<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 4 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: 1-10648
BPI PACKAGING TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2997486
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
455 SOMERSET AVENUE, NORTH DIGHTON, MASSACHUSETTS 02764
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(508) 824-8636
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of
the Act:
TITLE OF CLASS
Common Stock, $0.01 par value
Series A Convertible Preferred Stock, $0.01 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/A or any amendment to
this Form 10-K/A. X
The aggregate market value of the Registrant's voting stock issued and
outstanding as of July 6, 1999 was $5,590,135 for the Common Stock and $188,458
for the Series A Convertible Preferred Stock.
As of July 6, 1999, 21,500,521 shares of Common Stock, $0.01 par value per
share, were outstanding and 188,458 shares of Series A Convertible Preferred
Stock, $0.01 par value per share, were outstanding.
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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.
2
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PART I
ITEM 1. BUSINESS
GENERAL
BPI Packaging Technologies, Inc. (the "Company") converts commercially
available high molecular weight, high density polyethylene ("HMWHDPE") resins
into thin film, which is either sold directly into industrial or packaging
applications or converted in-house into carryout bags of "T-shirt sack" design
for supermarkets, convenience stores and other retail markets. The Company
utilizes advanced, high quality extrusion, printing and bag making equipment,
which was installed between 1990 and 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. 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
3
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$10,000,000. The Note has an interest rate of 6% 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.
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 H. 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; (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. Unsecured creditors
of the Company owed approximately $3,009,000 as of January 27, 1999 selected the
discounted payment plan resulting in extraordinary income of $1,731,762 during
the first quarter of 1999. The balance of the unsecured creditors selected the
three year payment plan or are currently negotiating with the Company or did not
reach discounted or deferred agreements with the Company. The Company did not
recognize any gain under the three year payment arrangement. This gain of
$1,731,762 was recorded as extraordinary income amounting to $0.08 per share.
The tax effect of this gain reduced the net operating tax loss carryforward from
prior years which has been fully reserved and, therefore, has no impact on
current operations.
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."
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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."
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:
<TABLE>
<CAPTION>
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1999
ANNUAL MARKET PATENT
(MILLIONS) STATUS COMPETITION
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HANDI-SAC-TM- $37 U.S. PATENT DIRECT: SONOCO T-SACK ROLL
CONVENIENCE, HARDWARE/AUTOMOTIVE AND ISSUED 1993 BAG
DRUG
INDIRECT: PAPER AND
FLAT T-SACKS
- ----------------------------------------------------------------------------------------------------------------------
FRESH-SAC-Registered Trademark- $63 U.S. PATENT DIRECT: CROWN POLY, SEALED
T-SHIRT PRODUCE BAG ISSUED 1993 AIR AND BETTER BAG
INDIRECT: PRODUCE BAG
ON A ROLL
- ----------------------------------------------------------------------------------------------------------------------
INSULATION OVERWRAP $15 PROCESS TECHNOLOGY DIRECT:
VANGUARD PLASTICS
NO INDIRECT
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HIGH PERFORMANCE PRINTED UNDER EVALUATION PROCESS TECHNOLOGY DIRECT: EXXON FILMS
TISSUE OVERWRAP FILM
NO INDIRECT
- ----------------------------------------------------------------------------------------------------------------------
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- ----------------------------------------------------------------------------------------------------------------------
T-SHIRT CARRYOUT BAG $850 U.S. PATENT ISSUED DIRECT: VANGUARD, SONOCO
1989 AND INTEGRATED BAGGING
SYSTEMS
INDIRECT: KRAFT PAPER BAGS
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
HANDI-SAC-TM- is a T-shirt bag sold in a patented dispensing mechanism. The
patented system allows the retailer to effectively store and dispense T-shirt
bags in a limited space under the check-out counter, which is important to
convenience, drug, retail and hardware stores. HANDI-SAC-TM- is installed in
approximately 11,000 convenience, drug, retail and hardware stores. The annual
market potential for HANDI-SAC-TM- is estimated at approximately $37 million.
The market is split approximately 70% plastic and 30% paper.
FRESH-SAC-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.
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.
6
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In the patented products, HANDI-SAC-TM- has direct competition from Sonoco
Products Company's T-sack roll bag product and flat T-sacks provided by Sonoco
Products Company, Vanguard Plastics and others; as well as paper bags.
FRESH-SAC-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-TM- 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-TM-.
No assurance can be given that the patents currently owned by the Company
and any patents that may be granted in the future will be enforceable or provide
the Company with meaningful protection from 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.
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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 June 14, 1999 was $1,062,583, as
compared to $510,472 at March 26, 1998. The Company generally sells products on
an individual purchase order basis to regular customers rather than under annual
contracts on a scheduled delivery basis. Accordingly, backlog may fluctuate
significantly and may not be an accurate indicator of general business trends.
SEASONALITY
Management reports that the first quarter of any year is traditionally the
slowest quarter for bag products marketed to the retail trade. There is no
apparent seasonality in the industrial film business.
MAJOR CUSTOMERS
For the year ended December 31, 1998, there were two customers that each
accounted for more than 10% of the Company's sales: Owens Corning at 10% and
Bunzl, a distributor of the Company's patented bag products to grocery and
convenience store retailers, at 20%. The Company's primary relationships are
with the decision makers at the retail level who chose Bunzl to redistribute the
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 June 14, 1999, the Company had 133 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.
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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 July 6, 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.
9
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock was traded on the National Association of
Securities Dealers Automated Quotation National Market System ("NASDAQ/NMS")
from October 12, 1992 through August 13, 1998. Since August 14, 1998, the
Company's Common Stock has been traded on the National Association of Securities
Dealers Automated Quotation Over-the-Counter Bulletin Board ("NASDAQ OTC"),
under the symbol "BPIE."
As of July 6, 1999, the Company had 21,500,521 shares (273 holders) of
record for its Common Stock and 188,458 shares (39 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.
<TABLE>
<CAPTION>
COMMON STOCK High Sale/Bid Low Sale/Bid
------------- ------------
<S> <C> <C>
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 $ 0.30 $ 0.14
</TABLE>
- --------------------
(1) In December 1997, the Company changed its fiscal year end from February 28
to December 31.
10
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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. 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 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.
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.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Year Ended Ten Month Period Ended Fiscal Years 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
</TABLE>
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<TABLE>
<CAPTION>
BALANCE SHEET DATA
At At At At At
December 31, December 31, February 28, February 23, February 24,
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $17,751,965 $20,970,740 $29,247,231 $35,277,975 $35,341,925
Long term obligations $ -- $ -- $ 3,809,241 $5,441,057 $ 4,495,692
Redeemable preferred
stock $ -- $ -- $ -- $ 183,369 $ 183,369
Working capital (deficit) ($12,748,154) ($13,897,932) ($5,819,144) ($2,767,867) $ 3,909,634
Stockholders' equity $ 3,279,473 $ 5,115,535 $11,544,675 $19,768,971 $24,048,204
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE 10 MONTH PERIOD ENDED DECEMBER 31,
1997
The Company was unable to accurately recast operating results to provide
for a 12 month period ending December 31, 1997 because monthly accounting
closings were not undertaken during the months in question. The months of
January and February are the lowest sales periods of the year under normal
seasonality trends. The results for a 12 month period ending December 31, 1997
probably would not have produced a lesser loss for the reporting period than the
loss as represented for the 10 month period ending December 31, 1997.
