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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 Somerset Avenue, North Dighton, Massachusetts 02764
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(508) 824-8636
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $.01 par value
Series A Convertible Preferred Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the Registrant's voting stock issued and
outstanding as of March 20, 2000 was $4,771,597 for the Common Stock and
$183,758 for the Series A Convertible Preferred Stock.
As of March 20, 2000, 28,068,221 shares of Common Stock, $0.01 par value
per share, were outstanding and 183,758 shares of Series A Convertible Preferred
Stock, $0.01 par value per share, were outstanding.
Documents Incorporated by Reference
Portions of the definitive proxy statement to be filed prior to April 28,
2000, pursuant to Regulation 14A of the Securities Exchange Act of 1934, are
incorporated by reference into Part III of this Form 10-K.
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FORWARD-LOOKING STATEMENTS OR INFORMATION
This Form 10-K includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Form 10-K which address
activities, events and developments that the Company expects or anticipates will
or may occur in the future, including such things as future capital expenditures
(including the amount and nature thereof), expansion and other development
trends of industry segments in which the Company is active, business strategy,
expansion and growth of the Company's business and operations and other such
matters are forward-looking statements. Although the Company believes the
expectations expressed in such forward-looking statements are based on
reasonable assumptions within the bounds of its knowledge of its business, a
number of factors could cause actual results to differ materially from those
expressed in any forward-looking statements, whether oral or written, made by or
on behalf of the Company. Many of these factors have previously been identified
in filings of statements made by or on behalf of the Company.
All phases of the Company's operations are subject to influences outside
its control. Any one, or a combination, of these factors could materially affect
the results of the Company's operations. These factors include: sales,
competition, inflation, raw material price increases, rate of market penetration
for products, new product development and market acceptance, litigation,
interest rate fluctuations, availability of equity financing, availability of
capital and operating lease financing, availability of bank or other financial
institution lines of credit and other capital market conditions. Forward-looking
statements made by or on behalf of the Company are based on a knowledge of its
business and the environment in which it operates, but because of the factors
listed above, actual results may differ from those in the forward-looking
statements. Consequently, all of the forward-looking statements made are
qualified by these cautionary statements and there can be no assurance that the
actual results or developments anticipated by the Company will be realized or,
even if substantially realized, that they will have the expected consequences to
or effects on the Company or its business or operations.
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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: (i) 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 (ii) Market Media Corporation, which sold and marketed in-store
advertising and promotion programs. In conjunction with suspension of the
operations of RC America, Inc. and Market Media Corporation on June 27, 1998,
the Company 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 Financings
On January 27, 1999, the Company entered into a Securities Purchase
Agreement (the "Agreement") with DGJ, L.L.C., a Delaware limited liability
company ("DGJ") (the "January 1999 Financing"), under which the Company issued
and sold to DGJ:
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 (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.
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 $300,000, in
the aggregate, in the Company's warrants. As of March 20, 2000, 6,563,000 of the
7,500,000 issued warrant shares were converted into Common Stock.
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As part of the January 1999 Financing, the Company entered into a
factoring agreement with Franklin Capital Corporation ("Franklin"), an entity
affiliated with Gary Edidin, one of the Company's Directors and a member of DGJ,
whereby the Company, with full recourse, assigned and sold to Franklin its
entire interests in all of its present and future accounts and similar rights
and instruments arising from its sales of goods, then existing or created
thereafter. The Company paid Franklin a factoring fee in an amount equal to 2%
of the gross amount of such receivables, however, the minimum commission for any
receivable was $5.00.
Under this factoring agreement, Franklin was able to advance to the
Company up to 85% of the purchase price of the Company's receivables as they
were created, subject to a maximum advance at any time outstanding of
$2,000,000. Interest was charged for the number of days that advances of the
purchase price of the receivables were made to the Company prior to the date
they were paid and the number of days that the advances from Franklin's account
remain outstanding at the prime rate plus 2% per annum, except that interest was
in no event less than 8% per annum. The Company retired this factoring agreement
on August 19, 1999 when the Company entered into the relationship with LaSalle
Business Credit, Inc. ("LaSalle") and DGJ, as described below.
The Company also issued a demand revolving note to Franklin in the
principal sum of $1,000,000 at an interest rate of 5% above the prime rate,
however, the interest charged could not be less than a minimum annual fixed rate
of 12 3/4%. This note was secured by a security agreement between the Company
and Franklin, which granted Franklin a continuing security interest in the
Company's present and future accounts, inventory, equipment and other property.
