SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 2 to 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
BPI PACKAGING TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-2997486
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 Somerset Avenue, North Dighton, Massachusetts 02764
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(Address of principal executive offices) (Zip Code)
(508) 824-8636
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
--------------
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 May 17, 1999 was $4,299,124 for the Common Stock and
$212,258 for the Series A Convertible Preferred Stock.
As of May 17, 1999, 21,495,621 shares of Common Stock, $.01 par value
per share, were outstanding and 212,258 shares of Series A Convertible
Preferred Stock, $.01 par value per share, were outstanding.
<PAGE>
FORWARD-LOOKING STATEMENTS OR INFORMATION
This Form 10-K/A 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/A 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.
<PAGE>
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 1999.
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 marketed 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. <Strikeout>Caufield
</Strikeout> 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")(the "January 1999 Financing"), 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 (the "Note");
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
for $100.
The Note matures on February 1, 2004 or earlier in the event of a
default, the sale of 50% or more of the Company's assets, the merger or
consolidation of the Company, the purchase of 50% or more of the shares of
the Common Stock by a person who was not a stockholder of the Company at
the time of the execution of the Agreement, or a primary public offering of
the Company's securities in excess of $10,000,000. The Note has an
interest rate of 5% per annum payable monthly in arrears, principal is due
at its maturity and it is secured by all assets of the Company. The Note
is subordinated to the equipment lease and the factoring agreement,
described below.
<PAGE>
In connection with the January 1999 Financing, DGJ required certain
members of the Company's management, C. Jill Beresford, James F.
Koehlinger, Hanspeter Schulz, Richard N. Nurse and Ivan J. Hughes, to
invest, in the aggregate, $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. See "Employment Contracts,
Termination of Employment and Change In Control" below for a description of
these warrants and a listing of each member of management owning these
warrants and how many shares of Common Stock each is exercisable into.
The shares of the Series C Preferred Stock were purchased by DGJ for
an aggregate purchase price of $100. Some of the rights and restrictions
of Series C Preferred Stock include the following: (i) the holders of
Series C Preferred Stock have no voting rights; provided, however, upon an
Event of Default, as defined in the Securities Purchase Agreement, holders
of the Series C Preferred Stock will be entitled to vote with the holders
of the Common Stock as a single class on each matter submitted to a vote to
the Company's stockholders, with each share of the Series C Preferred Stock
having 30 votes per one vote of each share of Common Stock; (ii) if the
Note has been retired in its entirety, the Company, at its option, may
elect to redeem all or a portion of the outstanding Series C Preferred
Stock, at an aggregated redemption price of $100 plus accrued interest at a
rate of 6% per annum commencing on January 27, 1999; and (iii) the shares
of the Series C Preferred Stock are not convertible into shares of Common
Stock.
In conjunction with the January 1999 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. Written notice of termination regarding this factoring
agreement was given by the Company on March 30, 1999. 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 treated as 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 Company's 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 with DGJ. The term of
the lease is ten years and its monthly payments of $102,000 represent
interest only. The total principal amount of the lease is $6,800,000 and
is due at the end of the lease term. The lease has been recorded as a
capital lease during the quarter ended March 31, 1999 and will be treated
as such in future periods. The lease requires the Company to meet certain
financial covenants, including, but not limited to, earnings targets and
debt-to-equity ratios. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Equipment Purchases and
Lease Financings."
<PAGE>
The January 1999 Financing will be deemed a related party transaction
as described in Item 13.
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:
1999
ANNUAL MARKET PATENT
(Millions) STATUS COMPETITION
------------ ----------- -----------
HANDI-SAC<trademark>
Convenience, Hardware/ $37 U.S. Patent DIRECT: Sonoco T-Sack
Automotive and Drug Issued 1993 Roll Bag
INDIRECT: Paper and
Flat T-Sacks
FRESH-SAC
<registered trademark> $63 U.S. Patent DIRECT: Crown Poly,
T-Shirt Produce Bag Issued 1993 Sealed Air and Better
Bag
INDIRECT: Produce Bag
On a Roll
INSULATION OVERWRAP $15 Process DIRECT: Vanguard
Technology Plastics
NO INDIRECT
HIGH PERFORMANCE Under Process DIRECT: Exxon Films
PRINTED TISSUE Evaluation Technology
OVERWRAP FILM NO INDIRECT
T-SHIRT CARRYOUT BAG $850 U.S. Patent DIRECT: Vanguard,
Issued 1989 Sonoco and Integra-
HANDI-SAC<trademark> 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<trademark> is installed in approximately 11,000 convenience, drug,
retail and hardware stores. The annual market potential for HANDI-
SAC<trademark> is estimated at approximately $37 million. The market is
split approximately 70% plastic and 30% paper.
FRESH-SAC<registered trademark> 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<registered trademark> 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.
<PAGE>
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 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<trademark> 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<registered trademark> 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<registered trademark> and HANDI-
SAC<trademark> products. The Company has a registered trademark in the
United States for FRESH-SAC<registered trademark>. In 1996, the Company was
issued a U.S. patent for its FRESH-SAC<registered trademark> advertising
vehicle called the Fresh Focus CartridgeTalker<trademark>.
<PAGE>
No assurance can be given that the patents currently owned by the
Company and any patents that may be granted in the future will be
enforceable or provide the Company with meaningful protection from
competitors. Even if a competitor's products were to infringe patents
owned by the Company, it could be costly for the Company to enforce its
rights in an infringement action and would divert funds and resources
otherwise used in the Company's operations. Furthermore, no assurance can
be given that the Company would be successful in enforcing such rights. 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 May 20, 1999 was $628,926, 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.
<PAGE>
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 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 May 20, 1999, the Company had 125 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 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. No further action has been taken by this group
of investors as of May 28, 1999.
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.
<PAGE>
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 May 17, 1999, the Company had 21,495,621 shares (272 holders)
of record for its Common Stock and 212,258 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 the range of the high and
low bid prices on the NASDAQ OTC. Such quotations represent inter-dealer
quotations without adjustment for retail markups, markdowns or commissions
and may not represent actual transactions.
High Sale Low Sale
Common Stock /Bid /Bid
- ------------ ----------- -----------
Fiscal 1997
First Quarter $4.25 $1.375
Second Quarter $3.625 $1.625
Third Quarter $3.6875 $1.8125
Fourth Quarter $2.3125 $1.625
10 Month Period Ended
December 31, 1997
First Quarter $1.96875 $1.5625
Second Quarter $1.875 $1.031
Third Quarter $2.313 $1.031
Fourth Quarter
(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 $ 0.125
Fourth Quarter $ 0.40 $ 0.12
1999
First Quarter $ 0.30 $ 0.14
Second Quarter
(through May 17, 1999) $ 0.20 $ 0.14
____________________
(1) In December 1997, the Company changed its fiscal year end from
February 28 to December 31.
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
From January 1998 to June 1998, the Company conducted a Rule 144A
offering of private placement units that resulted in total proceeds 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 and the total offering was
valued at $1,530,000. <Strikeout>Under Regulation D</Strikeout> This
offering was not underwritten. However, the Company retained an investment
advisor which received fees in cash of $197,200 and warrants to purchase
Common Stock as compensation for introducing prospective investors to the
Company for this offering. Under exemptions from registration under the
Securities Act of 1933 (the "Act") pursuant to Section 4(2) of the Act and
Regulations D and S promulgated under the Act , the securities were
initially sold within the United States to accredited investors and
qualified institutional buyers and outside the United Stated to non-U.S.
investors. The proceeds of the offering as well as the proceeds from the
<Strikeout>exercies</Strikeout> exercises of any of the warrants are
being used and will be used as working capital. The securities sold in the
offering have not been registered under the Act, but are expected to be
registered in the third quarter of 1999.
<Strikeout>[Insert Financial Advisor's compensation.]</Strikeout>
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.
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS DATA
----------------------------
<CAPTION>
Ten Month Fiscal Years
Year Ended Period Ended Ended
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 -- --
Income (loss) from 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
BALANCE SHEET DATA
At At At At At
December 31, December 31, February 28, February 23, February 24,
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
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>
<PAGE>
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<registered trademark> T-shirt sack produce bag and HANDI-
SAC<trademark>, were $7,799,714 in the year ended December 31, 1998,
compared to sales of $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 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 1997.
<PAGE>
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.
Operating profits (loss) for the various business units are as follows:
10 Month Period
Year Ended Ended
December 31, 1998 December 31, 1997
----------------- -----------------
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)
=========== ============
10 MONTH PERIOD ENDED DECEMBER 31, 1997 COMPARED TO FISCAL 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 1997.
Sales of the Company's proprietary bag products, FRESH-SAC<registered
trademark> T-shirt sack produce bag, HANDI-SAC<trademark> and MAXI-
SAC<trademark>, 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 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 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
1997. Market Media, Inc. recorded no sales in the 10 month period ended
December 31, 1997, compared to sales of $134,932 during Fiscal 1997.
<PAGE>
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 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 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 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 1997, or 3.6% of net sales.
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 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 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 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 $0.96 per share in Fiscal
1997.
Operating profits (loss) for the various business units are as
follows:
10 Month Period
Ended
December 31, 1997 Fiscal 1997
----------------- -------------
Proprietary, traditional
and film products ($ 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)
============ ============
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.
<PAGE>
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"). 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.
<PAGE>
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 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 a ten year
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 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 additional pieces 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 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.
<PAGE>
Description of impaired assets, patents, goodwill and plant assets
relating to bag making facilities:
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
==========
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 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. In the first quarter of
1999, the Company expended $25,000 on 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 installed and tested by July 31, 1999. The Company has
tested all of its manufacturing equipment, including its manufacturing
information systems, and all were determined to be Year 2000 compliant.
<Strikeout>The Company does not contract out its systems maintenance and
design and, therefore, has no third party risk in this regard.</Strikeout>
<Strikeout>The Company has ___ significant customers who have each
been sent a questionnaire regarding its Year 2000 compliance status. As of
May 17, 1999, the Company has received responses totaling ____% of the
dollar value of all sales to customers as of May ____, 1999. The nature of
their responses is that ____________________________________________. The
Company also sent questionnaires to all 409 suppliers regarding its Year
2000 compliance status. The Company received 36 responses as of May 19,
1999. The nature of these vendors' responses is ________________________.
</Strikeout> The Company has not utilized any independent verification or
validation processes since the tests performed on the Company's
manufacturing systems determined the systems to be Year 2000 complaint.
The Company does not contract out its systems maintenance and design and,
therefore, has no third party risk in this regard.
<PAGE>
As of May 28, 1999, the Company has contacted five significant
customers, which accounted for 50.3% of total sales for the first quarter
of 1999 regarding their Year 2000 compliance status. All of these
customers have indicated that they are either already Year 2000 complaint
or are on schedule to be Year 2000 compliant by December 31, 1999. None
of these customers currently order from the Company through electronic
systems.