During the 10 month period ended December 31, 1997, the Company exited the
traditional plastic carryout bag market. Sales for the year ended December 31,
1998 were $10,382,819, compared to $13,951,725 in the 10 month period ended
December 31, 1997.
Sales of the Company's proprietary bag products, FRESH-SAC-Registered
Trademark- T-shirt sack produce bag and HANDI-SAC-TM-, 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.
12
<PAGE>
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.
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:
<TABLE>
<CAPTION>
Year Ended 10 Month Period ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Proprietary, traditional and film products ($1,004,120) ($ 7,878,610)
RC America, Inc. (130,345) (34,584)
BPI Packaging Technologies, Inc. (7,353) (119)
Market Media, Inc. (122,136) (391,853)
Unallocated corporate overhead (1,481,974) (1,511,867)
------------ -------------
Operating profit (loss) $2,745,928) ($ 9,817,033)
Allowance for officer loan (68,039) (586,978)
Interest expense, net (425,246) (934,858)
------------ -------------
Net loss ($3,239,213) ($11,338,869)
------------ -------------
------------ -------------
</TABLE>
10 MONTH PERIOD ENDED DECEMBER 31, 1997 COMPARED TO FISCAL 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 -TM- and MAXI-SAC-TM-, and film
products were $6,185,039 in the 10 month period ended December 31, 1997,
compared to sales of $12,035,704 in Fiscal 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
13
<PAGE>
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.
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:
<TABLE>
<CAPTION>
10 Month Period Ended
December 31, 1997 Fiscal 1997
--------------------- -----------
<S> <C> <C>
Proprietary, traditional and film products ($7,878,610) ($9,079,854)
RC America, Inc. (34,584) 53,591
BPI Packaging, Inc. (119) (2,205)
Market Media, Inc. (391,853) (809,199)
Unallocated corporate overhead (1,511,867) (1,823,050)
------------ -----------
Operating profit (loss) ($9,817,033) ($11,660,717)
Allowance for Officer Loan (586,978) ( -- )
Interest expense, net (934,858) (1,103,514)
------------ -----------
Net loss ($11,338,869) ($12,764,231)
------------ -----------
------------ -----------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since its initial public offering in October 1990, the Company has
generated funds to finance its activities through both public sales and private
placements of its securities, as well as bank loans, equipment lease financings
and cash from operations.
NOTE PAYABLE
At August 10, 1998, the Company entered into a new revolving line of credit
arrangement with a lender providing for the borrowing of up to $2,000,000
against eligible accounts receivable. Part of the proceeds were used to repay a
line of credit with Foothill Capital Corporation and the balance was used as
14
<PAGE>
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.
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.
15
<PAGE>
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.
16
<PAGE>
Description of impaired assets, patents, goodwill and plant assets relating
to bag making facilities:
<TABLE>
<S> <C>
Patents $1,044,577
Goodwill 620,353
Plant equipment 3,335,070
Reserve for agreement with bag-making
equipment vendor 285,000
Write-off of rubber plates used
in bag-making equipment 100,000
----------
Total $5,385,000
----------
----------
</TABLE>
Fair value of all assets, except plant equipment, was determined to be zero
based upon the Company's decision to exit the traditional T-shirt bag business.
Fair value of the plant equipment was determined based upon projected future
cash flows for the remaining useful life, present book value and residual value
of assets at the end of its useful life, with cash flows both discounted at 14%
per year (average cost of secured debt financing).
A patent infringement suit settlement of $512,648, including legal defense
costs, was recorded during Fiscal 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. 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.
As of July 9, 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.
17
<PAGE>
The Company sent questionnaires to all 409 vendors as of May 14, 1999
regarding their Year 2000 compliance status. As of July 9, 1999 the Company
received 163 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, which
would cause the Company to obtain its resin and other supplies by other means of
transportation. The Company would be unable to manufacture products and revenues
would be impacted 60 days after the rail system ceases to function. 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 excess 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 is scheduled to be Year 2000 compliant as of July 31, 1999. The
only remaining component, as of July 9, 1999, is the Company's financial and
accounting systems, 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.
On July 29, 1998, the Company reported on Form 8-K the engagement of
Livingston & Haynes, P.C. as the Company's independent accountants. The decision
to engage Livingston & Haynes, P.C. was approved by the Company's Audit
Committee.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
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:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
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
</TABLE>
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. (a member of the Hoechst
Group), and was one of three managers responsible for the global installation of
Systems Anwendugen Prozesse technologies. From June 1995 to 1996, Dr. Schulz was
Business Director for Methanol/Formaldehyde/Polyols, a global commodity business
of Celanese (a member of the Hoechst Group) with production sites in the United
States, Canada and Germany. From 1982 to June 1995, Dr.
19
<PAGE>
Schulz was Vice President and General Manager of the High Density and Ultra High
Molecular Weight Polyethylene business at American Hoechst (a member of the
Hoechst Group). 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.
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 1998 until January 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 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.
20
<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.
21
<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:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Tracy L. McGrath 34 Vice President of Sales
</TABLE>
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.
22
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation Awards
Annual Compensation -------------------
------------------- Securities
Underlying All Other
Name and Principal Position Fiscal Year Salary(1) Bonus(2) Options(#) Compensation
--------------------------- ----------- --------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Dennis N. Caulfield (3) 1998 $169,846 $0 0 $9,923(3)
Former Chief Executive Officer 1997(A) $266,666 $0 0 $43,323(3)
1997 $320,000 $0 0 $130,220(3)
1996 $320,000 $0 0 $36,174(3)
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 of 1997 $180,000 $0 0 $26,716(4)
Directors 1996 $180,000 $0 0 $14,612(4)
Alex F. Vaicunas (5) 1998 $124,856 $0 0 $1,746(5)
Former Vice President of Film 1997(A) $104,167 $0 0 $3,150(5)
Sales 1997 $125,000 $0 0 $3,232(5)
1996 $125,000 $0 0 $1,213(5)
Richard Nurse, Ph.D. (6) 1998 $119,115 $0 0
Vice President of Technical 1997(A) $64,399 $0 0 $8,935(6)
Development 1997 $77,279 $0 0 $3,410(6)
1996 $71,936 $0 0 $4,401(6)
$3,656(6)
Paul J. DeCristofaro (7) 1998 $32,332 $0 0 $668(7)
Former Chief Financial Officer 1997(A) $83,410 $0 0 $0
1997 $100,092 $0 0 $0
</TABLE>
(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. Caulfield, 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. Caulfield, 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.
23
<PAGE>
(3) In the periods presented, the Company paid approximately $335 and $990
per month for two personal term life insurance policies for Mr.
Caulfield 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. Caulfield. The Fiscal 1997
amount includes $73,846 paid for unused vacation from prior fiscal
years and $12,308 for unused vacation from Fiscal 1997. This amount
also includes $0, $6,400, $8,000 and $0 the Company contributed to Mr.