Pursuant to the terms of this agreement, the amount eligible to be advanced to
the Company under this revolving note was limited to the lesser of $1,000,000 or
the sum of 50% of eligible inventory and 50% of eligible raw materials. The
Company retired its obligations under this note on August 19, 1999.
The Company also refinanced its equipment, capital and operating leases in
January 1999 when it entered into an equipment lease with DGJ. The new lease
carries no debt reduction obligation and is treated as long-term debt. The
combined monthly payments under the retired leases were reduced from
approximately $305,000 per month to $102,000 per month under the new equipment
lease with DGJ. The term of the lease is ten years and its monthly payment of
$102,000 represents interest only.
The Company is in default on the equipment lease with DGJ as it failed to
make lease payments of $102,000 per month for the months of September 1999
through March 2000, or $714,000 in total. As this has caused an event of
default, as defined in the equipment lease, DGJ is entitled to various rights
and remedies under the equipment lease and the Agreement including, but not
limited to, the right to have any and all remaining sums under the lease become
immediately due and payable and the right to repossess the leased equipment. As
of March 20, 2000, DGJ has indicated a willingness to defer exercising its
rights and remedies upon default pending discussion with the Company regarding
how the equipment lease default is to be cured.
Also in January 1999, the Company entered into agreements with most of its
unsecured creditors that provided for a discounted payment in February 1999 or
permitted the Company to pay the entire balance without interest over a
three-year period.
On August 19, 1999, the Company entered into a series of transactions with
LaSalle and DGJ to refinance the indebtedness incurred as part of the January
1999 Financing. The Company's loan agreement with LaSalle provides the Company
with a $4,000,000 revolving line of credit. This credit facility is secured by a
first priority security interest in its accounts receivable, inventory and
certain other assets. DGJ is the lessor of substantially all the equipment that
the Company uses, under a capital lease, and holds a first priority security
interest in its equipment. LaSalle received a second priority security interest
in the Company's equipment. Certain of the proceeds of this credit facility were
used to retire existing indebtedness the Company owed to Franklin, including the
factoring agreement and revolving note described above, while the
4
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remaining proceeds were used to retire some of the Company's other indebtedness
and for working capital purposes. This credit facility bears interest at a
fluctuating rate equal to 1.5% per annum above the prime rate of LaSalle in
effect from time to time and matures in three years. As of March 20, 2000, the
balance outstanding under this agreement is $2,974,515.
In addition, the Company and DGJ amended and restated the Note since the
Company was unable to fulfill the financial obligations under the terms of the
loan and lease documents with DGJ. To cure the defaults, the Company restated
the Note to include, in addition to the original principal and interest accrued
thereunder at 6%, all amounts outstanding under: (i) an equipment loan made by
DGJ to the Company as of March 1, 1999 in the original principal amount of
$218,665; (ii) a series of advances made to the Company by Franklin during the
second quarter of 1999 (which totaled approximately $900,000, and were reduced
to approximately $660,000 after application of proceeds of the credit facility),
rights to repayment of which were subsequently assigned by Franklin to the
Company; (iii) delinquent payments under the DGJ lease of approximately
$570,000; and (iv) interest on the foregoing. The resulting balance of
$4,773,585 was restated as the principal amount of a new amended promissory
note. The amended promissory note is in the original principal amount of
$4,773,585 and is payable as follows: $3,200,000 of principal is due and payable
on February 1, 2004, or earlier by acceleration, as described in the Agreement,
or otherwise, and $1,573,585 is due and payable pursuant to the terms of an
intercreditor agreement between DGJ and LaSalle. The amended promissory note
bears interest at a rate of 10% per annum, and is secured by all Company assets,
subordinated to LaSalle except as to equipment.
The Company failed to make interest payments to DGJ totaling approximately
$296,000 during the period of September 1999 through March 2000. As this has
caused an event of default, as defined in the amended promissory note, DGJ is
entitled to various rights and remedies under the amended promissory note and
the Agreement including, but not limited to, the right to declare all or any
part of the unpaid principal amount of the amended promissory note outstanding
to be due and payable. As of March 20, 2000, DGJ has indicated a willingness to
defer exercising its rights and remedies upon default pending discussion with
the Company regarding how the amended promissory note default is to be cured.