The Company sent questionnaires to all 409 vendors as of May 14, 1999
regarding their Year 2000 compliance status. As of May 24, 1999, the
Company received 94 responses. All major vendors responded that they are
currently Year 2000 compliant and the other vendors are either Year 2000
compliant or are on schedule to be Year 2000 compliant by December 31,
1999.
In the most likely-worse case scenario, Year 2000 compliance issues
may cause the railroad systems in the United States to become
dysfunctional<Strikeout>. If the rail system were to fail and resin could
not be delivered to the Company</Strikeout> , which would cause the
Company to obtain its resin and other supplies by other means of
transportation<Strikeout>, the</Strikeout> . The
Company would be
unable to manufacture products and revenues would be impacted 60 days after
the rail system ceases to function. <Strikeout>[Insert Contingency Plan.]
</Strikeout>
The Company's contingency plan is to implement a manual
system for its accounting and finance functions. The Company's
manufacturing contingency plan is to accumulate a 30-day inventory of raw
materials by December 31, 1999 to address vendor problems caused by Year
2000 issues.
The Company has not deferred any of its information technologies
projects due to its Year 2000 efforts. Furthermore, there has been no
impact from any deferred projects on the Company's financial condition or
results of operations.
The Company <Strikeout>will</Strikeout>
is scheduled to be
Year 2000 compliant as of July 31, 1999 <Strikeout>with the remaining
components being its financial</Strikeout> . The only remaining
component, as of May 28, 1999, is the Company's financial and
accounting systems, <Strikeout>telephone and alarm systems, fax and copy
machines, utilities, insurance providers, banking institutions and key
suppliers</Strikeout> described above . 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, Fiscal 1997 and the year ended
February 23, 1996 ("Fiscal 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.
<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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
GENERAL INFORMATION
The Company's Certificate of Incorporation and By-laws, each as
amended, provide that the members of the Board will be classified as nearly
as possible into three classes, each with, as nearly as possible, one-third
of the members of the Board. A classified board is designed to assure
continuity and stability in the Board's leadership and policies. Ivan J.
Hughes and Allen S. Gerrard serve as the Class I directors until the Annual
Meeting of Stockholders to be held in 1999. David N. Laux and Hanspeter
Schulz serve as the Class II directors until the Annual Meeting of
Stockholders to be held in the year 2001. Gary R. Edidin, Bruce M. Fleisher
and Theodore L. Koenig serve as the Class III directors until the Annual
Meeting of Stockholders to be held in the year 2000. The successors to the
class of directors whose terms expire at an annual meeting would be elected
for a term of office to expire at the third succeeding annual meeting after
their election and until their successors have been duly elected by the
stockholders. Directors chosen to fill vacancies on a classified board will
hold office until the next election of the class for which directors will
have been chosen, and until their successors are duly elected by the
stockholders. Officers are elected by and serve at the discretion of the
Board, subject to their employment contracts.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, their positions
held in the Company and their ages are as follows:
NAME AGE POSITION
- ---- --- --------
Hanspeter Schulz 60 President and Director
Richard H. Nurse 54 Vice President of Manufacturing
Peter W. Blackett 50 Senior Vice President of Sales
James F. Koehlinger 62 Chief Financial Officer and Treasurer
C. Jill Beresford 44 Vice President of Marketing
Ivan J. Hughes 70 Chairman of the Board
David N. Laux 71 Director
Gary R. Edidin 54 Director
Bruce M. Fleisher 68 Director
Allen S. Gerrard 63 Director
Theodore L. Koenig 40 Director
No director or executive officer is related by blood, marriage or
adoption to any other director or executive officer.
HANSPETER SCHULZ, PH.D. Dr. Schulz has been the Company's President
and Director since January 1999. From August 1998 to January 1999, Dr.
Schulz served as a consultant to the Company. From 1996 to August 1998, Dr.
Schulz was a Director of Business Integration for Celanese Ltd., and was
one of three managers responsible for the global installation of SAP,
including the redesign of relevant business processes. From 1995 to 1996,
Dr. Schulz was Business Director for Methanol/Formaldehyde/Polyols, a
global commodity business of Celanese with production sites in the United
States, Canada and Germany. From 1982 to 1995, Dr. Schulz was Vice
President and General Manager of the High Density and Ultra High Molecular
Weight Polyethylene business at American Hoechst. From 1959 to 1969, Dr.
Schulz studied chemistry and related subjects at the Universities of
Stuttgart, Germany, Kansas, USA (on a scholarship basis) and Hamburg,
Germany resulting in a Ph.D. of Natural Sciences in 1969.
<PAGE>
RICHARD H. NURSE, PH.D. Dr. Nurse has been the Company's Vice
President of Manufacturing since January 1999. Prior thereto, he was the
Company's Vice President of Technical Development since January 1995. From
1989 to 1995, Dr. Nurse was an independent consultant to the plastics
industry. From 1987 to 1988, Dr. Nurse was the Director of Research and
Development for Cookson Performance Plastics, a plastics additive
manufacturer. From 1985 to 1987, he was a Technical Manager for Nortech
Company, another plastics additive manufacturer. From 1973 to 1985, Dr.
Nurse was with the Hoechst AG, a plastics resin manufacturer, serving in
technical application and development management in South Africa and
Germany and since 1979, in the United States. Dr. Nurse received a Ph.D.
degree in Polymer Technology from the University of Manchester Institute of
Science and Technology in England and a Bachelor of Science degree in
Chemical and Plastics Technology from the Polytechnic of South Bank,
London, England.
PETER W. BLACKETT. Mr. Blackett has been the Company's Senior Vice
President of Sales since March 1999. From 1997 to 1999, he was employed
with Fina Oil and Chemical Company as Regional Sales Manager and from 1992
to 1997, as a Technical Service Manager for Fina's High Density
Polyethylene business group. Mr. Blackett holds a Higher National
Certificate in Mechanical Engineering from Peterborough Technical College
and a Graduateship of the Plastics Institute from Borough Polytechnic in
South London.
JAMES F. KOEHLINGER. Mr. Koehlinger has been the Company's Chief
Financial Officer and Treasurer since January 1999. He previously served
as a consultant to the Company, on a part-time basis, from August 1998 to
January 1999. From October 1996 to January 1999, Mr. Koehlinger was a
senior consultant with Benchmark, a financial consulting firm. He
previously served as the Company's Chief Financial Officer from February
1988 to October 1996. Mr. Koehlinger received a Bachelor of Science degree
from Indiana University and a Master of Business Administration degree from
Clark University. He is also a certified public accountant.
C. JILL BERESFORD. Ms. Beresford has been the Company's Vice
President of Marketing since January 1999. From June 27, 1998 until
January 27, 1999, she was the Company's Chairman, Chief Executive Officer
and Chief Financial Officer. She also served as the Chief Operating
Officer of the Company from 1995 to 1998. She served as the Company's
President from July 1996 to June 1998. She was Treasurer of the Company
from May 1990 to January 27, 1999 and a Director of the Company from March
1989 until January 1999. From May 1990 to July 1995, Ms. Beresford was the
Company's Vice President of Marketing. Ms. Beresford attended the
University of Guelph, Ontario, Canada and received a Masters degree in
Business Administration from Boston University.
IVAN J. HUGHES. Mr. Hughes was re-elected as a Director of the
Company on July 13, 1998 and became Chairman of the Board on January 27,
1999. Mr. Hughes previously served as a Director of the Company from March
1996 to February 1998. Since 1991, Mr. Hughes has been the President of
the Plastic Division of Duro Bag Manufacturing Company ("Duro Bag"), a
privately held company which manufactures grocery bags, shopping and
specialty bags for the food and retail industry. Mr. Hughes has been
employed by Duro Bag in various positions for the past 35 years and
presently serves on the Executive and Compensation Committees. Mr. Hughes
received a Bachelor of Science degree in Mechanical Engineering at
Lafayette College and completed his graduate studies at Columbia
University.
<PAGE>
DAVID N. LAUX. Mr. Laux has served as a Director of the Company
since January 1993. Since 1991, Mr. Laux has served as a Director of ROC
Taiwan Fund, a closed end fund listed on the New York Stock Exchange.
Since 1990, Mr. Laux has been President of the USA-ROC Economic Council, a
private non-profit association which promotes business relations between
the United States and Taiwan. Mr. Laux received his Bachelor of Arts degree
from Amherst College and his Master of Business Administration degree from
the American University in Washington, D.C. He has done graduate work at
the University of California at Berkeley and Georgetown University. Mr.
Laux is also a graduate of the Advanced Management Program at Harvard
Business School.
GARY R. EDIDIN. Mr. Edidin has served as a Director of the Company
since January 1999. In January 1999, Mr. Edidin became a Member of the
Board of Managers, Chairman, President and Chief Executive Officer of DGJ.
In 1975, Mr. Edidin co-founded Edidin Associates, an investment banking
firm. He has been Managing Partner of Edidin Associates since 1980. In
1992, Mr. Edidin co-founded Franklin Capital Corp., a regional asset based
lender, and is presently the Co-Chairman and member of its Board of
Directors. In 1980, Mr. Edidin served as the Chief Executive Officer and
Chairman of Optique Du Monde, Ltd. ("ODM"), an eyewear company. In 1988,
ODM was sold to the Safilo Group, an Italian publicly traded eyewear
company. Since 1988, he has been a management consultant to the Safilo
Group and Safilo USA, its U.S. subsidiary. In 1997, Mr. Edidin represented
Safilo Group in its acquisition of Smith Sports Optics, Inc. and began
serving that company as a member of the Board of Directors and Executive
Committee. He has also served as the Chairman and Chief Executive Officer
of Clarin Corp., a manufacturer of institutional seating, since 1993.
Since 1998, Mr. Edidin has served as a member of the Board of Directors of
Colors For Plastic, a plastic coloration company. In 1977, a group of
investors, including Edidin Associates, purchased the Lawndale Trust and
Savings Bank, a community bank in Chicago. The same subsequently purchased
the Garfield Ridge Trust and Savings Bank and the Bank of Chicago, two
Chicago community banks. In 1995, these three banks were merged into one
under the name Bank of Chicago. In 1997, Bank of Chicago was sold to TCF,
a publicly traded savings bank headquartered in Minnesota. Mr. Edidin has
served these banks in various capacities over the years, including Chairman
and Chief Executive Officer. Mr. Edidin received his Bachelor of Science
degree from the University of Pennsylvania, Wharton School, and his Juris
Doctor degree from the University of Chicago Law School. Mr. Edidin also
attended the University of Chicago Business School.
BRUCE M. FLEISHER. Mr. Fleisher has served as a Director of the
Company since April 1999. Since 1998, Mr. Fleisher has been involved in
private investing. From 1996 to 1998, he served as the Vice President and
Division Manager, Chicago for the Supply Systems Division of Unisource
Worldwide, Inc., a wholesale distributor of paper and packaging supplies.
From 1983 to 1996, he was the President and owner of Darter, Inc. In 1996,
Darter, Inc. was purchased by Unisorce Worldwide, Inc. From 1996 to 1997,
he was also a member of the Board of Directors and Chairman of the
Industrial Committee for the National Paper Trade Association. Mr. Fleisher
received his Bachelor of Science degree in Economics from the University of
Pennsylvania, Wharton School, and his Masters degree in Business
Administration from George Washington University.