Caulfield's 401(k) account during 1998, the 10 months ended December
31, 1997, in Fiscal 1997 and in Fiscal 1996, respectively. Mr.
Caulfield'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. Caulfield'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.
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
$100,000 that is exercisable during any one calendar year. Options granted under
the stock option plans generally expire 10 years from the date of grant.
24
<PAGE>
AGGREGATED OPTION EXERCISED IN THE LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options Options
at FY-End Exercisable/
Shares Acquired Exercisable/ Unexercisable
Name on Exercise Value Realized($) Unexercisable ($)(1)
---- --------------- ----------------- ------------------- -------------
<S> <C> <C> <C> <C>
C. Jill Beresford 0 0 163,224/0 0 / 0
</TABLE>
(1) In-the-money options are those options for which the fair market value
of the underlying Common Stock is greater than the exercise price of
the option. On 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.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
The Company entered into employment, non-competition, and confidentiality
agreements with each of Mr. Caulfield, Ms. Beresford and Mr. Vaicunas. Base
salaries for Mr. Caulfield, Ms. Beresford and Mr. Vaicunas 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 provided for severance payments of 60 months base salary in the
event her employment was terminated without cause and prohibited 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 had 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 Mr. 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.
25
<PAGE>
EMPLOYMENT AND CONSULTING AGREEMENT TERMS
<TABLE>
<CAPTION>
EMPLOYEE/CONSULTANT BASE SALARY/FEE TERM WARRANT SHARES
- ------------------- --------------- ---- --------------
<S> <C> <C> <C>
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
</TABLE>
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 expire on January 27, 2009. Please refer to the
chart above, under the title" Warrant Shares," for the number of shares of 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. Blacklett 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,
26
<PAGE>
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.
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
27
<PAGE>
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 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. Caulfield's and Ms.
Beresford's compensation as Chief Executive Officer was based upon analysis by
the predecessor 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 was $180,000 for the 12
month period ended 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
28
<PAGE>
"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
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.
29
<PAGE>
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
GRAPHIC OMITTED.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock or
Series A Convertible Preferred Stock as of July 6, 1999 by: (i) directors of the
Company; (ii) executive officers of the Company; (iii) directors and executive
officers of the Company as a group; and (iv) 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. Some of the persons listed
below are 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. All of the
persons listed below disclaim beneficial ownership in any shares beneficially
owned by the others. 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 21,500,521 and 188,458 shares of Common Stock and Series A
Convertible Preferred Stock outstanding, respectively, as of July 6, 1999.
Except as otherwise indicated, the stockholders listed in the table have sole
voting and investment powers with respect to the shares indicated.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES OF COMMON STOCK PERCENTAGE OF COMMON STOCK
OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) AND SERIES A PREFERRED STOCK (2)(3)
- ------------------- ---------------------- -----------------------------------
<S> <C> <C>
Hanspeter Schulz, Ph.D. (4)(5) 2,188,000 9.16%
Richard H. Nurse, Ph.D. (4)(5) 1,725,000 7.37%
C. Jill Beresford (4)(5)(6)(7) 2,561,249 10.60%
James F. Koehlinger (4)(5) 1,719,000 7.34%
Peter W. Blackett (4) 0 0%
Ivan J. Hughes (5)(7)(8) 1,027,000 4.54%
Davis and Oak Streets
Ludlow, Kentucky 41016-0250
David N. Laux (9) 52,500 *
1700 N. Moore St, Suite 1703
Arlington, Virginia 22209
30
<PAGE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES OF COMMON STOCK PERCENTAGE OF COMMON STOCK
OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) AND SERIES A PREFERRED STOCK (2)(3)
- ------------------- ---------------------- -----------------------------------
<S> <C> <C>
Gary R. Edidin (10) 80,000,000 78.67%
Edidin & Associates
600 Central Avenue
Suite 262
Highland Park, IL 60035
Allen S. Gerrard (11) 80,000,000 78.67%
Deere Park Capital Management
40 Skokie Boulevard
Suite 110
Northbrook, IL 60062
Theodore L. Koenig (12) 0 0%
55 East Monroe Street, Suite 4100
Chicago, Illinois 60603
Bruce M. Fleisher 0 0%
2350 N. Lincoln Park West
Chicago, Illinois 60614
DGJ (13) 80,000,000 78.67%
600 Central Avenue, Suite 262
Highland Park, Illinois 60036
All Officers and Directors 89,220,249 81.43%
as a Group (11 persons)(6)(7)(8)(9)
</TABLE>
* Less than one percent.
(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 335,153 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.
31
<PAGE>
(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 authorized shares of Common Stock.
The following table lists the name of the individual and the corresponding
number shares of Common Stock his or her warrant is convertible into (the
"Warrant Shares"):
<TABLE>
<CAPTION>
Name Warrant Shares
---- --------------
<S> <C>
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
</TABLE>
(6) Includes: (i) 1,314,130 shares of Common Stock; (ii) 146,695 shares of
Series B Convertible Preferred Stock; (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; and (iv) 937,000 shares of Common Stock issuable
upon the exercise of a warrant (see footnote 5).
(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: (i) 82,500 shares of Common Stock; (ii) 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; and (iii) 937,000 shares of Common Stock
issuable upon the exercise of a warrant (see footnote 5).
(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 80,000,000 shares
of Common Stock beneficially owned by DGJ by virtue of his positions with
DGJ. See footnote (13) for a description of DGJ's beneficial ownership of
80,000,000 shares of Common Stock. 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.
32
<PAGE>
(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
80,000,000 shares of Common Stock beneficially owned by DGJ by virtue of
his positions with DGJ. See footnote (13) for a description of DGJ's
beneficial ownership of 80,000,000 shares of Common Stock. 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.
(13) Includes 30,937,500 shares of Common Stock currently issuable upon the
exercise of a warrant at a price of $0.04 per share through January 27,
2009 and 49,062,500 shares of Common Stock issuable upon the exercise of a
warrant at a price of $0.04 per share through January 27, 2009 if the
stockholders approve at the Annual Meeting of Stockholders or a special
meeting of stockholders the increase in the authorized number of shares of
Common Stock. 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.
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, April, May and
June, Duro Bag issued purchase orders for $192,000, $190,335, $209,513,
$255,729, $0 and $350,019 to the Company to purchase bags for Duro Bag
customers. The Company expects similar orders from Duro Bag to those received in
the first six months of 1999 during the remainder of the year. The Company
manufactures these products on behalf of Duro Bag for its customers. The Company
sells these products on terms as contracted by Duro Bag and its customers, which
terms are equal, if not better, than the Company could obtain from its other
customers for these products.
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 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. 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 yet
been repaid. This note was reserved for as of March 31, 1999.
Effective February 26, 1994, Ronald Caulfield exchanged his 49,500 shares
of common stock of RC America for 200,000 shares of the Company's Common Stock,
pursuant to the terms of a Stock Exchange Agreement by and between the Company
and Ronald Caulfield (the "Exchange Agreement"). The Exchange Agreement also
provides for the issuance to Ronald Caulfield of up to an additional 100,000
shares of the Company's Common Stock over a five 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,
33
<PAGE>
2,649 and 2,550 shares, respectively, of the 100,000 shares of Common Stock were
issued to Mr. Ronald Caulfield. The Exchange Agreement contains demand and
piggy-back registration rights for the shares.
