/97 was
sold during the
year ended
12/31/98
</TABLE>
S-1
<PAGE>
Valuation and Qualifying Accounts and Reserves
For the 10 Month Period Ended December 31, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additional Deductions
Balance at Charged to Accounts Balance at end Description of
DESCRIPTION 3/1/97 EXPENSES WRITTEN-OFF OF PERIOD CHANGES
----------- ------ -------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
Reserve for 75,000 0 0 75,000
Accounts Receivable
Credits
Allowance for 50,000 225,000 0 275,000 Allowance was
Doubtful Accounts Increased based
on evaluation of
Accounts
Receivable at
12/31/97
Inventory Reserve 850,000 0 (560,000) 290,000 Reserve was
reduced based on
evaluation of
Inventory at
12/31/97
</TABLE>
S-2
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 73,116
<SECURITIES> 0
<RECEIVABLES> 1,066,841
<ALLOWANCES> 184,452
<INVENTORY> 717,413
<CURRENT-ASSETS> 1,724,388
<PP&E> 28,752,199
<DEPRECIATION> 13,461,894
<TOTAL-ASSETS> 17,751,965
<CURRENT-LIABILITIES> 14,472,492
<BONDS> 0
0
2,140,986
<COMMON> 214,956
<OTHER-SE> 923,531
<TOTAL-LIABILITY-AND-EQUITY> 17,751,965
<SALES> 10,382,819
<TOTAL-REVENUES> 0
<CGS> 8,826,905
<TOTAL-COSTS> 8,826,905
<OTHER-EXPENSES> 4,301,842
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 471,166
<INCOME-PRETAX> (3,239,213)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,239,213)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,239,213)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> 0
</TABLE>