ALLEN S. GERRARD. Mr. Gerrard has served as a Director of the
Company since January 1999. Since 1996, Mr. Gerrard has served as a
Director of Deere Park Capital Management, an investment and merchant
banking firm, and since April 1998, he has also served as Vice-Chairman of
such company. Beginning in January 1999, Mr. Gerrard has been a Member of
the Board of Managers and Treasurer of DGJ. From November 1998 to March
1999, Mr. Gerrard served as Director of McConnell Dowell Corporation,
Limited, a publicly traded company involved in construction. Since 1997,
Mr. Gerrard has served as a Director of Dominion Bridge Company, a
publicly-traded construction and shipbuilding company. Mr. Gerrard
received his Bachelor of Arts degree in Political Science from the
University of Illinois in Champaign-Urbana and his Juris Doctor degree from
the University of Michigan Law School.
<PAGE>
THEODORE L. KOENIG. Mr. Koenig has served as a Director of the
Company since April 1999. In 1996, Mr. Koenig founded and since has served
as President of Monroe Investments, Inc., a Chicago-based investment and
merchant banking firm specializing in strategic growth investment
opportunities. Mr. Koenig's principal occupation is that of an attorney. He
has been a partner with Holleb & Coff, a Chicago-based law firm since 1989.
Mr. Koenig received his Bachelor of Arts degree in Accounting from Indiana
University Kelley School of Business and his Juris Doctor degree from the
Illinois Institute of Technology, Chicago Kent School of Law. Mr. Koenig
is also a Certified Public Accountant.
SIGNIFICANT EMPLOYEE
The following employee is not an executive officer of the Company but
is expected to make significant contributions to the business of the
Company:
NAME AGE POSITION
- ---- --- --------
Tracy L. McGrath 34 Vice President of Sales
TRACY L. MCGRATH. Ms. McGrath has served as the Company's Vice
President of Sales since January 1999. Prior thereto, she was the
Company's Vice President of Marketing since December 1997 and, prior
thereto, was the Company's Marketing Manager since November 1993. Ms.
McGrath has a Bachelor of Science degree in Communications from Eastern
Connecticut State University.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors
and officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the Commission reports of
ownership and changes in ownership of Common Stock and other equity
securities of the Company. Officer, directors and greater-than-10%
stockholders are required by the Commission regulation to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such reports furnished to the
Company or written representations that no other reports were required, the
Company believes that, during 1998, its officers, directors and greater-
than-10% beneficial owners were in compliance with all filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to
the annual and long term compensation for services in all capacities to the
Company during 1998, the 10 months ended December 31, 1997, Fiscal 1997
and Fiscal 1996, of those persons who were, at December 31, 1998: (i) the
Company's Chief Executive Officer (including persons who held this position
at any time during 1998); and (ii) other executive officers of the Company
receiving total cash and bonus compensation in excess of $100,000. The
Company did not grant any restricted stock awards or stock appreciation
rights or make any long term incentive plan payouts to the individuals
named in the tables below during the periods indicated.
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
--------------------------
<CAPTION>
Long Term
Annual Compensation Compensation Awards
---------------------------- ----------------------------
Securities
Name and Underlying All Other
Principal Position Fiscal Year Salary (1) Bonus (2) Options (#) Compensation
- ------------------ ----------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
<Strikeout>
Dennis N. Caufield (3) 1998 $89,846 $0 0 $9,923(3)
Former Chief Executive </Strikeout>
Officer
1997(A) $169,846 $0 0 $43,323(3)
1997 $266,666 $0 0 $130,220(3)
1996 $320,000 $0 0 $36,174(3)
$320,000
C. Jill Beresford (4) 1998 $182,506 $0 0 $12,848(4)
Chief Executive Officer, 1997(A) $150,000 $0 0 $6,424(4)
Chairman of the Board 1997 $180,000 $0 0 $26,716(4)
of Directors 1996 $180,000 $0 0 $14,612(4)
Alex F. Vaicunas (5) 1998 $124,856 $0 0 $1,746(5)
Former Vice President 1997(A) $104,167 $0 0 $3,150(5)
of Film Sales 1997 $125,000 $0 0 $3,232(5)
1996 $125,000 $0 0 $1,213(6)
Richard Nurse, Ph.D. (6) 1998 $119,115 $0 0 $8,935(6)
Vice President of 1997(A) $64,399 $0 0 $3,410(6)
Technical Development 1997 $77,279 $0 0 $4,401(6)
1996 $71,936 $0 0 $3,656(6)
Paul J. DeCristofaro (7) 1998 $32,332 $0 0 $668(7)
Former Chief Financial 1997(A) $83,410 $0 0 $0
Officer 1997 $100,092 $0 0 $0
</TABLE>
<PAGE>
(A) Reflects information for the 10 months ended December 31, 1997.
(1) Amounts shown indicate cash compensation earned and received by
executive officers. No amounts were earned but deferred at the election of
those officers. Executive officers participate in Company group life and
health insurance.
(2) From July 1, 1993 through December 31, 1998, Mr. Caufield, Ms.
Beresford and Mr. Vaicunas were eligible to participate in an executive
compensation program which provided them with an aggregate bonus equal to
6% of the Company's pre-tax profit for the first $1,000,000 in pre-tax
profits in any fiscal year, and 12% of pre-tax profits in excess of
$1,000,000 in any fiscal year except that in the discretion of the Board of
Directors the bonus would not exceed $750,000 in the aggregate in any
fiscal year beginning with fiscal year 1995. No bonuses were paid to Mr.
Caufield, Ms. Beresford or Mr. Vaicunas during 1998, the 10 month period
ended December 31, 1997, in Fiscal 1997 or in Fiscal 1996 under this
program. This program is no longer in effect.
(3) In the periods presented, the Company paid approximately $335 and
$990 per month for two personal term life insurance policies for Mr.
Caufield and $700 per month for a disability policy. The Company also made
automobile and insurance payments of approximately $980 per month during
1998, the 10 months ended December 31, 1997, in Fiscal 1997 and in Fiscal
1996, for an automobile for Mr. Caufield. The Fiscal 1997 amount includes
$73,846 paid for unused vacation from prior fiscal years and $12,308 for
unused vacation from Fiscal 1997. This amount also includes $0, $6,400,
$8,000 and $0 the Company contributed to Mr. Caufield's 401(k) account
during 1998, the 10 months ended December 31, 1997, in Fiscal 1997 and in
Fiscal 1996, respectively. Mr. Caufield's employment with the Company
terminated on July 2, 1998.
(4) In the periods presented, the Company paid approximately $80 per
month for a personal term life insurance policy for Ms. Beresford and
approximately $190 per month for a disability policy. In the periods
presented, the Company also made automobile and insurance payments of
approximately $435 and $790, respectively, per month for an automobile for
Ms. Beresford for 1998 and all other periods presented, respectively. The
amount also includes $10,385 and $7,616 of unused vacation pay that was
paid in Fiscal 1997 and Fiscal 1996, respectively. This amount also
includes $3,655, $3,655, $3,738 and $623 the Company contributed to Ms.
Beresford's 401(k) account during 1998, the 10 months ended December 31,
1997, in Fiscal 1997 and in Fiscal 1996, respectively. Ms. Beresford began
serving as the Chairman of the Board of Directors and Chief Executive
Officer on July 2, 1998, when Mr. Caufield's employment with the Company
ceased.
(5) In the periods presented, the Company paid approximately $65 per
month for a disability policy for Mr. Vaicunas. This amount excludes
automobile and insurance payments from the Company on behalf of Mr.
Vaicunas of approximately $760 per month for an automobile. Mr. Vaicunas
reimburses the Company for any personal use of the automobile. This amount
also includes $0, $2,500, $2,452 and $433 the Company contributed to Mr.
Vaincunas' 401(k) account during 1998, the 10 months ended December 31,
1997, in Fiscal 1997 and in Fiscal 1996, respectively. Mr. Vaicunas served
as the Vice President of Film Sales until December 26, 1998.
(6) In the periods presented, the Company reimbursed Dr. Nurse for
mileage on his car and travel expenses associated with Company business.
Dr. Nurse served as the Vice President of Technical Development throughout
1998.
(7) This amount includes $668 the Company contributed to Mr.
DeCristofaro's 401(k) account during 1998. Mr. DeCristofaro served as the
Company's Chief Financial Officer until March 1998.
<PAGE>
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 receive options, the time period during
which the options may be exercised, the number of shares of Common Stock
that may be purchased and the exercise price (which cannot be less than the
fair market value of the Common Stock at 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 $100,000
that is exercisable during any one calendar year. Options granted under
the stock option plans generally expire 10 years from the date of grant.
AGGREGATED OPTION EXERCISED IN THE LAST FISCAL YEAR
AND FY-END OPTION VALUES
---------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options Options
Shares Value at FY-End Exercisable/
Acquired Realized Exercisable/ Unexercisable
Name on Exercise ($) Unexercisable ($)(1)
- ---- ----------- ---------- ------------ -------------
C. Jill
Beresford 0 0 163,224/0 0 / 0
(1) In-the-money options are those options for which the fair market
value of the underlying Common Stock is greater than the exercise price of
the option. On December 31, 1998, the fair market value of the Company's
Common Stock underlying the options (as determined by the last sale price
quoted on NASDAQ OTC Bulletin Board) was $0.19. Since the exercise price
of all of the options reflected in this table is greater than $0.19, the
options held by this individual were not in-the-money and are, therefore,
not included in this calculation.
401(K) RETIREMENT SAVINGS PLAN
The Company provides an employee retirement savings plan under
Section 401(k) of the Internal Revenue Code which covers substantially all
employees (the "Plan"). 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.
<PAGE>
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
The Company entered into employment, non-competition, and
confidentiality agreements with each of Mr. Caufield, Ms. Beresford and Mr.
Vaicunas. Base salaries for Mr. Caufield, Ms. Beresford and Mr. Vaicunas
were $320,000, $180,000 and $125,000 per annum, respectively, subject to
periodic review by the Board of Directors. Each of these agreements
expired on June 30, 1998. Ms. Beresford's employment agreement was renewed
for an additional one year term. Her agreement provides for severance
payments of 60 months base salary in the event her employment is terminated
without cause and prohibits her from competing with the Company for a
period of 24 months following termination of employment with the Company.
In the event of a change of control in the Company, she has the option to
terminate her employment and to receive additional severance compensation
subject to the provisions of their employment agreements. The Company has
also entered into non-competition and confidentiality agreements with
certain other employees.
In conjunction with the January 1999 Financing (as defined in Item 1
above), on January 27,1999, the Company entered into an employment
agreement with each of Ms. Beresford, Mr. Koehlinger, Dr. Nurse and Dr.
Schulz and a consulting agreement with Ivan J. Hughes with terms as listed
below. In addition, on March 22, 1999, the Company entered into an
employment agreement with Peter W. Blackett with terms as listed below.