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 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.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS.
The financial statements required to be filed by Item 8 herewith
are as follows:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants -- Livingston & Haynes, P.C. F-1
Report of Former Independent Accountants - PricewaterhouseCoopers LLP F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the year ended December
31, 1998, the 10 month period ended December 31, 1997, and for the
fiscal year ended February 28, 1997 F-5
Consolidated Statements of Changes in Stockholders' Equity for the
year ended December 31, 1998, the 10 month period ended
December 31, 1997 and the fiscal year ended February 28, 1997 F-6
Consolidated Statements of Cash Flows for the year ended December
31, 1998, the 10 month period ended December 31, 1997 and the
fiscal year ended February 28, 1997 F-8
Notes to Consolidated Financial Statements F-10
(a)(2) FINANCIAL STATEMENT SCHEDULES. The financial statement schedules
required to be filed by Item 8 herewith is as follows:
Schedule II Valuation and Qualifying Accounts S-1
</TABLE>
(a)(3) Exhibits:
EXHIBIT NO.: DESCRIPTION TITLE:
3 Certificate of Incorporation of the Company, as amended (6)
3.1 By-laws of the Company, as amended (6).
4 Form of Certificate of Designation of Series A Convertible
Preferred Stock, as amended (2).
4.1 Form of Amended Certificate of Designation for Series B
Convertible Preferred Stock (2).
4.2 Specimen Series A Convertible Preferred Stock Certificate (2).
4.3 Form of Common Stock Purchase Warrant (13).
35
<PAGE>
4.4 Certificate of Designation of Series C Preferred Stock (13).
4.5 Pledge Agreement, dated as of January 27, 1999, between DGJ and
C. Jill Beresford (13).
4.6 Common Stock Purchase Warrant issued by the Company to Global
Financial Services, Inc. (14).
4.7 Common Stock Purchase Warrant issued by the Company to DGJ,
L.L.C. (14).
4.8 Common Stock Purchase Warrant issued by the Company to Brantrock
(14).
10** 1990 Stock Option Plan (1).
10.1** Form of Employment Agreement of Dennis N. Caufield (3).
10.2** Form of Employment Agreement of C. Jill Beresford (3).
10.3** Form of Employment Agreement of Alex F. Vaicunas (3).
10.4** 1993 Stock Option Plan (3).
10.5 Stock Exchange Agreement by and between the Company and Ronald V.
Caufield (4).
10.6** Employment Agreement of Ronald V. Caufield (4).
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).
10.9 Lease for Premises at 455-473 Somerset Ave., North Dighton,
Massachusetts (7).
10.10** 1996 Stock Option Plan (8).
10.11 Loan and Security Agreement by and among the Company, RC America,
Inc. and Foothill Capital Corporation (9).
10.12 Secured Promissory Note from the Company and RC America to
Foothill (9).
10.13 Pledge and Security Agreement by and between the Company and
Foothill (9).
10.14 Continuing Guaranty of Market Media, Inc (9).
10.15 Continuing Guarantee of BPI Packaging (UK) Limited (9).
10.16 Security Agreement by and between Market Media, Inc. and Foothill
(9).
10.17 Security Agreement by and between BPI Packaging (UK) Limited and
Foothill (9).
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).
36
<PAGE>
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).
10.27 Invoice Purchase and Sale Agreement, dated August 19, 1998 (12).
10.28 Joint Filing Agreement (13).
10.29 Securities Purchase Agreement, dated as of January 27, 1999,
between the Company and DGJ (13).
10.30 Agreement, dated January 27, 1999, among DGJ, Ivan J. Hughes and
C. Jill Beresford (13).
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).
10.33 Factoring Agreement between the Company and Franklin Capital
Corporation (14).
10.34 Revolving Note issued by the Company to Franklin (14).
10.35 Security Agreement between the Company and Franklin (14).
10.36 Employment Agreement between the Company and C. Jill Beresford
(14).
10.37 Employment Agreement between the Company and James Koehlinger
(14).
10.38 Employment Agreement between the Company and Richard H. Nurse,
Ph.D (14).
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 (16).
99 Press Release, dated July 7, 1998 (11).
99.1 Press Release, dated January 28, 1999 (14).
37
<PAGE>
(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 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
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.
(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.
(16) Incorporated by reference from our Annual Report on Form 10-K for the
year ended December 31, 1999 and filed with the SEC on March 31, 1999.
* Certain formation withheld and filed separately with the 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.
38
<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: July 12, 1999
By: /s/ Hanspeter Schulz
---------------------------
Hanspeter Schulz, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Hanspeter Schulz President and Director July 12, 1999
- --------------------
/s/ Ivan J. Hughes Chairman of the Board July 12, 1999
- ------------------
/s/ Richard H. Nurse Vice President of Manufacturing July 12, 1999
- --------------------
/s/ C. Jill Beresford Vice President of Marketing July 12, 1999
- ---------------------
/s/ James F. Koehlinger Chief Financial Officer, July 12, 1999
- ----------------------- Principal Accounting Officer and
Treasurer
/s/ David N. Laux Director July 12, 1999
- -----------------
/s/ Gary R. Edidin Director July 12, 1999
- ------------------
/s/ Bruce M. Fleisher Director July 12, 1999
- ---------------------
/s/ Allen S. Gerrard Director July 12, 1999
- --------------------
/s/ Theodore L. Koenig Director July 12, 1999
- ----------------------
</TABLE>
39
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants -- Livingston & Haynes, P.C. F-1
Report of Former Independent Accountants - PricewaterhouseCoopers LLP F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the year ended December 31, 1998, the 10-
month period ended December 31, 1997 and the fiscal year ended February 28, 1997 F-5
Consolidated Statements of Stockholders' Equity for the year ended December 31,
1998, the 10-month period ended December 31, 1997 and the fiscal year ended
February 28, 1997 F-6
Consolidated Statements of Cash Flows for the year ended December 31, 1998, the
10-month period ended December 31,1997 and the fiscal year ended February 28, 1997 F-8
Notes to Consolidated Financial Statements F-10
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS - LIVINGSTON & HAYNES, P.C.
March 22, 1999
To the Board of Directors and Stockholders
of BPI Packaging Technologies, Inc.
We have audited the accompanying consolidated balance sheet of BPI
Packaging Technologies, Inc., (the "Company") and subsidiaries as of December
31, 1998 and the related consolidated statements of operations, stockholders'
equity, cash flows and Schedule 2, Valuation and Qualifying Accounts for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The 1997 financial statements were
audited by other auditors whose report dated May 22, 1998, on those statements,
included an explanatory paragraph describing conditions that raised substantial
doubt about the Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
and subsidiaries as of December 31, 1998 and the results of their operations,
their changes in stockholders' equity and cash flows for the year then ended are
in conformity with generally accepted accounting principles.
/s/ Livingston & Haynes, P.C.
Livingston & Haynes, P.C.