During the period of September 1, 1999 through March 30, 2000, DGJ made
additional advances to the Company totaling $1,300,000. These loans bear
interest at the rate of 10% per annum with interest payable monthly and the
principal is due and payable on the same date as the maturity date of the
amended promissory note discussed above.
At the Company's annual meeting of stockholders on August 24, 1999, its
stockholders approved the increase in its authorized number of shares of Common
Stock from 60,000,000 to 150,000,000 shares. The Company utilized some of these
newly authorized shares to complete a rights offering of 15,000,000 shares of
its Common Stock in March 2000 resulting in the Company receiving $600,000 of
gross proceeds for working capital and other corporate-related purposes.
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:
5
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<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------
2000
ANNUAL MARKET PATENT
(Millions) STATUS COMPETITION
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<S> <C> <C> <C>
HANDI-SAC(TM) $37 U.S. Patent Direct: Sonoco T-Sack
Convenience, Issued 1993 Roll Bag
Hardware/Automotive Indirect: Paper and
and Drug Flat T-Sacks
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FRESH-SAC(R) $63 U.S. Patent Direct: Crown Poly,
T-Shirt Produce Bag Issued 1993 Sealed
Air and Better Bag
Indirect: Produce Bag
On a Roll
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INSULATION OVERWRAP $15 Process Direct:
Technology Vanguard Plastics
No Indirect
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HIGH PERFORMANCE PRINTED Under Evaluation Process Direct: Tredegar Ind.
TISSUE OVERWRAP FILM Technology No Indirect
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T-SHIRT CARRYOUT BAG $850 U.S. Patent Direct: Vanguard,
Issued 1989 Sonoco
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. Management
estimates the annual market potential for HANDI-SAC(TM) at approximately $37
million in 2000. The market is split approximately 70% plastic and 30% paper.
FRESH-SAC(R) is a thin T-shirt produce bag sold in a patented dispensing
mechanism. This program is presently being sold to approximately 600
supermarkets directly and through distributors. Management estimates the annual
market potential for the FRESH-SAC(R) Produce Profit Builder Program to be $63
million in 2000.
The Company has numerous test and trial orders that it is currently
working on from applications ranging from insulation overwrap to high
performance printed tissue overwrap film. The Company anticipates receiving
orders from many of its customers in 2000.
Since the above applications did not fill the Company's conversion
capacity of 40 million pounds of HMWHDPE resin, 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.
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Competition
The plastic film and bag markets are highly competitive. There are high
barriers of entry into the plastic bag and film markets due to significant
capital requirements. The Company's capacity is estimated at approximately 40
million pounds annually, depending on product mix.
In the patented products, HANDI-SAC(TM) has direct competition from Sonoco
Products Company's T-sack roll bag product and flat T-sacks provided by Sonoco
Products Company, Vanguard Plastics and others; as well as paper bags.
FRESH-SAC(R) has direct competition from: Crown Poly and Sealed Air, which
manufacture plastic roll bags in a patented dispensing system; Better Bag, which
manufactures flat produce bags; and indirect competition from a variety of
traditional plastic low-cost bag-on-a-roll manufacturers.
The Company has direct competition for its thin, clear film used for
tissue overwrap from Tredegar Industries, which has a similar thin film.
However, management believes that Tredegar Industries has an exclusive five year
supply agreement with a consumer packaged goods company that prohibits it from
supplying other companies and, therefore, Tredegar Industries is not presently
considered to be a competitor. The Company competes with the major manufacturers
of flexible packaging and other companies that manufacture thick, plastic films
for tissue overwrap. The Company believes that its tissue overwrap film is more
cost effective than any competitive product.
In the traditional plastic grocery T-shirt bag market, which the Company
exited during the 10 month period ended December 31, 1997 and re-entered in the
third quarter of 1998, the Company's competitors include large companies: i.e.,
Sonoco Products Company, Interplast Corporation and Vanguard Plastics.
Proprietary Processes, Patents and Other Rights
The Company has developed patents related to T-shirt bags. The Company
owns a patent issued in 1989 for its T-shirt carryout bag. In 1993, the Company
was issued a U.S. patent for the dispensing system used in conjunction with its
FRESH-SAC(R) and HANDI-SAC(TM) products. The Company has a registered trademark
in the United States for FRESH-SAC(R). In 1996, the Company was issued a U.S.
patent for its FRESH-SAC(R) advertising vehicle called the Fresh Focus
CartridgeTalker(TM).