EMPLOYMENT AND CONSULTING AGREEMENT TERMS
-----------------------------------------
Employee/ Base Salary/ Warrant
Consultant Fee Term Shares
- ---------- ------------ ---------- ----------
C. Jill Beresford $125,000 7/1/99 - 6/30/00 937,000
James F. Koehlinger $125,000 1/27/99 - 1/27/02 1,719,000
Richard H. Nurse $125,000 1/27/99 - 1/27/02 1,719,000
Hanspeter Schulz $150,000 1/27/99 - 1/27/02 2,188,000
Ivan J. Hughes $ 52,000 1/27/99 - 1/27/02 937,000
Peter W. Blackett $125,000 3/22/99 - 3/21/02 0
At the end of the terms of employment of Mr. Koehlinger, Dr. Nurse,
Dr. Schulz and Mr. Blackett, each individual's employment will revert to
the status of employment at will and will thereafter be subject to
termination by either party at any time and regardless of cause. Upon
expiration of Ms. Beresford's term, at the Company's option, the Company
may extend her employment term for an additional 18 months provided that
Ms. Beresford is given proper notice.
Under the terms of each agreement described above, each of these
individuals will receive options to purchase Common Stock during the term
of each's respective agreement if the Company equals or exceeds certain
financial performance goals. See "Compensation Committee - Board
Compensation Committee Report on Executive Compensation - Bonus Plan" below
for a description of the performance goals. Also, in consideration of Ms.
Beresford, Mr. Koehlinger, Dr. Nurse, Dr. Schulz and Mr. Hughes entering
into his or her agreement, the Company granted each of these individuals a
warrant to purchase a certain number of shares of Common Stock at $0.04 per
share. Such warrants are not exercisable until the Company's stockholders
approve an amendment to the Company's Certificate of Incorporation
increasing the number of shares of authorized Common Stock. Such warrants
<PAGE>
expire on January 27, 2009. Please refer to the chart above, under the
title "Warrant Shares," for the number of shares <Strikeout>each's
</Strikeout> each individual's warrant is exercisable into. Each of
these individuals has paid to the Company their respective amount due under
these warrants. Dr. Schulz, Mr. Koehlinger, Dr. Nurse and Ms. Beresford
borrowed funds in the aggregate amount of $262,520 from DGJ necessary to
exercise these warrants. In consideration for the loan from DGJ to these
individuals, these individuals pledged the shares which will be issued upon
exercise of the warrants. Dr. Schulz is also given, as consideration for
his employment, costs related to an apartment and an automobile for the
duration of his employment under his employment agreement. Mr. Blackett
<Strikeout>was</Strikeout> will be given, as consideration for his
employment, reimbursement for reasonable and necessary expenses incurred in
connection with the relocation of his personal residence closer to the
Company's office.
Each of the agreements between the Company and the employees and
consultant listed above contains a covenant not to compete provision and a
confidentiality provision.
COMPENSATION OF DIRECTORS
All outside Directors of the Company are paid $1,875 each per
calendar quarter. No other Directors receive any compensation. In June
1992, David N. Laux, an outside Director, received options to purchase a
total of 7,500 shares of Common Stock at a purchase price of $2.50 per
share through June 9, 2002. In March 1996, Ivan J. Hughes, then considered
an outside Director, received options to purchase a total of 7,500 shares
of Common Stock at a purchase price of $2.38 per share through June 9,
2003. In January 1998, Mr. Laux received options to purchase a total of
25,000 shares of Common Stock at a purchase price of $1.25 per share
through December 31, 2003.
Board Of Directors, Board Committees And Meetings
The Board of Directors has established an Audit Committee, a
Compensation Committee and an Executive Committee. The Board of Directors
held three meetings during 1998. Each director attended at least 75% of all
meetings of the Board of Directors and applicable Committees held during
1998.
EXECUTIVE COMMITTEE
The Executive Committee is empowered to act with all authority
granted to the Board of Directors between Board of Directors meetings,
except with respect to those matters required by Delaware law or by the
Company's By-laws to be subject to the power and authority of the Board of
Directors as a whole. Messrs. Ivan J. Hughes, Hanspeter Schulz and Gary R.
Edidin are the current members of the Executive Committee. The former
Executive Committee did not meet during 1998.
AUDIT COMMITTEE
The Board of Directors has established an Audit Committee, whose
current members are David N. Laux, Bruce M. Fleisher, Gary R. Edidin and
Allen S. Gerrard. The purpose of the Audit Committee is to: (i) review the
Company's financial results and recommend the selection of the Company's
independent auditors; (ii) review the effectiveness of the Company's
accounting policies and practices, financial reporting and internal
controls; and (iii) review the scope of independent audit coverage, the
fees charged by the independent auditors, any transactions which may
involve a potential conflict of interest, and internal control systems.
<PAGE>
The functions of the Audit Committee are to: (i) recommend annually
to the Board of Directors the appointment of the independent public
accountants of the Company; (ii) discuss and review the scope and the fees
of the prospective annual audit and to review the results thereof with the
Company's independent public accountants; (iii) review and approve non-
audit services of the independent public accountants; (iv) review
compliance with existing major accounting and financial policies of the
Company; (v) review the adequacy of the financial organization of the
Company; and (vi) review management's procedures and policies relative to
the adequacy of the Company's internal accounting controls.
During 1998, the former Audit Committee met one time and the new
Audit Committee has met once in 1999 for the purposes of: (i) reviewing the
arrangements and scope of the Company's annual audit; (ii) discussing the
matters of concern to the Committee with regard to the Company's financial
statements or other results of the audit; and (iii) reviewing the Company's
internal accounting procedures and controls and the activities and
recommendations of the Company's independent public accountants.
COMPENSATION COMMITTEE
David N. Laux, Bruce M. Fleisher, Gary R. Edidin and Allen S. Gerrard
serve on the Compensation Committee. The former Compensation Committee did
not meet during 1998.
BOARD OF DIRECTORS COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee believes that the primary objectives of
the Company's compensation policies are to attract and retain a management
team that can effectively implement and execute the Company's strategic
business plan. These compensation policies include: (i) an overall
management compensation program that is competitive with management
compensation programs at companies of similar size to attract, retain and
motivate superior talent in the Company's industry; (ii) short-term bonus
incentives for management to meet the Company's overall business strategy
and profitability goals, including net income performance goals; (iii)
promoting the Company's pay-for-performance philosophy; and (iv) long-term
incentive compensation which will encourage management to continue to focus
on stockholder return.
It is the intention of the Compensation Committee to utilize a pay-
for-performance compensation strategy that will facilitate the attainment
of the Company's sales growth and profitability goals. Also, the
Compensation Committee's goal is to use compensation policies to closely
align the interests of the Company with the interests of stockholders so
that the Company's management has incentives to achieve short-term
performance goals while building long-term value for the Company's
stockholders. The Compensation Committee will review its compensation
policies from time to time to determine the reasonableness of the Company's
compensation programs and to take into account factors which are unique to
the Company.
BONUS PLAN. To incentivize senior management of the Company, Ms.
Beresford, Mr. Koehlinger, Dr. Nurse, Dr. Schulz, Mr. Blackett and Mr.
Hughes will receive options to purchase Common Stock, at $0.04 per share,
during the term of their respective employment or consulting agreements if
the Company equals or exceeds certain financial performance goals in 1999,
2000 and 2001. If the Company's net earnings for the particular fiscal
years plus amounts deducted in the computation thereof for: (a) interest
expense; (b) Federal, state and local income taxes; (c) depreciation; (d)
amortization of intangibles, as computed by the Company's accountants in
accordance with generally accepted accounting principals, consistently
applied; and (e) any expenses or other charges associated with the
investment, loans, and equipment leases made by DGJ to the Company and all
<PAGE>
other charges ("EBITDA"), equals or exceeds one of the EBITDA performance
goals as stated in the employment or consulting agreements, the Company
will grant such individuals options to purchase a certain number of shares
of Common Stock. The maximum number of shares of Common Stock, in the
aggregate, these individuals and one other employee, Ms. McGrath, can
purchase under these options is 14,750,000 shares. These options are not
exercisable until the Company's stockholders approve an amendment to the
Company's Certificate of Incorporation increasing the number of authorized
shares of Common Stock. See "Employment Contracts, Termination of
Employment and Change in Control Arrangements" section above for a
description of these agreements.
COMPENSATION FOR PRIOR CHIEF EXECUTIVE OFFICERS. Mr. Caufield's and
Ms. Beresford's compensation as Chief Executive Officer was based upon
analysis by the predessor Compensation Committee of other comparable public
companies' chief executive officers' compensation and each's efforts and
success in the following areas: establishing strategic goals and objectives
for the long-term growth of the Company; raising equity and debt capital
needed to allow the Company to erase its working capital deficit and
adequately capitalizing the Company to move forward; improving the
Company's operating results; and establishing critical strategic
partnerships with vendors and distribution channels.
BASE SALARIES. Ms. Beresford's base salary will continue to be
$180,000 per annum until June 30, 1999 and for her employment term from
July 1, 1999 to June 30, 2000, her base salary will be $125,000 per annum.
The current Compensation Committee believes that executive officer salaries
reflect base salaries paid to senior officers of other companies of similar
size.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), generally disallows tax deductions to public companies for
compensation over $1 million paid to a corporation's chief executive
officer and the four other most highly compensated executive officers.
Qualifying "performance-based" compensation will not be subject to the
deduction limit if certain requirements are met. The Compensation Committee
has discussed and considered and will continue to evaluate the potential
impact Section 162(m) has on the Company in making compensation
determinations, but has not established a set policy with respect to future
compensation determinations.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of David N. Laux, Bruce M.
Fleisher, Gary R. Edidin and Allen S. Gerrard. None of the executive
officers of the Company have served on the Board of Directors of any other
entity that has had any of such entity's officers serve either on the
Company's Board of Directors or Compensation Committee. However, Ivan J.
Hughes, the Chairman of the Board, serves on the Compensation Committee of
Duro Bag, a customer of the Company. See "Certain Relationships and
Related Transactions" in Item 13 below.
CONCLUSION
The current Compensation Committee believes that the newly-instituted
executive compensation plan implemented as part of the January 1999
Financing is consistent with the overall corporate strategy for continued
growth in sales, manufacturing and earnings and stockholder value.
COMPENSATION COMMITTEE
Gary R. Edidin
Bruce M. Fleisher
Allen S. Gerrard
David N. Laux
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return
(assuming reinvestment of dividends) from investing $100 on December 31,
1993, and plotted at December 31, 1994, 1995, 1996, 1997 and 1998 in each
of: (i) the Company's Common Stock; (ii) The National Association of
Securities Dealers Automated Quotation System ("NASDAQ") National Market
System Index of Companies; and (iii) Media General Industry Group
representing Packaging and Container Companies, which consists of other
companies in the packaging and containers manufacturing industry.