Wellesley, Massachusetts
F-1
<PAGE>
REPORT OF 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
F-2
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
Consolidated Balance Sheets
Assets
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Current assets:
Cash $ 73,116 $ 125,220
Accounts receivable, net 882,389 721,239
Inventories, net 717,413 1,057,866
Prepaid expenses 51,420 52,948
------------- -------------
Total current assets 1,724,338 1,957,273
------------- -------------
Property and equipment, net 15,290,305 17,828,860
------------- -------------
Deposits - leases and equipment purchases 149,851 141,284
Loans to officers, net 6,072 5,416
Other assets, net 581,399 1,037,907
------------- -------------
737,322 1,184,607
------------- -------------
$ 17,751,965 $ 20,970,740
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
Consolidated Balance Sheets
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Current liabilities
Note payable $ 814,311 $ 1,162,349
Trade notes payable 584,433 584,433
Capital lease obligations due within one year 3,800,286 4,426,205
Accounts payable 6,597,223 6,714,870
Accrued expenses 2,676,239 2,967,348
---------------- --------------
Total current liabilities 14,472,492 15,855,205
---------------- --------------
Commitments and contingencies
Stockholders' Equity
Series B convertible preferred stock, $.01 par value 1,466,954 1,466,954
Series A convertible preferred stock, $.01 par value 674,032 1,126,932
Common stock, $.01 par value; shares authorized --
60,000,000 at December 31, 1998 and 1997 Shares
issued and outstanding - 21,495,621 and 19,513,496 at
December 31, 1998 and 1997, respectively 214,956 195,135
Capital in excess of par value 44,912,833 43,076,603
Accumulated deficit (43,989,302) (40,750,089)
---------------- --------------
3,279,473 5,115,535
---------------- --------------
$ 17,751,965 $ 20,970,740
---------------- --------------
---------------- --------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
10 Month period
Fiscal Year Ended Ended Fiscal Year Ended
December 31, 1998 December 31, 1997 February 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net sales $ 10,382,819 $ 13,951,725 $ 30,810,037
Cost of goods sold 8,826,905 17,311,037 27,784,329
----------- ------------ ------------
Gross profit (loss) 1,555,914 (3,359,312) 3,025,708
Operating expenses:
Selling, general and administrative 4,301,842 6,137,985 8,695,612
Bad debt expense --- 319,736 93,165
Write-down of impaired assets and
related expenses --- --- 5,385,000
Patent infringement settlement --- --- 512,648
----------- ------------ ------------
Loss from operations (2,745,928) (9,817,033) (11,660,717)
Other (expense) income:
Allowance for officer loan (68,039) (586,978) ---
Interest expense (471,166) (984,064) (1,112,647)
Interest income 45,920 49,206 9,133
----------- ------------ ------------
Net loss ($3,239,213) ($11,338,869) ($12,764,231)
----------- ------------ ------------
----------- ------------ ------------
Basic and diluted net loss per share ($0.16) ($0.73) ($0.96)
Shares used in computing basic and
diluted net loss per share 20,849,356 15,579,747 13,261,815
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
Consolidated Statements of Changes in Stockholders' Equity
For the Year Ended December 31, 1998, the 10 Month Period Ended December 31,
1997 and for the Fiscal Year Ended February 28, 1997
<TABLE>
<CAPTION>
Series A Convertible Series B Convertible
Common Stock Preferred Stock Preferred Stock
------------ --------------- --------------- Capital in Accumu-
Excess of lated
Shares Amount Shares Amount Shares Amount Par Value Deficit 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
Regulation D private
placement offerings,
net of issuance costs 1,207,500 12,075 2,194,793 2,206,868
Sale of common and
preferred stock
pursuant to partial
exercise of
underwriter's warrants
from prior public
offerings, net of
issuance costs 402,600 4,026 100,000 225,000 851,024 1,080,050
Conversion of Series
A convertible
preferred stock to
common stock 56,800 568 (56,800) (227,200) 226,632 --
Sale of common stock
pursuant to exercise of
class B warrants from
the Company's third
public offering, net of
issuance costs 511,761 5,118 1,092,799 1,097,917
Issuance of common
stock based on RC
America's FY96
results 2,550 26 5,074 5,100
Issuance of 92,308
Regulation S common
shares in exchange
for Series C
redeemable preferred
stock 92,308 923 149,077 150,000
Net loss for the
year ended February
28, 1997
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
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Series A Convertible Series B Convertible
Common Stock Preferred Stock Preferred Stock
------------ --------------- --------------- Capital in Accumu-
Excess of lated
Shares Amount Shares Amount Shares Amount Par Value Deficit Total
------ ------ ------ ------ ------ ------ --------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock in exchange
for commission on
private placement
offerings 387,500 3,875 383,626 387,501
Issuance of common
stock in exchange
for consulting
services 33,500 335 33,165 33,500
Warrants granted to
consultants 76,158 76,158
Net loss for the 10
month period ended
December 31, 1997 (11,338,869) (11,338,869)
Balance at December 31,
1997 19,513,496 195,135 325,483 1,126,932 146,695 1,466,954 43,076,603 (40,750,089) 5,115,535
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 --
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
---------- -------- ------- -------- ------- ---------- ----------- ----------- ----------
---------- -------- ------- -------- ------- ---------- ----------- ----------- ----------
</TABLE>
The accompanying notes are an integral
part of consolidated financial statements.
F-7
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
10 Month period
Fiscal Year Ended ended Fiscal Year Ended
December 31, 1998 December 31, 1997 February 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss ($3,239,213) ($11,338,869) ($12,764,231)
---------- ----------- -----------
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 2,538,880 2,186,621 3,417,849
Write-down of impaired assets and related
expenses -- -- 5,897,648
Inventory reserve (290,000) (925,000) 1,215,000
Allowance for lease losses -- 1,643,377 --
Allowance for officer loan -- 586,978 --
Warrants and common stock granted to consultants -- 109,658 --
Allowance for uncollectible trade receivables -- 175,000 --
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable - (161,150) 1,197,521 84,372
trade
(Increase) Decrease in inventories 630,453 4,401,587 (1,821,856)
(Increase) Decrease in prepaid expenses 1,528 217,538 (302,566)
Increase (Decrease) in other assets, net 456,508 840,896 (198,418)
(Decrease) Increase in accounts payable (117,647) 209,020 3,218,584
(Decrease) Increase in other accrued expenses (291,109) 364,134 132,409
---------- ----------- -----------
Total Adjustments 2,767,463 11,007,330 11,643,022
---------- ----------- -----------
Net cash used by operating activities (471,750) (331,539) (1,121,209)
---------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment (325) (212,144) (1,549,878)
Cost of patents -- -- (144,928)
Decrease (increase) in deposits, net (8,567) (12,823) 388,922
Advances to officers (656) (112,597) (44,560)
---------- ----------- -----------
Net cash used by investing activities (9,548) (337,564) (1,350,444)
---------- ----------- -----------
Cash flows from financing activities:
Net (payments) borrowings under note payable (348,038) (2,571,128) (19,127)
Principal payments on long-term debt and capital
lease (625,919) (1,492,754) (1,945,014)
obligations
Net proceeds from sales and issuances of stock 1,403,151 4,800,071 4,384,835
---------- ----------- -----------
Net cash provided by financing activities 429,194 736,189 2,420,694
---------- ----------- -----------
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
10 Month period
Fiscal Year Ended ended Fiscal Year Ended
December 31, 1998 December 31, 1997 February 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net (decrease) increase in cash (52,104) 67,086 (50,959)
Cash at beginning of period 125,220 58,134 109,093
-------- -------- ----------
Cash at end of period $73,116 $125,220 $58,134
-------- -------- ----------
-------- -------- ----------
Cash paid for interest $471,166 $900,855 $1,093,648
-------- -------- ----------
-------- -------- ----------
</TABLE>
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
F-9
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
BPI Packaging Technologies, Inc. (the "Company") converts commercially
available high molecular weight, high density polyethylene 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.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
The Company recognizes revenues on an accrual basis upon shipment of
products and passage of title to the Company's customers. Concentration of
credit risk with respect to accounts receivable is limited due to the number and
diversity of customers comprising the Company's customer base. The Company
maintains reserves for potential credit losses.