No assurance can be given that the patents currently owned by the Company
and any patents that may be granted in the future will be enforceable or provide
the Company with meaningful protection from 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.
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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, printed
with customer information using aqueous-based inks and shipped to customers. If
the film is to be used to manufacture bags, it is then slit-sealed into bags,
reviewed by quality control inspectors, boxed and shipped to customers. The
Company retains customer design printing plates for future use.
The Company's manufacturing equipment consists of blown film extrusion
lines, printing presses, bag making machines and film slitting operations.
Additional slitting capacity was acquired in the first quarter of 1999.
Raw Materials
HMWHDPE resin comprises the principal raw material in the Company's
products, the principal component of which is ethylene, a derivative of natural
gas. HMWHDPE resin is currently available from several sources. During the year
ended December 31, 1999, as in some prior fiscal years, resin prices fluctuated
significantly, a trend the Company expects will continue.
Backlog
The Company's backlog of firm orders at March 20, 2000 was $249,737, as
compared to $889,164 at March 22, 1999. 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, 1999, three of the Company's customers
accounted for more than 10% of sales: at 20%, 19% and 15%. Changes in the
Company's marketing and sales strategy will affect its distribution channels
and change the forecasted percentage of concentration. Management does not
believe the loss of any one of these major customers will have a material
adverse effect on the Company's business.
Employees
On February 23, 2000, Hanspeter Schulz resigned as President and as a
member of the Board of Directors of the Company to pursue personal interests.
However, Dr. Schulz has been serving the Company as a consultant since such
date. In conjunction with Dr. Schulz's resignation, the Board of Directors
promoted James F. Koehlinger, the Company's Chief Financial Officer and
Treasurer, to the position of Acting Chief Operating Officer.
As of March 20, 2000, the Company had 132 full-time employees. None of the
Company's employees are represented by a union.
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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 adjusted based on certain indices. The monthly rental
payment was reduced to $26,255 effective March 1, 1998 due to a reduction in
space. The Company is responsible for payment of real estate taxes, which are
approximately $52,000 per year, and maintenance costs, which are approximately
$30,000 per year. The Company has an option to extend the lease for a seven year
period at the expiration of the lease.
Item 3. Legal Proceedings
Currently, the Company 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. This notice alleges that the Company's
former management made misrepresentations concerning registration rights
attendant to the securities purchased by them pursuant to Regulation D, Rule
144A and Regulation S of the Securities Act. On October 28, 1999, the securities
held by this group of investors were registered with the SEC by prospectus and
registration statement. The Company believes that any disposition in connection
with this potential claim will not have a material effect on its operations.
Except as noted below, no further action has been taken by this group of
investors as of March 20, 2000.
On October 4, 1999, Professional Edge Fund, L.P. ("Pro Edge"), one of
the group of investors, described above, filed suit against the Company in
the Court of Common Pleas of Philadelphia County Trial Division, Action No.
000147. Pro Edge also named as defendants C. Jill Beresford, the Company's
Vice President of Marketing, Dennis N. Caulfield, the Company's former Chief
Executive Officer and the Company's former Chairman of the Board of
Directors, and Newport Capital Partners in this matter. Pro Edge has alleged
that the Company has breached a contract in regards to the registration of
shares it purchased in a private placement of the Company's shares in
November 1997 and that the Company has been unjustly enriched based on the
sale of these unregistered shares. Pro Edge sought damages in an amount of
approximately $1,013,000 plus interest, costs and expenses of the lawsuit. On
February 28, 2000, the Company was advised that this action was dismissed
without prejudice based upon improper venue. As of March 20, 2000, no further
action has been taken.
On November 26, 1997, the estate of a former temporary worker, Mr. John
Dion, has filed a wrongful death suit against the Company in Bristol County
(Massachusetts) Superior Court, Civil Action No. 97-01688. The lawsuit alleges
that the Company's actions caused or contributed to Mr. Dion's December 7, 1994,
fatal forklift accident at the Company. Both parties continue to conduct
discovery regarding this accident. The Company's general liability insurance
carrier is vigorously defending the Company against these allegations. The
outcome of this lawsuit remains uncertain. The Company has a total of $3 million
in insurance coverage in place. The Company believes the insurance coverage is
sufficient to cover its exposure.