COMPARISON FOR FIVE YEAR CUMULATIVE TOTAL RETURN
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
BPI Packaging
Technologies, Inc. $100 $62.26 $32.08 $28.77 $16.98 $10.85
NASDAQ Market Index $100 $104.99 $136.18 $169.23 $207.00 $291.96
Peer Companies Group $100 $101.48 $100.15 $108.45 $100.92 $87.00
GRAPHIC OMITTED
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
FIVE-PERCENT BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of Common
Stock and Series A Preferred Stock as of May 17, 1999 by persons who
beneficially owned more than 5% of the Common Stock and Series A Preferred
Stock or by persons who did not beneficially own more than 5% of the Common
Stock and Series A Preferred Stock, in the aggregate, but who constituted
members of a "group" within the meaning of Section 13(d)(3) of the Exchange
Act, beneficially owning more than 5% of the Common Stock and Series A
Preferred Stock. Each of the persons listed below was a member of such a
group by virtue of being a party to the Lockup Agreement (the "Lockup
Agreement"), by and among Ms. Beresford, Mr. Hughes and DGJ, dated January
27, 1999, pursuant to which the parties agreed to vote their shares of
stock as directed by DGJ on any matters presented to the Company's
stockholders with respect to the Securities Purchase Agreement. Each of
the persons listed below disclaims beneficial ownership in any shares
beneficially owned by the others. The number of shares of Common Stock and
Series A Preferred Stock beneficially owned by each person listed below is
based on information contained in the Schedule 13D filed with the
Commission on behalf of the listed persons. The percentage of shares of
the Common Stock and Series A Preferred Stock each listed person is
indicated as beneficially owning is based on 21,495,621 and 212,258 shares
of Common Stock and Series A Preferred Stock, respectively, outstanding on
May 17, 1999.
Percentage
of Common
Stock and
Number of Shares Series A
Name and Address of Common Stock Preferred Stock
Of Beneficial Owner Beneficially Owned (1) (2)(3)
- ------------------- ----------------------- -----------------
C. Jill Beresford (4)(5) 1,624,249 6.81%
455 Somerset Avenue
North Dighton, Massachusetts
07264
<PAGE>
Percentage
of Common
Stock and
Number of Shares Series A
Name and Address of Common Stock Preferred Stock
Of Beneficial Owner Beneficially Owned (1) (2)(3)
- ------------------- ----------------------- -----------------
Ivan J. Hughes (5)(6) 90,000 *
Davis and Oak Streets
Ludlow, Kentucky
41016-0250
DGJ (7) 30,937,500 51.56%
600 Central Avenue,
Suite 262
Highland Park, Illinois
60036
* Less than one percent.
(1) None of these persons own any shares of Series A Preferred Stock.
<Strikeout>No</Strikeout> Except those listed in the next table, no
other stockholder owns at least 5% of the Common Stock and Series A
Preferred Stock, combined.
(2) Pursuant to the rules of the Commission, shares of Common Stock which
an individual or group has a right to acquire within 60 days pursuant to
the exercise of options or warrants are deemed to be outstanding for the
purpose of computing the percentage ownership of such individual or group,
but are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person shown in the table. This table
reflects the ownership of all shares of Common Stock and the Series A
Convertible Preferred Stock voting as a single class, since each is
entitled to one vote per share.
(3) Does not give effect to the issuance of: (i) up to 358,953 shares of
Common Stock issuable upon conversion of Series A and Series B Convertible
Preferred Stock; (ii) up to 180,372 shares issuable upon exercise of
warrants issued to an individual and principals of the placement agent in
the Company's private placements to overseas investors; (iii) up to
1,950,000 shares issuable upon exercise of options granted or available for
grant under the Company's 1990, 1993 and 1996 stock option plans; (iv) up
to 200,000 shares of Common Stock issuable upon the exercise of warrants
issued to financial consultants of the Company, subject to adjustment; and
(v) up to 5,000,000 and 900,000 shares of Common Stock issuable upon the
exercise of warrants expiring January 27, 2009 and January 27, 2003,
respectively, issued to consultants of the Company, subject to adjustments.
(4) Includes: (i) 1,314,130 shares of Common Stock; (ii) 146,695 shares
of Series B Convertible Preferred Stock; and (iii) 163,224 shares of Common
Stock issuable upon the exercise of an option at a price of $2.50 per share
through June 30, 2003.
(5) These individuals received warrants to purchase a certain number of
shares Common Stock at $0.04 per share. These warrants expire on January
27, 2009 and are described above in "Board of Directors and Executive
Officers - Employment Contracts, Termination of Employment and Change in
Control Arrangements." These warrants are not exercisable until the
Company's stockholders approve an amendment to the Company's Certificate of
Incorporation increasing the number of shares of the Company's authorized
Common Stock.
<PAGE>
The following table lists the name of the individual and the
corresponding number of shares of Common Stock their warrant is exercisable
into ("Warrant Shares"):
Name Warrant Shares
---- --------------
C. Jill Beresford 937,000
Ivan J. Hughes 937,000
(6) Includes 82,500 shares of Common Stock and 7,500 shares of Common
Stock issuable upon exercise of an option at a purchase price of $2.38 per
share through March 24, 2006.
(7) Includes 30,937,500 shares of Common Stock issuable upon the exercise
of a warrant at a price of $0.04 per share through January 27, 2009.
However, DGJ has indicated that it has no current intention of exercising
this warrant to purchase Common Stock. This amount does not include
1,629,930 shares of Series C Preferred Stock of the Company owned by DGJ.
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the beneficial ownership of Common
Stock or Series A Convertible Preferred Stock as of May 17, 1999 by: (i)
directors of the Company; (ii) executive officers of the Company; and (iii)
directors and executive officers of the Company as a group. The number of
shares beneficially owned of Common Stock and Series A Convertible
Preferred Stock listed below is based on information contained in a
Schedule 13D filed with the Commission on behalf of the named persons and
on information provided to the Company by the named persons. The
percentage of shares of the class each person is listed as beneficially
owning is based upon 21,495,621 and 212,258 shares of Common Stock and
Series A Convertible Preferred Stock outstanding, respectively, as of
May 17, 1999. Except as otherwise indicated, the stockholders listed in the
table have sole voting and investment powers with respect to the shares
indicated.
Number of
Shares of Percentage of
Common Stock Common Stock and
Name and Address Beneficially Series A Preferred
of Beneficial Owner Owned (1) Stock (2)(3)
- ------------------- ------------ -----------------
Hanspeter Schulz, Ph.D. (4)(5) 0 0%
Richard H. Nurse, Ph.D. (4)(5) 6,000 *
C. Jill Beresford (4)(5)(6)(7) 1,627,249 6.81%
James F. Koehlinger (4)(5) 0 0%
Peter W. Blackett (4) 0 0%
Ivan J. Hughes (5)(7)(8)
Davis and Oak Streets
Ludlow, Kentucky 41016-0250 90,000 *
David N. Laux (9)
1700 N. Moore St, Suite 1703
Arlington, Virginia 22209 52,500 *
Gary R. Edidin (10)
Edidin & Associates
600 Central Avenue
Suite 262
Highland Park, IL 60035 30,937,500 51.56%
Allen S. Gerrard (11)
Deere Park Capital
Management
40 Skokie Boulevard
Suite 110
Northbrook, IL 60062 30,937,500 51.56%
Theodore L. Koenig (12)
55 East Monroe Street,
Suite 4100
Chicago, Illinois 60603
Bruce M. Fleisher 0 0%
2350 N. Lincoln Park West
Chicago, Illinois 60614 0 0%
All Officers and Directors
as a Group (11 persons)
(6)(7)(8)(9) 32,713,249 54.09%
* Less than one percent.
<PAGE>
(1) None of these persons own any shares of Series A Preferred Stock. No
other stockholder owns at least 5% of the Common Stock and Series A
Preferred Stock, combined.
(2) Pursuant to the rules of the Commission, shares of Common Stock which
an individual or group has a right to acquire within 60 days pursuant to
the exercise of options or warrants are deemed to be outstanding for the
purpose of computing the percentage ownership of such individual or group,
but are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person shown in the table. This table
reflects the ownership of all shares of Common Stock and the Series A
Convertible Preferred Stock voting as a single class, since each is
entitled to one vote per share.
(3) Except as otherwise noted, does not give effect to the issuance of:
(i) up to 358,953 shares of Common Stock issuable upon conversion of Series
A and Series B Convertible Preferred Stock; (ii) up to 180,372 shares
issuable upon exercise of warrants issued to an individual and principals
of the placement agent in the Company's private placements to overseas
DGJs; (iii) up to 1,950,000 shares issuable upon exercise of options
granted or available for grant under the Company's 1990, 1993 and 1996
Stock Option Plans; (iv) up to 200,000 shares of Common Stock issuable upon
the exercise of warrants issued to financial consultants of the Company,
subject to adjustment; and (v) up to 5,000,000 and 900,000 shares of Common
Stock issuable upon the exercise of warrants expiring January 27, 2009 and
January 27, 2003, respectively, issued to consultants of the Company,
subject to adjustments.
(4) These individuals may be reached at the Company's headquarters
located at 455 Somerset Avenue, North Dighton, Massachusetts 02764.
(5) These individuals acquired warrants to purchase a certain number of
shares Common Stock at $0.04 per share. These warrants expire on January
27, 2009 and are described above in "Board of Directors and Executive
Officers - Employment Contracts, Termination of Employment and Change in
Control Arrangements." These warrants are not exercisable until the
Company's stockholders approve an amendment to the Company's Certificate of
Incorporation increasing the number of shares of the Company's authorized
Common Stock.
The following table lists the name of the individual and the
corresponding number shares of Common Stock their warrant is convertible
into (the "Warrant Shares"):
Name Warrant Shares
Hanspeter Schulz, Ph.D. 2,188,000
Richard H. Nurse, Ph.D. 1,719,000
C. Jill Beresford 937,000
James F. Koehlinger 1,719,000
Ivan J. Hughes 937,000
---------
7,500,000
(6) Includes: (i) 1,314,130 shares of Common Stock; (ii) 146,695 shares
of Series B Convertible Preferred Stock; and (iii) 163,224 shares of Common
Stock issuable upon the exercise of an option at a price of $2.50 per share
through June 30, 2003.
(7) Under the terms of the Lockup Agreement, agreed to vote as directed
by DGJ with respect to any matters presented to the Company's stockholders
with respect to the Agreement and agreed not to sell shares of Common Stock
without the prior written consent of DGJ.
(8) Includes 82,500 shares of Common Stock and 7,500 shares of Common
Stock issuable upon exercise of an option at a purchase price of $2.38 per
share through March 24, 2006.
<PAGE>
(9) Includes: (i) 20,000 shares of Common Stock; (ii) 7,500 shares of
Common Stock issuable upon exercise of an option at a purchase price of
$2.50 per share through June 9, 2002; and (iii) 25,000 shares of Common
Stock issuable upon exercise of an option at a purchase price of $1.25 per
share through December 31, 2003.