INVENTORIES
The Company values its inventories at the lower-of-cost, determined using
the first-in, first-out (FIFO) method, or market. Cost includes material and
conversion costs.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost which includes costs of assets
constructed or purchased, related delivery and installation costs and interest
incurred on significant capital projects during their construction and
installation periods. Property under capital leases is recorded at the lower of
the present value of future minimum rental payments or the fair value of the
property at the beginning of the lease term. Maintenance and repairs that do not
extend the useful life of the asset or improve capacity are charged to expense
when incurred. Machinery and equipment are depreciated using the straight-line
method over a period of eleven years. Leasehold improvements consist of costs
relating to buildings and
F-10
<PAGE>
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.
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
F-11
<PAGE>
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).
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
F-12
<PAGE>
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 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 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, 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.
In conjunction with the financing, DGJ required certain members of the
Company's management to invest, in the aggregate, $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.
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. Unsecured creditors
of the Company owed approximately $3,009,000 as of January 27, 1999 selected the
discounted payment plan resulting in extraordinary income of $1,731,762 during
the first quarter of 1999. The balance of the unsecured creditors selected the
three year payment plan or are currently negotiating with the Company or did not
reach discounted or deferred agreements with the Company. The Company did not
recognize any gain under the three year payment arrangement. This gain of
$1,731,762 was recorded as extraordinary income amounting to $0.08 per share.
The tax effect of this gain reduced the net operating tax loss carryforward from
prior years which has been fully reserved and, therefore, has no impact on
current operations.
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
F-13
<PAGE>
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.
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 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, warrants and Series C Preferred Stock purchased by DGJ for
$3,200,200 were valued using a discounted cash flow analysis, at an assumed rate
of 14%. Net cash proceeds after fees were assigned to the various components of
this transaction based upon the discounted value of the Note at 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 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 fair market value of the Common Stock on January 27, 1999 was
$0.28 per share. The warrants have an exercise price of $0.04 per share.
The plan to restructure the Company's operations and management, which
began in the third quarter of 1998, to satisfy past due trade creditors and past
due operating and capital lease balances, is progressing.
F-14
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
Pro Forma Balance Sheet
December 31, 1998
<TABLE>
<CAPTION> Pro Forma
As audited December 31,
December 31, 1998 Adjustments 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 882,389 882,389
receivable, net
Inventories, net 717,413 717,413
Prepaid expenses 51,420 51,420
Total current 1,724,338 2,628,438
assets
Property and 15,290,305 1,678,973
equipment, net 16,969,278
Deposits - 149,851 (75,940) 73,911
leases and
equipment
purchases
Loans to 6,072 6,072
officers, net
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 584,433 (584,433) --
payable
Capital lease 3,800,286 (3,800,286) --
obligations due
within one year
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
--------- --------------
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 1,466,954 1,466,954
convertible
preferred stock,
$.01 par value
Series A 674,032 674,032
convertible
preferred stock,
$.01 par value
Series C -- 100 100
F-15
<PAGE>
redeemable
preferred stock,
$.01 par value
Common stock,
$.01 par value; 214,956 214,956
shares
authorized --
60,000,000
Capital in excess 44,912,833 480,000 (100)
of par value 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 stockholders'
equity $ 17,751,965 3,500,000 (1,960,900) 250,000 0 1,356,337 $ 20,897,402
------------------ ----------- ----------- ----------- -------------- -------------- ---------------
------------------ ----------- ----------- ----------- -------------- -------------- ---------------
</TABLE>
NOTE 3: ACCOUNTS RECEIVABLE-TRADE
Accounts receivable-trade consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Accounts receivable-trade $ 1,066,841 $ 1,071,239
Allowance for doubtful accounts (109,452) (275,000)
Allowance for credits (75,000) (75,000)
-------------- --------------
$ 882,389 $ 721,239
-------------- --------------
-------------- --------------
</TABLE>
NOTE 4: INVENTORIES
Inventories, net of valuation reserves, consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Raw material $ 296,427 $ 285,058
Finished goods 420,986 1,062,808
Reserves -- (290,000)
-------------- --------------
$ 717,413 $ 1,057,866
-------------- --------------
-------------- --------------
</TABLE>
Raw material includes virgin high density, high molecular weight
polyethylene ("HDHMWPE") resin, re-processed HDHMWPE material, color inks and
additives, and post-industrial scrap generated during the manufacturing process.
F-16
<PAGE>
NOTE 5: PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Machinery and equipment $ 24,817,161 $ 24,817,161
Leasehold improvements 3,611,407 3,611,082
Office furniture and fixtures 303,731 303,731
Motor vehicles 19,900 19,900
-------------- --------------
28,752,199 28,751,874
Less accumulated depreciation and
Amortization (13,461,894) (10,923,014)
------------ ------------
$ 15,290,305 $ 17,828,860
-------------- --------------
-------------- --------------
</TABLE>
Assets recorded under capital leases and included in property and
equipment were as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Machinery and equipment $ 13,041,270 $ 13,041,270
Less accumulated amortization (5,478,653) (4,055,971)
--------- ---------
$ 7,562,617 $ 8,985,299
-------------- --------------
-------------- --------------
</TABLE>
Depreciation and amortization expense relating to fixed assets was
$2,538,880, $2,186,621 and $3,216,189 for the year ended December 31, 1998, the
10 month period ended December 31, 1997 and for the year ended February 28,
1997, respectively, of which $1,422,682, $1,185,568 and $1,158,749, related to
amortization of equipment held under capital leases, respectively.
During Fiscal Year 1997, in accordance with SFAS No. 121, the Company
wrote-down machinery and equipment to their estimated fair value, which resulted
in a non-recurring charge of $3,335,070, which is included in the $5.9 million
write-down of impaired assets and related expenses (Note 6).
NOTE 6: WRITE-DOWN OF IMPAIRED ASSETS AND PATENT INFRINGEMENT SETTLEMENT
During the fourth quarter of the fiscal year ended February 28, 1997, the
Company made the decision to exit the traditional T-shirt bag business. The
application of Statement of Financial Standard No. 121, "Accounting for the
Impairment of Ling-Lived Assets and Long-Lived Assets to be Disposed Of," caused
the Company to recognize a non-cash charge of $5,385,000 to write down to fair
value certain long-lived assets consisting principally of machinery and
equipment, patents and goodwill, together with other related expenses. The
method used to determine fair value was a discounted cash flow approach. The
assets consist of those related to the manufacture of the traditional T-shirt
bag business.