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 1999, 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 March 20, 2000, 356 holders of record held 28,068,221 shares of the
Company's Common Stock and 62 holders of record held 183,758 shares of the
Company's 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 high and low bid prices on the
NASDAQ OTC. The quotations represent inter-dealer quotations without adjustment
for retail markups, markdowns or commissions and may not represent actual
transactions.
COMMON STOCK High Sale/Bid Low Sale/Bid
------------- ------------
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
Third Quarter $ 0.30 $ 0.11
Fourth Quarter $ 0.28 $ 0.05
2000
First Quarter (through March 20, 2000) $ 0.20 $ 0.06
- - ----------
On March 20, 2000, the high ask price of the common stock was $0.20; the
low bid price was $0.13 and the close price was $0.17.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered
Securities
The Company sold 3,800,097 shares of Common Stock, in the aggregate, in
July 1997, October 1997, December 1997 and June 1998. In each of such offerings:
(i) the issuances of the securities were deemed to be exempt from registration
under Section 4(2) and Regulation D of the Securities Act of 1933, as amended
(the "Securities Act"), as transactions by an issuer not involving any public
offering; (ii) the sale proceeds were used as part of the Company's working
capital; and (iii) the securities were then registered under the Securities Act
on October 28, 1999. The sole purpose of such offerings was to register
securities acquired by the Company's stockholders through private placements of
its equity securities with accompanying warrants.
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The Company did not receive any part of the proceeds of any sale of the
shares sold by the stockholders. The Company paid all of the costs and fees
relating to the registration of such shares; however, the Company did not pay
any discounts, concessions or commissions payable to underwriters, dealers or
agents incident to the offering of such shares.
In January 1999, the Company completed a private placement offering under
Regulation D of the Securities Act to DGJ, an accredited investor as defined in
Regulation D, with total gross proceeds of $3,200,200. The Company sold
1,629,930 shares of its Series C preferred stock for $100, issued warrants
exercisable for 80,000,000 shares of Common Stock at $0.04 per share for $100
and executed a promissory note in favor of DGJ in the principal amount of
$3,200,000, as part of the January 1999 Financing.
In March 2000, the Company completed a rights offering for 15,000,000
shares of its Common Stock to its stockholders of record as of the close of
business on December 2, 1999. The Common Stock underlying the rights were
registered under the Securities Act on January 28, 2000. The Company will use
the $600,000 of gross proceeds for working capital and other corporate-related
purposes. The purpose of the rights offering was to give the Company's
non-affiliated stockholders an opportunity to make an additional investment in
the Company at the same price per share ($.04) as given to DGJ as part of the
January 1999 Financing.
Dividends
The Company has not paid any cash dividends on its Common Stock since
inception. Section 7.12 of the Securities Purchase Agreement and the Company's
current revolving line of credit loan arrangement prohibit the payment of
dividends (in cash or other property) on or in respect of any shares of any
class of capital stock of the Company's securities and does not anticipate the
payment of cash dividends on its Common Stock in the foreseeable future. It is
expected that any earnings, which may be generated from operations, after
payment of dividends on the Company's Series A and B Preferred Stock, will be
used to finance the growth of the Company. Dividends on each of these classes of
Preferred Stock are non-cumulative.
Item 6. Selected Financial Data
The following tables set forth summary financial information for the
periods indicated. This information should be read in conjunction with the
Company's consolidated financial statements (including the notes thereto)
included herein.