(10) A member of DGJ and also a member of the Board of Managers, Chairman,
President and Chief Executive Officer of DGJ. Mr. Edidin holds no shares
of the Company directly, but may deemed to beneficially own 30,937,500
shares of Common Stock beneficially owned by DGJ by virtue of his positions
with DGJ. This amount does not include 1,629,930 shares of Series C
Preferred Stock of the Company owned by DGJ. Mr. Edidin disclaims
beneficial ownership of all such shares.
(11) A Director of Deere Park Capital Management, which is a member of
DGJ. He is also a Member of the Board of Managers and Treasurer of DGJ.
Mr. Gerrard holds no shares of the Company directly, but may deemed to
beneficially own 30,937,500 shares of Common Stock beneficially owned by
DGJ by virtue of his positions with DGJ. This amount does not include
1,629,930 shares of Series C Preferred Stock of the Company owned by DGJ.
Mr. Gerrard disclaims beneficial ownership of such shares.
(12) A member of Monroe Investments, Inc., which is a member of Hilco BPI,
L.L.C., which is a member of DGJ. He disclaims beneficial ownership of
stock of the Company except to the extent of his membership interest in DGJ
through such entities.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Ivan J. Hughes, a director of the Company, is the President of the
Plastic's Division, and a director and a member of the Executive and
Compensation Committees of Duro Bag. In January, February, March and April
Duro Bag issued purchase orders for $192,000, $190,335, $209,513 and
$255,729 to the Company to purchase bags for Duro Bag customers. The
Company expects similar monthly orders from Duro Bag throughout 1999.
In November 1990, the Company established an officer's loan
receivable from Dennis N. Caufield, its then Chairman for $132,197. The
note was amended in April 1998 and the interest rate changed to 6%
effective from November 1990 and is now payable on or before January 1,
2001. Interest on the loan, along with advances for travel not offset by
expense reports, caused the loan balance to equal $586,978 at December 31,
1997. Mr. Caufield did not make any payments against the loan from the
period beginning 1990 through December 31, 1997. Accordingly, the Company
reserved the full amount of this loan on that date. Also, no payments were
made in 1998. In addition, the Company paid, on behalf of Mr. Caulfield,
approximately $36,000 of a $200,000 personal income tax levy imposed by the
Massachusetts Department of Revenues on Mr. Caufield in exchange for an
interest bearing note due on or before June 30, 1998, which has not yet
been repaid. This note was reserved for as of March 31, 1999.
Effective February 26, 1994, Ronald Caufield exchanged his 49,500
shares of common stock of RC America for 200,000 shares of the Company's
Common Stock, pursuant to the terms of a Stock Exchange Agreement by and
between the Company and Ronald Caufield (the "Exchange Agreement"). The
Exchange Agreement also provides for the issuance to Ronald Caufield of up
to an additional 100,000 shares of the Company's Common Stock over a five
year period based on RC America attaining certain levels of pre-tax
earnings. No shares of Common Stock were issued in 1998 or for the 10
month period ended December 31, 1997. As a result of RC America's earnings
for Fiscal 1997 and Fiscal 1996, 2,649 and 2,550 shares, respectively, of
the 100,000 shares of Common Stock were issued to Mr. Ronald Caufield. The
Exchange Agreement contains demand and piggy-back registration rights for
the shares.
<PAGE>
In February 1999, the Company borrowed approximately $219,000 from
DGJ to purchase additional pieces of equipment. This loan bears interest
at a rate of 18% per annum and matures in September 1999.
Four of the Company's directors, Gary R. Edidin, Allen S. Gerrard,
Theodore L. Koenig and Bruce M. Fleisher, are either <Strikeout>related to
</Strikeout> affiliated with DGJ or have been appointed by DGJ. The
January 1999 Financing and all other transactions between the Company and
DGJ will be deemed to be related party transactions due to the relationship
of these directors to DGJ. Also, Mr. Koenig is a partner with the Chicago-
based law firm of Holleb & Coff, which provides legal services to the
Company.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS.
The financial statements required to be filed by Item 8 herewith are
as follows:
Page
Report of Independent Accountants --
Livingston & Haynes, P.C. F-2
Report of Former Independent Accountants -
PricewaterhouseCoopers LLP F-3
Consolidated Balance Sheets as of
December 31, 1998 and 1997 F-4
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-6
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-7
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-12
Notes to Consolidated Financial Statements F-14
(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
(a)(3) Exhibits:
<Strikeout>
(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 incorporated herein by reference:
Exhibit No. Title
10 Employment Agreement between the Company and Peter W.
Blackett.
<PAGE>
(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:
Exhibit No. Title</Strikeout>
Exhibit No.:
** 1
<Strikeout>3a
</Strikeout>
3 Certificate of Incorporation of the Company, as amended
(6) .
** 2
<Strikeout>3b
</Strikeout>
3.1 By-laws of the Company, as amended (6) .
** 3
<Strikeout>3b
</Strikeout>
4 Form of Certificate of Designation of Series A
Convertible Preferred Stock, as amended (2) .
** 4
<Strikeout>3c
</Strikeout>
4.1 Form of Amended Certificate of Designation for Series B
Convertible Preferred Stock (2) .
** 5
<Strikeout>4a
</Strikeout>
4.2 Specimen Series A Convertible Preferred Stock Certificate
(2) .
** 6
<Strikeout>5
</Strikeout>
4.3 Form of Common Stock Purchase Warrant (13) .
** 7
<Strikeout>6
</Strikeout>
4.4 Certificate of Designation of Series C Preferred Stock
(13) .
** 8
<Strikeout>4
</Strikeout>
4.5 Pledge Agreement, dated as of January 27, 1999, between
DGJ and C. Jill Beresford (13) .
<Strikeout>4.1
</Strikeout>
4.6 Common Stock Purchase Warrant issued by the Company to
Global Financial Services, Inc. <Strikeout> ("Global")</Strikeout>.
(14).
<Strikeout>4.2
</Strikeout>
4.7 Common Stock Purchase Warrant issued by the Company to
DGJ, L.L.C. <Strikeout>("DGJ")</Strikeout> (14) .
<PAGE>
<Strikeout>4.3
</Strikeout>
4.8 Common Stock Purchase Warrant issued by the Company to
Brantrock (14) .
** 9
10** <Strikeout>1996</Strikeout> 1990 Stock Option Plan
(1) .
<Strikeout>
99.1 Press Release, dated January 28, 1999.
99.2 Securities Purchase Agreement between the Company and
DGJ.
</Strikeout>
10.1**
Form of Employment Agreement of Dennis N. Caufield
(3).
** 10
<Strikeout>10b*
</Strikeout>
10.2 * Form of Employment Agreement of C. Jill Beresford
(3) .
** 11
<Strikeout>10c*
</Strikeout>
10.3* * Form of Employment Agreement of Alex F. Vaicunas
(3) .
** 12
<Strikeout>10d*
</Strikeout>
10.4* * 1993 Stock Option Plan (3) .
** 13
<Strikeout>10a
</Strikeout>
10.5 Stock Exchange Agreement by and between the Company and
Ronald V. <Strikeout>Caulfield</Strikeout> Caufield (4) .
10.6** Employment Agreement of Ronald V. Caufield (4).
** 14
<Strikeout>10a
</Strikeout>
10.7 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 (5) .
10.8 Amendment to Promissory Note of Dennis N. Caufield
(7).
** 15
<Strikeout>10d
</Strikeout>
10.9 Lease for Premises at 455-473 Somerset Ave., North
Dighton, Massachusetts (7) .
10.10** 1996 Stock Option Plan (8).
** 16
<Strikeout>10a
</Strikeout>
10.11 Loan and Security Agreement by and among the Company, RC
America, Inc. and Foothill Capital Corporation
<Strikeout>("Foothill")</Strikeout> (9) .
<PAGE>
** 17
<Strikeout>10b
</Strikeout>
10.12 Secured Promissory Note from the Company and RC America
to Foothill (9) .
** 18
<Strikeout>10c
</Strikeout>
10.13 Pledge and Security Agreement by and between the Company
and Foothill (9) .
** 19
<Strikeout>10d
</Strikeout>
10.14 Continuing Guaranty of Market Media, Inc (9) .
** 20
<Strikeout>10e
</Strikeout>
10.15 Continuing Guarantee of BPI Packaging (UK) Limited
(9) .
** 21
<Strikeout>10f
</Strikeout>
10.16 Security Agreement by and between Market Media, Inc. and
Foothill (9) .
** 22
<Strikeout>10g
</Strikeout>
10.17 Security Agreement by and between BPI Packaging (UK)
Limited and Foothill (9) .
** 23
<Strikeout>10i
</Strikeout>
10.18 * Settlement Agreement by and between the Company and Mobil
Oil Corporation, dated December 10, 1996 (9) .
10.19 Loan and Security Agreement by and among the Company, RC
America, Inc. and Foothill Capital Corporation (10).
10.20 Secured Promissory Note from the Company and RC America,
Inc. to Foothill (10).
10.21 Pledge and Security Agreement by and between the Company
and Foothill (10).
10.22 Continuing Guarantee of Market Media, Inc (10).
10.23 Continuing Guarantee of BPI Packaging (UK) Limited (10).
10.24 Security Agreement by and between Market Media, Inc. and
Foothill (10).
10.25 Security Agreement by and between BPI Packaging (UK)
Limited and Foothill (10).
10.26* Settlement Agreement by and between the Company and Mobil
Oil Corporation, dated December 10, 1996 (10).
<PAGE>
<Strikeout>
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.
</Strikeout>
<Strikeout>
99.10 Consulting Agreement between the Company and Ivan J.
Hughes.
(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:
Exhibit No. Title
1 Securities Purchase Agreement, dated as of January 27, 1999,
between the Company and DGJ.
7 Joint Filing Agreement.
8 Power of Attorney.
(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
</Strikeout>
<Strikeout>
10.1
</Strikeout>
10.27 Invoice Purchase and Sale Agreement, dated August 19,
1998 (12) .
10.26* Settlement Agreement by and between the Company and Mobil
Oil Corporation, dated December 10, 1996 (10).
10.28 Joint Filing Agreement (13).
10.29 Securities Purchase Agreement, dated as of January 27,
1999, between the Company and DGJ (13). .
<Strikeout>
(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.
<PAGE>
(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
andFoothill.
10d Continuing Guarantee of Market Media, Inc.
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.
(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:
</Strikeout>
<Strikeout>
10e Continuing Guarantee of BPI Packaging (UK) Limited.
10f Security Agreement by and between Market Media, Inc. and
Foothill.
</Strikeout>
** 24
<Strikeout> 2
</Strikeout>
10.30 Agreement, dated January 27, 1999, among DGJ, Ivan
J. Hughes and C. Jill Beresford (13) .
** 25
<Strikeout>3
</Strikeout>
10.31 Closing Agreement, dated as of January 27, 1999, by and
among the Company, DGJ, and C. Jill Beresford (13) .
10.32 Securities Purchase Agreement between the Company and
DGJ (14).