F-17
<PAGE>
Description of impaired assets; patents, goodwill and plant assets relating
to bag making facilities:
<TABLE>
<S> <C>
Patents $1,044,577
Goodwill 620,353
Plant equipment 3,335,070
Reserve for agreement with
bag-making equipment 285,000
Write-off of rubber plates used
in bag-making equipment 100,000
----------
Total $5,385,000
----------
----------
</TABLE>
Fair value of all assets, except plant equipment, was determined to be zero
based upon the Company's decision to exit the traditional T-shirt bag business.
Fair value of the plant equipment was determined based upon projected future
cash flows for the remaining useful life, present book value and residual value
of assets at the end of its useful life, with cash flows both discounted at 14%
per year (average cost of secured debt financing).
A patent infringement suit settlement of $512,648, including legal defense
costs, was recorded during Fiscal Year 1997.
Due to the increase in the Company's conversion capacity, the Company
re-entered the standard grocery T-shirt bag business in the third quarter of
1998 to realize marginal contributions to fixed costs.
NOTE 7: PATENTS
The Company owns several patents. No costs associated with patent
applications were capitalized during the year ended December 31, 1998, the 10
month period ended December 31, 1997 and fiscal year ended February 28, 1997.
Amortization expense of approximately $87,000 was recorded in the Fiscal Year
ended February 28, 1997.
In conjunction with the write-down of impaired assets and related expenses,
the write-off of all patent costs and associated accumulated amortization
resulted in a charge of $1,045,000 to the Statement of Operations in the Fiscal
Year ended February 28, 1997. The total accumulated amortization balance at
February 23, 1996 was approximately $313,000. As more fully described in Note 6,
this charge is the result of the Company's decision to exit the traditional
T-shirt bag product lines.
NOTE 8: OTHER ASSETS
Other assets are comprised of the following:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Spare parts and supplies, net $ 334,703 $ 669,405
Other assets 246,696 368,502
-------------- --------------
$ 581,399 $ 1,037,907
-------------- --------------
-------------- --------------
</TABLE>
F-18
<PAGE>
NOTE 9: ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Employee compensation and benefits $ 50,750 $ 207,283
Accrued lease expense 1,643,377 1,643,377
State taxes and penalties 299,096 550,000
Professional fees 47,000 140,000
Other 636,016 426,688
-------------- --------------
$ 2,676,239 $ 2,967,348
-------------- --------------
-------------- --------------
</TABLE>
NOTE 10: TRADE NOTES PAYABLE
The Company converted two trade payables into unsecured trade notes payable
which matured on March 15, 1998 and April 17, 1998 and bear fixed interest rates
of 10% and 8.5%. As of December 31, 1998, the Company was in default on both of
the above trade notes payable. These notes payable were satisfied in connection
with the financial restructuring, which occurred subsequent to December 31, 1998
(Note 2).
NOTE 11: NOTE PAYABLE
At December 31, 1998, the Company had a $2,000,000 revolving line of credit
secured by accounts receivable. Borrowings under the line of credit were subject
to 70% of qualifying accounts 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.
F-19
<PAGE>
NOTE 12: CAPITAL LEASE OBLIGATIONS
The Company's capital lease obligations consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Total minimum lease payments $ 4,307,824 $ 5,006,262
Less amount representing interest 507,538 580,057
-------------- --------------
Obligations under capital leases 3,800,286 4,426,205
Less amounts due within one year 3,800,286 4,426,205
Long-term portion $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
As all capital leases were in default as of December 31, 1998 and 1997, all
future payments have been classified as current. Subsequent to December 31,
1998, these capital lease obligations were satisfied in connection with the
financial restructuring (Note 2).
NOTE 13: STOCKHOLDERS' EQUITY
As of December 31, 1998 the Company had 21,495,621 shares of common stock
outstanding. During Fiscal Year 1997, covering the period from February 24, 1996
to February 28, 1997, a total of 1,207,500 shares were issued in a private
placement with net proceeds of $2,206,868. From March 1, 1997 to December 31,
1997, a total of 4,991,125 shares were issued in a private placement with net
proceeds of $4,403,991. An additional 387,500 shares were issued relating to the
private placements from March 1, 1997 to December 31, 1997. During the year
ended December 31, 1998, a total of 1,868,900 shares were issued in a private
placement with net proceeds of $1,282,951.
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
F-20
<PAGE>
ended December 31, 1998 and the 10 month period ended December 31, 1997, no
shares of common stock were issued. Based on the operating results of RC
America, Inc. for Fiscal Year 1997 and Fiscal Year 1996, an additional 2,640 and
2,550 shares were issued in May 1997 and May 1996, respectively.
Holders of the Series A Preferred Stock are entitled to receive, in each
fiscal year in which the Company attains net earnings after tax, as defined,
non-cumulative dividends at the annual rate of $0.34 per share. Such dividends
will be payable in cash if net earnings after tax exceed 150% of the amount
necessary to pay the dividends and in cash, common stock, or any combination
thereof if such net earnings are less than such amount. Dividends on the Series
B Preferred Stock are payable before any dividends are paid or declared for the
Series A Preferred Stock and the common stock. The holders of the Series B
Preferred Stock are entitled to receive non-cumulative dividends at an annual
rate of $.60 per share payable in cash.
NOTE 14: WARRANTS TO PURCHASE SECURITIES OF THE COMPANY
An aggregate of 153,000 shares of Common Stock and 50,000 shares of Series
A Preferred Stock were issued to the underwriters of the second public offering,
at an exercise price of $2.25 in May 1996 upon the exercise of Class A Warrants
which would have expired on June 13, 1996.
In conjunction with the third public offering, an aggregate of 48,725 Class
A Warrants were exercised at $5.00 before the expiration date of June 15, 1995
and an aggregate of 456,931 Class B Warrants were exercised at $2.80 before the
expiration date of October 6, 1996. Additionally, an aggregate of 299,600 shares
of Common Stock were issued to the underwriters of the third public offering at
an exercise price of $2.25 in May 1996 upon the exercise of Class B Warrants
which would have expired on October 7, 1997.
As of December 31, 1997 all Class A and Class B warrants issued to the
public stockholders and the underwriters were exercised or expired.
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
F-21
<PAGE>
zero percent as compared to the Federal statutory rate of 34% because the
Company has placed a full valuation allowance on its net deferred tax assets.
Cumulative temporary differences under SFAS No. 109 are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Allowance for uncollectible accounts $ 310,655 $ 377,322
Net operating loss carryforward 13,270,876 12,825,784
Inventory 53,522 151,993
Write-down of fixed assets 1,114,955 1,226,450
Write-down of patents 367,862 400,031
Allowance for lease losses 685,606 685,606
Investment tax credit 528,200 528,200
Other items 482,291 489,712
-------------- --------------
Total deferred tax assets $ 16,813,967 $ 16,685,098
-------------- --------------
-------------- --------------
Deferred tax liabilities:
Excess depreciation $ 162,376 $ 76,197
Prepaid rent 99,345 143,281
-------------- --------------
Net deferred tax assets $ 16,552,246 $ 16,465,620
Deferred tax asset valuation allowance $ (16,552,246) $ (16,465,620)
</TABLE>
A valuation allowance is required to be established for deferred tax assets
if, based on the weight of available evidence, it is more likely than not that
some portion or all of the deferred tax asset will not be realized. The Company
has determined that a valuation allowance is required as it is not certain that
the results of future operations will generate sufficient taxable income to
realize the deferred tax asset.