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<PAGE>
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Year Ended Year Ended Ten Month Period Ended Fiscal Years Ended
December 31 December 31, December 31, February 28, February 23,
1999 1998 1997 1997 1996
<S> <C> <C> <C> <C> <C>
Net sales $ 18,525,970 $ 10,382,819 $ 13,951,725 $ 30,810,037 $ 28,839,954
Cost of goods sold 16,159,384 8,826,905 17,311,037 27,784,329 26,161,723
------------ ------------ ------------ ------------ ------------
Gross profit (loss) 2,366,586 1,555,914 (3,359,312) 3,025,708 2,678,231
Selling, general and
administrative expense 3,952,806 4,301,842 6,137,985 8,695,612 6,370,956
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 (1,586,220) (2,745,928) (9,817,033) (11,660,717) (3,692,725)
Allowance for officer loan -- (68,039) (586,978) -- --
Interest and other
expense (1,872,856) (471,166) (984,064) (1,112,647) (865,206)
Interest income -- 45,920 49,206 9,133 47,786
Extraordinary income 1,856,157 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss (1,602,919) (3,239,213) (11,338,869) (12,764,231) (4,510,145)
Basic and diluted net loss per share (.07) (.16) (.73) (.96) (.38)
Shares used in computing basic and
diluted net loss per share 23,242,165 20,849,356 15,579,747 13,261,815 11,756,532
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
At At At At At
December 31, December 31, December 31, February 28, February 23,
1999 1998 1997 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $ 23,252,885 $ 17,751,965 $ 20,970,740 $ 29,247,231 $ 35,277,975
Long term obligations $ 10,395,000 $ -- $-- $ 3,809,241 $5,441,05
Redeemable preferred
stock $ -- $ -- $-- $ -- $ 183,369
Working capital (deficit) (5,110,204) ($12,748,154) ($13,897,932) ($5,819,144) ($ 2,767,867)
Stockholders' equity $ 2,456,554 $ 3,279,473 $ 5,115,535 $ 11,544,675 $ 19,768,971
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
For the year ended December 31, 1999, the Company had sales of $18,525,970
compared to sales of $10,382,819 in the year ended December 31, 1998, an
increase of 78%.
For the year ended December 31, 1999, cost of goods sold was $16,159,384
or 87% of sales, compared to $8,826,905 or 85% of sales for the year ended
December 31, 1998. The increase in cost of goods sold, as a percentage of sales,
was primarily due to resin price increases of 60%, which the Company was unable
to pass on to its customers due to competitive pricing pressures, offset by
increase in volume.
12
<PAGE>
Selling, general and administrative expense for the year ended December
31, 1999 was $3,952,806, or 21% of sales, compared to $4,301,842, or 41% of
sales, for the year ended December 31, 1998. The decrease in selling, general
and administrative expense, as a percentage of sales, is due to the reduction of
fixed expenses, offset by an increase in variable expenses, which resulted from
an increase in sales volume. The decrease in fixed expenses is due to overhead
reductions, including the closing of operations of its two subsidiaries.
For the year ended December 31, 1999, interest expense was $1,872,856,
compared to $471,166 for the year ended December 31, 1998. The increase in
interest expense is due to the conversion of operating leases to capital leases
as a result of the Company's January 1999 Financing and an increase in
borrowings under the Company's credit line.
The net loss before extraordinary income was $3,459,076 for the year ended
December 31, 1999, compared to a net loss of $3,239,213 for the year ended
December 31, 1998. Cost of goods sold would have been approximately $303,000
greater in the years ended 1999 and 1998 had the Company not recorded a
write-down of plant and equipment during the fiscal year ended February 28,
1997.
Extraordinary income of $1,856,157 for the year ended December 31, 1999
was the result of the January 1999 Financing and the resulting discounts from
settlements with unsecured creditors. No extraordinary income was reported for
the year ended December 31, 1998.
The net loss after extraordinary income was $1,602,919 for the year
ended December 31, 1999, compared to a net loss of $3,239,213 for the year
ended December 31, 1998. Cost of goods sold would have been approximately
$303,000 greater in the years ended 1999 and 1998 had the Company not
recorded a write-down of plant and equipment during the fiscal year ended
February 28, 1997.
The Company had a basic and diluted net loss before extraordinary income
of $0.15 per share for the year ended December 31, 1999, compared to a net loss
of $0.16 per share for the year ended December 31, 1998.
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.
For the year ended December 31, 1998, cost of goods sold was $8,826,905,
or 85% of sales, compared to $17,311,037, or 124% of sales in the 10 month
period ended December 31, 1997. 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 fiscal year
ended February 28, 1997.
13
<PAGE>
Selling, general and administrative expense for December 31, 1998 was
$4,301,842, or 41% of sales, compared to $6,137,985, or 44% of sales, in the 10
month period ended December 31, 1997. Overhead reductions, including the closing
of operations of its two subsidiaries, were mainly responsible for the decrease.
For the year ended December 31, 1998, interest expense decreased to
$471,166, or 5% of net sales, compared to $984,064, or 7% of net sales in the 10
month period ended December 31, 1997. Interest decreased due to lower debt
balances outstanding under the Company's credit lines.