** 26
<Strikeout>99.3
</Strikeout>
10.33 Factoring Agreement between the Company and Franklin
Capital Corporation <Strikeout>("Franklin")</Strikeout> (14) .
10.34 Revolving Note issued by the Company to Franklin (14).
10.35 Security Agreement between the Company and Franklin (14).
<PAGE>
10.36 Employment Agreement between the Company and C. Jill
Beresford (14).
10.37 Employment Agreement between the Company and James
Koehlinger (14).
** 27
<Strikeout>99.8
</Strikeout>
10.38 Employment Agreement between the Company and Richard H.
Nurse, Ph.D (14) .
** 28
<Strikeout>99.9
</Strikeout>
10.39 Employment Agreement between the Company and Hanspeter
Schulz, Ph.D (14) .
10.40 Consulting Agreement between the Company and Ivan J.
Hughes (14).
10.41 Employment Agreement between the Company and Peter W.
Blackett (15)
16 Letter from Pricewaterhouse Coopers LLP to the Securities
and Exchange Commission (11).
21 Subsidiaries of the Company (4).
27 Financial Data Schedule.
99 Press Release, dated July 7, 1998 (11).
99.1 Press Release, dated January 28, 1999 (14).
(1) Incorporated by reference from our Form S-18 Registration Statement
(No. 33-36142-B) declared effective by the SEC on October 3, 1990.
(2) Incorporated by reference from our Form S-1 Registration Statement
(No. 33-39463) declared effective by the SEC on June 13, 1991.
(3) Incorporated by reference from our Form S-1 Registration Statement
(No. 33-39463) declared effective by the SEC on June 13, 1991.
(4) Incorporated by reference from our Annual Report on Form 10-K and
amendment thereto initially filed with the SEC on June 10, 1994.
(5) Incorporated by reference from our <Strikeout>(i)The following
exhibit was filed as part of the Company's</Strikeout> Quarterly Report on
Form 10-Q for the quarter ended August 25, 1995 and filed with the SEC
on October 6, 1995.
(6) Incorporated by reference from our Quarterly Report on Form 10-Q for
the quarter ended November 24, 1995 and filed with the SEC on January 8,
1996.
(7) Incorporated by reference from our Annual Report on Form 10-K for
the fiscal year ended February 23, 1996 and filed with the Commission
on <Strikeout>October 15, 1996, and is incorporated herein by
reference.</Strikeout> June 7, 1996.
(8) Incorporated by reference from our Quarterly Report on Form 10-Q for
the quarter ended August 23, 1996 and filed with the SEC on October 15,
1996.
<PAGE>
(9) Incorporated by reference from our Quarterly Report on Form 10-Q for
the quarter ended November 22, 1996 and filed with the SEC on January 7,
1997.
(10) Incorporated by reference from of our Annual Report on Form 10-K for
the 10 month period ended December 31, 1997 and filed with the SEC on
May 27, 1998.
(11) Incorporated by reference from our Current Report on Form 8-K with
the SEC on July 14, 1998.
(12) Incorporated by reference from our Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 and filed with the SEC on November 16,
1998.
(13) Incorporated by reference from our Schedule 13D filed with the SEC on
February 2, 1999.
(14) Incorporated by reference from our Current Report on Form 8-K, dated
January 27, 1999, and filed with the SEC on February 11, 1999.
(15) Incorporated by reference from our Current Report on Form 8-K, dated
March 31, 1999, and filed with the SEC on March 31, 1999.
<Strikeout>
(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.
(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:
(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:
(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:
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:
10a** Form of Employment Agreement of Dennis N. Caulfield.
(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:
(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:
10i** 1990 Stock Option Plan.
<PAGE>
(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.
</Strikeout>
_______________________________
* Certain formation withheld and filed separately with the <Strikeout>
Commission</Strikeout> SEC 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.
<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: <Strikeout>March 31</Strikeout>
May 28 , 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.
Signature Title Date
- --------- ---------- ----------
/s/ Hanspeter Schulz President and Director <Strikeout>
March 31
</Strikeout>
May 28 ,
1999
/s/ Ivan J. Hughes Chairman of the Board <Strikeout>
March 31
</Strikeout>
May 28 ,
1999
/s/ Richard H. Nurse Vice President of
Manufacturing <Strikeout>
March 31
</Strikeout>
May 28 ,
1999
/s/ C. Jill Beresford Vice President of Marketing <Strikeout>
March 31
</Strikeout>
May 28 ,
1999
/s/ James F. Koehlinger Chief Financial Officer,
Principal Accounting Officer
and Treasurer <Strikeout>
March 31
</Strikeout>
May 28 ,
1999
/s/ David N. Laux Director <Strikeout>
March 31
</Strikeout>
May 28 ,
1999
<PAGE>
/s/ Gary R. Edidin Director <Strikeout>
March 31
</Strikeout>
May 28 ,
1999
/s/ Bruce M. Fleisher Director May 28, 1999
/s/ Allen S. Gerrard Director <Strikeout>
March 31
</Strikeout>
May 28 ,
1999
/s/ Theodore L. Koenig Director May 28, 1999
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants
-- Livingston & Haynes, P.C. F-2
Report of Former Independent Accountants
-- PricewaterhouseCoopers LLP F-3
Consolidated Balance Sheets as of December 31, 1998
and 1997 F-4
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-6
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-7
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-12
Notes to Consolidated Financial Statements F-14
<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
<PAGE>
REPORT OF FORMER 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 Standards 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
<PAGE>
BPI Packaging Technologies, Inc.
Consolidated Balance Sheet
Assets
December 31, December 31,
1998 1997
------------ ------------
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
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
BPI Packaging Technologies, Inc.
Consolidated Balance Sheet
Liabilities and Stockholders' Equity
December 31, December 31,
1998 1997
------------ ------------
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.
<PAGE>
BPI Packaging Technologies, Inc.
Consolidated Statement of Operations
Fiscal 10 Month Fiscal
Year Ended Period Ended Year Ended
December 31, December 31, February 28,
1998 1997 1997
------------ ------------ ------------
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
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
<TABLE>
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
<CAPTION>
Series A Series B
Convertible Convertible
Common Stock Preferred Stock Preferred Stock
-------------------- ------------------ -------------------
Capital in Accumu-
Excess of lated
Shares Amount Shares Amount Shares Amount Par Value Deficit Total
---------- --------- -------- ---------- -------- ---------- ---------- ---------- ----------
<S> <C> <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) 19,768,971
Sale of
common stock
pursuant to
Regulation S
and Regula-
tion D private
placement
offerings,
net of
issuance
costs 1,207,500 12,075 2,194,793 2,206,868
Sale of common
and preferred
stock pursuant
to partial
exercise of
underwriter's
warrants from
prior public
offerings,
net of
issuance
costs 402,600 4,026 100,000 225,000 851,024 1,080,050
<PAGE>
Series A Series B
Convertible Convertible
Common Stock Preferred Stock Preferred Stock
-------------------- ------------------ -------------------
Capital in Accumu-
Excess of lated
Shares Amount Shares Amount Shares Amount Par Value Deficit Total
---------- --------- -------- ---------- -------- ---------- ---------- ---------- ----------
Conversion
of Series A
convertible
preferred
stock to
common
stock 56,800 568 (56,800) (227,200) 226,632 --
Sale of
common stock
pursuant to
exercise of
class B
warrants
from the
Company's
third public
offering,
net of
issuance
costs 511,761 5,118 1,092,799 1,097,917
Issuance of
common stock
based on
RC America's
FY96 results 2,550 26 5,074 5,100
Issuance of
92,308
Regulation S
common shares
in exchange
for Series C
redeemable
preferred
stock 92,308 923 149,077 150,000
<PAGE>
Series A Series B
Convertible Convertible
Common Stock Preferred Stock Preferred Stock
-------------------- ------------------ -------------------
Capital in Accumu-
Excess of lated
Shares Amount Shares Amount Shares Amount Par Value Deficit Total
---------- --------- -------- ---------- -------- ---------- ---------- ---------- ----------
Net loss
for the year
ended Febru-
ary 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) 11,544,675
Conversion of
Series A
convertible
preferred
stock to
common
stock 21,663 217 (21,663) (86,652) 86,435 --
Issuance of
common stock
based on RC
America FY 97
results 5,280 52 8,527 8,579
Sale of
common stock
pursuant to
Regulation S
and Regulation
D private
placement
offerings,
net of
issuance
costs 4,991,125 49,911 4,354,080 4,403,991
Issuance of
common stock
in exchange
for commission
on private
placement
offerings 387,500 3,875 383,626 387,501
<PAGE>
Series A Series B
Convertible Convertible
Common Stock Preferred Stock Preferred Stock
-------------------- ------------------ -------------------
Capital in Accumu-
Excess of lated
Shares Amount Shares Amount Shares Amount Par Value Deficit Total
---------- --------- -------- ---------- -------- ---------- ---------- ---------- ----------
Issuance of
common stock
in exchange
for consulting
services 33,500 335 33,165 33,500
Warrants
granted to
consultants 76,158 76,158
Net loss
for the 10
month period
ended Decem-
ber 31,
1997 (11,338,869)(11,338,869)
Balance at
December 31,
1997 19,513,496 195,135 325,483 1,126,932 146,695 1,466,954 43,076,603 (40,750,089) 5,115,535
Sale of
Stock pursuant
to Regulation
D private
offerings,
net of
issuance
costs 1,868,900 18,689 1,264,262 1,282,951
Warrants
granted for
lease
extension 120,200 120,200
Conversion of
Series A
Convertible
Preferred 113,225 1,132 (113,225) (452,900) 451,768 --
<PAGE>
Series A Series B
Convertible Convertible
Common Stock Preferred Stock Preferred Stock
-------------------- ------------------ -------------------
Capital in Accumu-
Excess of lated
Shares Amount Shares Amount Shares Amount Par Value Deficit Total
---------- --------- -------- ---------- -------- ---------- ---------- ---------- ----------
Net loss
for the
year ended
December 31,
1998 (3,239,213)(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) $3,279,473
========== ======== ======= ======== ======= ========== =========== ============ ==========
<FN>
The accompanying notes are an integral
part of consolidated financial statements.
</TABLE>
<PAGE>
BPI Packaging Technologies, Inc.
Consolidated Statement of Cash Flows
Fiscal Year 10 Month Fiscal Year
Ended Period Ended Ended
December 31, December 31, February 28,
1998 1997 1997
------------ ------------ ------------
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)
------------ ------------ -----------
<PAGE>
Fiscal Year 10 Month Fiscal Year
Ended Period Ended Ended
December 31, December 31, February 28,
1998 1997 1997
------------ ------------ ------------
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
----------- ----------- -----------
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:
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.
<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
<Strikeout>("HMWHDPE") </Strikeout> 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. 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 questions. 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.
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.
<PAGE>
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.
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. The Company operates in one reportable segment under
SFAS No. 131. The activities of RC America, Inc. and Market Media, Inc.
were not significant to the overall operations of the Company. Therefore,
RC America, Inc. and Market Media, Inc. are not presented as discontinued
operations.
<PAGE>
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 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).