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.
F-22
<PAGE>
NOTE 17: RELATED PARTY TRANSACTIONS
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%.
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.
F-23
<PAGE>
On January 27, 1999 and March 22, 1999, the Company entered into employment
agreements with certain officers. Among other provisions, these agreements
provide for a minimum base compensation of $650,000 in the aggregate plus
incentive compensation based on pre-tax profits and for severance payments.
These agreements expire on various dates from June 30, 2000 through March 2002.
NOTE 19: OPERATING LEASES AND COMMITMENTS
The Company's lease agreement for its North Dighton facility was
renegotiated effective January 1, 1996 and runs for a period of 12 years. The
Company has entered into various operating leases for certain manufacturing
equipment expiring on various dates through 2007.
The future minimum rental commitments under non-cancelable operating leases
as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating
Fiscal Year Leases
----------- ------
<S> <C>
1999 1,180,000
2000 893,000
2001 480,000
2002 383,000
2003 383,000
Thereafter 2,243,000
----------
$5,562,000
----------
----------
</TABLE>
Expense under operating leases was $937,340, $1,410,000 and $1,646,000 for
the year ended December 31, 1998, the 10 month period ended December 31, 1997
and the Fiscal Year ended February 28, 1997, respectively. All operating leases
and real-estate leases were in default as of 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
F-24
<PAGE>
Option Plans during the 10 month period ended December 31, 1997 and the year
ended February 28, 1997 are summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Ten Month Period Ended
December 31, 1998 December 31, 1997
----------------- -----------------
Weighted Average Weighted Average
Options Shares Exercise Price Shares Exercise Price
------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 783,117 $3.54 773,830 $3.98
Options granted whose exercise price
equal the market price of the stock on
grant date 25,000 $1.25 156,000 $1.75
Options granted whose exercise price is
greater than the market price of the
stock on grant date
Canceled (424,430) $2.23 (146,713) $3.98
------- -------
Outstanding at year end 383,687 $2.70 783,117 $3.54
------- -------
------- -------
Options exercisable at period end 358,687 629,317
------- -------
------- -------
Weighted average fair value of options
granted during the period $1.25 $1.75
</TABLE>
In April of 1997, the Company changed the exercise price for selected
options granted in prior periods from $6.25, $4.00, $3.88 and $3.00 to $2.50 per
share.
<TABLE>
<CAPTION>
Year Ended
February 28, 1997
-----------------
Weighted Average
Options Shares Exercise Price
------- ------ --------------
<S> <C> <C>
Outstanding at beginning of year 795,630 $4.04
Options granted whose exercise price equal the market price of
the stock on grant date 12,500 2.40
Options granted whose exercise price is greater than the market
price of the stock on grant date 9,200 2.40
Canceled (43,500) 3.49
------
Outstanding at year end 773,830 3.98
-------
-------
Options exercisable at period end 589,377
-------
-------
Weighted average fair value of options granted during the period $2.40
</TABLE>
F-25
<PAGE>
In March 1996, the Company granted 18,500 options with an exercise price of
$2.38. In January 1997, the Company granted 3,200 options with an exercise price
of $2.50. In March 1996, the Company changed the exercise price for selected
options, which were granted in fiscal year 1993, from $6.25 to $4.00, and
selected options, which were granted in fiscal year 1994, from $6.63 to $4.00.
The following table summarizes information about employee options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Weighted Average
Range of Exercise Number Outstanding at Remaining Weighted Average
Prices December 31, 1998 Contractual Life Exercise Price
------ ----------------- ---------------- --------------
<S> <C> <C> <C>
$1.25 - 3.00 336,937 4.79 $2.42
3.88 - 4.75 24,250 4.78 4.13
5.50 - 5.75 22,500 6.10 5.58
-------
383,687 4.86 2.71
-------
-------
<CAPTION>
Options Outstanding
-------------------
Range of Exercise Number Outstanding at Weighted Average
Prices December 31, 1998 Exercise Price
------ ----------------- --------------
<S> <C> <C>
$1.25 - 3.00 313,737 $2.51
3.88 - 4.75 22,450 4.14
5.50 - 5.75 22,500 5.58
-------
358,687 2.81
-------
-------
</TABLE>
FAIR VALUE DISCLOSURES
At December 31, 1998, the Company had three option plans, which are
described above. The Company applies APB 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its stock option plans. Had compensation cost for the Company's three stock
option plans been determined based on the fair value at the grant dates for
awards under those plans consistent with the method of FASB Statement 123, the
Company's net loss and loss per share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Ten Month Period
Fiscal Year Ended Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C> <C>
Net Loss As reported ($3,239,213) ($11,338,869)
Pro forma ($3,245,145) ($11,468,958)
Basic and diluted As reported ($0.16) ($0.73)
Net loss per share Pro forma ($0.16) ($0.74)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the applicable periods: dividend yield of
0.0% for both periods; risk free interest rate of 5.16% for options granted
during the year ended December 31, 1998 and 5.81% for options granted and
re-priced during the
F-26
<PAGE>
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.
NOTE 23: SIGNIFICANT FOURTH QUARTER ADJUSTMENTS TO THE TEN MONTH PERIOD 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.
F-27
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
Schedule II
Rule 12-09 Valuation and Qualifying Accounts and Reserves
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additional Deductions
Balance at Charged to Accounts Balance at end of Description of
Description 1/1/98 Expenses Written-Off Period Changes
----------- ------ -------- ----------- ------ -------
<S> <C> <C> <C> <C> <C>
Reserve for 75,000 0 0 75,000
Accounts Receivable
Credits
Allowance for 275,000 0 (165,548) 109,452 Allowance was
Doubtful Accounts reduced based on
evaluation of
Accounts
Receivable at
12/31/98
Inventory Reserve 290,000 0 (290,000) 0 Inventory
reserved at
12/31/97 was
sold during the
year ended
12/31/98
</TABLE>
S-1
<PAGE>
Valuation and Qualifying Accounts and Reserves
For the 10 Month Period Ended December 31, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additional Deductions
Balance at Charged to Accounts Balance at end of Description of
Description 3/1/97 Expenses Written-Off Period Changes
----------- ------ -------- ----------- ------ -------
<S> <C> <C> <C> <C> <C>
Reserve for 75,000 0 0 75,000
Accounts Receivable
Credits
Allowance for 50,000 225,000 0 275,000 Allowance was
Doubtful Accounts Increased based
on evaluation of
Accounts
Receivable at
12/31/97
Inventory Reserve 850,000 0 (560,000) 290,000 Reserve was
reduced based on
evaluation of
Inventory at
12/31/97
</TABLE>
S-2