<PAGE>
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
A going-concern footnote was included with the February 28, 1997
and December 31, 1997 financial statements because the Company had very
unfavorable working capital, debt to equity ratio and operating cash flow
deficiencies, which raised substantial doubt about the Company's ability to
continue as a going concern. The restructuring with DGJ (as described
below) significantly improved both the working capital and debt to equity
ratios subsequent to December 31, 1998. New management of the Company put
into place in the middle of 1998 an operating plan that reduced fixed costs
and increased revenues in the second half of 1998. These changes brought
about by the new management have resulted in an improvement in the results
of operation and produced a positive cash flow from operations for the last
six months in 1998 and during the first three months of 1999.
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:
1. a Promissory Note in the aggregate principal amount of
$3,200,000 (the "Note") ;
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
for $100.
The Note matures on.
<Strikeout>The $3,200,000 subordinated note with a term of payment
due</Strikeout> February 1, 2004 or earlier <Strikeout>: 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</Strikeout> in the event of a default, the sale of 50% or more of
the Company's assets, the merger or consolidation of the Company, the
purchase of 50% or more of the shares of the Common Stock by a person who
was not a stockholder of the Company at the time of the execution of the
Purchase Agreement, or a primary public offering of the Company's
securities in excess of $10,000,000. The Note has an interest rate of
6% per annum payable monthly in arrears<Strikeout>. The note</Strikeout>
, principal is due at its maturity and it is secured by all assets
of the Company. The Note is subordinated to the equipment lease and the
factoring agreement, described below.
<PAGE>
In conjunction with the financing, DGJ required certain members of
the Company's management to invest, in the aggregate, <Strikeout>In
addition, Company management invested</Strikeout> $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.
** 29 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.
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. Written notice of termination regarding this factoring
agreement was given by the Company on March 30, 1999. 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.
* 29 moved from here; text not shown
The gain on the restructuring of trade notes payable and accounts
payable will be accounted for as an extraordinary item in the Company's
Consolidated Statement of Operations in future periods. The creditors who
selected the long-term debt agreement are being paid their balances due
over a 36-month period in 36 equal installments with no interest. The
Company was involved in a patent infringement suit and reached a settlement
on January 27, 1999 to pay the balance due of $200,000 as part of the
restructuring of the Company's debt described above.
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 <Strikeout>under</Strikeout> treated as
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 Company's 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 with DGJ. The term of the lease is
ten years and its monthly payments of $102,000 represent interest only.
The total principal amount of the lease is $6,800,000 and is due at the end
of the lease term. The lease has been recorded as a capital lease during
the quarter ended March 31, 1999 and will be treated as such in future
periods. The lease requires the Company to meet certain financial
covenants, including, but not limited to, earnings targets and debt to
equity ratios.
The Note .
<PAGE>
<Strikeout>A note payable</Strikeout>, 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. <Strikeout>The Series C Preferred
Stock is not convertible and</Strikeout> because it is not convertible
to Common Stock and its redemption price is the same as its purchase price,
$100 plus accrued interest at 6% per annum beginning on January 27, 1999.
Also, the Series C Preferred Stock 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.
<PAGE>
<TABLE>
BPI Packaging Technologies, Inc.
Pro Forma Balance Sheet
As audited Pro Forma
December 31, Adjust- December 31,
1998 ments 1998
------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets
Cash $ 73,116 3,500,000 (1,960,900) 250,000 (885,000) $ 977,216
Accounts receivable,
net 882,389 882,389
Inventories, net 717,413 717,413
Prepaid expenses 51,420 51,420
------------ ----------
Total current
assets 1,724,338 2,628,438
Property and
equipment, net 15,290,305 1,678,973 16,969,278
Deposits - leases and
equipment purchases 149,851 (75,940) 73,911
Loans to officers, net 6,072 6,072
Other assets, net 581,399 885,000 (246,696) 1,219,703
------------ ----------- ----------- ---------- ---------- ---------- -----------
737,322 1,299,686
------------ ----------- ---------- ---------- ---------- ---------- -----------
Total assets $ 17,751,965 3,500,000 (1,960,900) 250,000 0 1,356,337 $20,897,402
============ =========== ========== ========== ========== ========== ===========
Current liabilities
Note payable $ 814,311 250,000 $ 1,064,311
Trade notes payable 584,433 (584,433) --
Capital lease obligations
due within one year 3,800,286 (3,800,286) --
Accounts payable 6,597,223 584,433 (1,960,900) (1,425,540) (1,846,100) (75,116) 1,874,000
Accrued expenses 2,676,239 (1,643,377) 1,032,862
----------- -----------
<PAGE>
As audited Pro Forma
December 31, Adjust- December 31,
1998 ments 1998
------------ -------- ------------
Total current
liabilities 14,472,492 3,971,173
---------- -----------
Capital lease obligations
- long-term portion -- 6,800,000 6,800,000
-----------
Long-term debt
Accounts Payable -- (1,425,540) 1,425,540
Notes payable -- 3,200,000 (480,000) 2,720,000
Stockholders'
equity
Subscribed stock -- 300,000 300,000
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 -- 100 100
Common stock,
$.01 par value;
60,000,000 shares
authorized 214,956 214,956
Capital in excess
of par value 44,912,833 480,000 (100) 45,392,733
Accumulated deficit (43,989,302) 1,846,100 75,116 (42,068,086)
----------- ----------- ----------- ----------- ----------- ----------- -----------
3,279,473 5,980,689
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Liabilities and
Shareholders' equity $17,751,965 $ 3,500,000 (1,960,900) 250,000 0 1,356,337 $20,897,402
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
NOTE 3: ACCOUNTS RECEIVABLE-TRADE
Accounts receivable-trade consist of the following:
December 31, December 31,
1998 1997
------------ ------------
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
=========== ===========
NOTE 4: INVENTORIES
Inventories, net of valuation reserves, consist of the following:
December 31, December 31,
1998 1997
------------ ------------
Raw material $ 296,427 $ 285,058
Finished goods 420,986 1,062,808
Reserves -- (290,000)
----------- -----------
$ 717,413 $ 1,057,866
=========== ===========
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:
December 31, December 31,
1998 1997
------------ ------------
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
=========== ===========
<PAGE>
Assets recorded under capital leases and included in property and
equipment were as follows:
December 31, December 31,
1998 1997
------------ ------------
Machinery and equipment $13,041,270 $13,041,270
Less accumulated amortization (5,478,653) (4,055,971)
----------- -----------
$ 7,562,617 $ 8,985,299
=========== ===========
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:
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
==========
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.
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.
<PAGE>
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:
December 31, December 31,
1998 1997
------------ ------------
Spare parts and supplies, net $ 334,703 $ 669,405
Other assets 246,696 368,502
----------- -----------
$ 581,399 $ 1,037,907
=========== ===========
NOTE 9: ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31, December 31,
1998 1997
------------ ------------
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
=========== ===========
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).
<PAGE>
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 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:
December 31, December 31,
1998 1997
------------ ------------
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 $ -- $ --
=========== ===========
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).
<PAGE>
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.
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 at $10 per share at the
Company's option and convertible by the stockholder 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.
<PAGE>
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.
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:
December 31, December 31,
1998 1997
------------ ------------
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)
<PAGE>
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.
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
<Strikeout>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 December31, 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</Strikeout> In
November 1990, the Company established an officer's loan receivable from
Dennis N. Caulfield, its then Chairman for $132,197. The note was amended
in April 1998 and the interest rate change to 6% effective from November
1990 and is now payable on or before January 1, 2001. Interest on the
loan, along with advances for travel not offset by expense reports, cause
the loan balance to equal $586,978 at December 31, 1997. Mr. Caulfield did
not make any payments against the loan from the period beginning 1990
through December 31, 1997. Accordingly, the Company reserved the full
amount of this loan on that date. Also, no payments were made in 1998. In
addition, the Company paid, on behalf of Mr. Caulfield, approximately
$36,000 of a $200,000 personal income tax levy imposed by the Massachusetts
Department of Revenues on Mr. Caulfield in exchange for an interest bearing
note due on or before June 30, 1998, which has not been repaid. This note
was reserved for as of March 31, 1999 .
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%.
<PAGE>
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.
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.
<PAGE>
The future minimum rental commitments under non-cancelable operating
leases as of December 31, 1998 are as follows:
OPERATING
FISCAL YEAR LEASES
----------- -----------
1999 1,180,000
2000 893,000
2001 480,000
2002 383,000
2003 383,000
Thereafter 2,243,000
----------
$5,562,000
==========
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 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:
<PAGE>
Fiscal Year Ended Ten Month Period Ended
December 31, 1998 December 31, 1997
--------------------- ----------------------
Weighted Average Weighted Average
--------------------- ---------------------
Exercise Exercise
Options Shares Price Shares Price
- ------- ---------- ---------- ---------- ----------
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
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.
Year Ended
February 28, 1997
------------------------
Weighted Average
-----------------------
Exercise
Options Shares Price
- ------- ---------- ----------
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
==========
<PAGE>
Year Ended
February 28, 1997
------------------------
Weighted Average
-----------------------
Exercise
Options Shares Price
- ------- ---------- ----------
Options exercisable at
period end 589,377
==========
==========
Weighted average fair value
of options granted during
the period $2.40
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:
OPTIONS OUTSTANDING
-------------------
Weighted
Average Weighted
Number of Remaining Average
Range of Outstanding at Contractural Exercise
Exercise Prices December 31, 1998 Life Price
--------------- ----------------- ----------- ----------
$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
=======
OPTIONS EXERCISABLE
-------------------
Number Weighted
Range of Exercisable at Average
Exercise Prices December 31, 1998 Exercise Price
--------------- ----------------- --------------
$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
=======
<PAGE>
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:
Fiscal Ten Month
Year Ended Period Ended
December 31, December 31,
1998 1997
------------ -------------
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)
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.
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.
<PAGE>
NOTE 23: SIGNIFICANT FOURTH QUARTER ADJUSTMENTS TO THE
TEN MONTH PERIOD <Strikeout>ENDING</Strikeout> ENDED
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.
<PAGE>
BPI Packaging Technologies, Inc.
Schedule II
Rule 12-09 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEAR ENDED DECEMBER 31, 1998
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additional
Balance Charged Deductions Balance
at to Accounts at end Description of
Description 1/1/98 Expenses Written-Off of Period charges
- ----------- ------- ---------- --------------------- --------------
Reserve for
Accounts
Receivable
Credits 75,000 0 0 75,000
Allowance
for Doubtful
Accounts 275,000 0 (165,548) 109,452 Allowance was
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
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE 10 MONTH PERIOD ENDED DECEMBER 31, 1997
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additional
Balance Charged Deductions Balance
at to Accounts at end Description of
Description 3/1/97 Expenses Written-Off of Period Charges
- ----------- ------- ---------- --------------------- --------------
Reserve for
Accounts
Receivable
Credits 75,000 0 075,000
Allowance for
Doubtful
Accounts 50,000 225,000 0 275,000 Allowance was
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