For the year ended December 31, 1998, the Company had a net loss of
$3,239,213, 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 during the fiscal year ended February 28, 1997.
The Company incurred a loss of $0.16 per share in 1998, compared to a loss
of $0.73 per share in the 10 month period ended December 31, 1997.
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
On January 27, 1999, the Company issued a promissory note in the aggregate
principal amount of $3,200,000 to DGJ. This note matures on February 1, 2004,
had an interest rate of 6% per annum payable monthly in arrears and is secured
by all of the Company's assets. As part of the new financing agreement obtained
with a bank on August 19, 1999, the Company entered into an amended loan
agreement with DGJ, which restates the original note and includes $1,573,585,
representing subsequent advances made to the Company, an equipment loan made in
March 1999 and past due interest on the Company's obligations to DGJ. This
amended promissory note bears interest at 10% per annum. The addition to the
original note is payable on demand. An intercreditor agreement with the bank
providing credit line financing as of August 19, 1999, provides certain terms
that the Company must meet before DGJ can collect on its obligations.
The Company failed to make interest payments to DGJ totaling approximately
$296,000 during the period of September 1999 through March 2000. As this has
caused an event of default, as defined in the amended promissory note, DGJ is
entitled to various rights and remedies under the amended promissory note and
the Agreement including, but not limited to, the right to declare all or any
part of the unpaid principal amount of the amended promissory note outstanding
to be due and payable. As of March 20, 2000, DGJ has indicated a willingness to
defer exercising its rights and remedies upon default pending discussion with
the Company regarding how the amended promissory note default is to be cured.
DGJ made additional advances to the Company totaling $1,300,000 during the
period from September 1, 1999 through March 30, 2000.
On August 19, 1999, the Company entered into a credit line agreement with
a bank that provides it with $4,000,000 of financing secured by its accounts
receivable, inventory and other certain assets. The loan
14
<PAGE>
facility bears interest at a rate of 1.5% above the bank's prime rate. At March
20, 2000, the balance outstanding under this agreement was $2,974,515.
The Company's previous equipment, capital and operating leases were
replaced with a new equipment lease with DGJ in January 1999. 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 lease
obligation is a ten-year lease with monthly payments of $102,000 representing
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 was recorded as a capital lease during
the quarter ended March 31, 1999 and is being treated as such on an on-going
basis. The lease requires the Company to meet certain financial covenants
including, but not limited to, earnings targets and debt-to-equity ratios.
The Company is in default on the equipment lease with DGJ as it failed to
make lease payments of $102,000 per month for the months of September 1999
through March 2000, or $714,000 in total. As this has caused an event of
default, as defined in the equipment lease, DGJ is entitled to various rights
and remedies under the equipment lease and the Agreement including, but not
limited to, the right to have any and all remaining sums under the lease become
immediately due and payable and the right to repossess the leased equipment. As
of March 20, 2000, DGJ has indicated a willingness to defer exercising its
rights and remedies upon default pending discussion with the Company regarding
how the equipment lease default is to be cured.
On October 12, 1999 and March 17, 2000, DGJ advanced an additional
$102,000 and $150,000, respectively, for the purchase of additional
equipment, pursuant to a promissory note providing for a single principal
payment on February 1, 2004. The annual interest rate is 10%, and interest is
due monthly. The note is secured and is subject to the same subordination
terms as the amended promissory note, as reflected in the intercreditor
agreement, described above. As of March 20, 2000, DGJ has indicated a
willingness to defer exercising its rights and remedies upon default pending
discussion with the Company regarding how the amended promissory note default
is to be cured.
Sales of Securities
As of March 20, 2000, 6,563,000 of the 7,500,000 warrant shares issued to
management in connection with the January 1999 Financing were converted into
Common Stock.
On March 17, 2000, the Company completed a rights offering for 15,000,000
shares of its Common Stock to its stockholders of record as of the close of
business on December 2, 1999. Each non-affiliated stockholder of the Company
received one right for each share of the Company's Common Stock, which it owned.
Each of the rights entitled stockholders to purchase 0.7 shares of Common Stock
at $0.04 per share. The rights offering was oversubscribed and the Company will
use the $600,000 of gross proceeds for working capital and other
corporate-related purposes.
No common stock was issued from sales by the Company during 1999. In
connection with the January 1999 Financing, 1,629,930 shares of Series C
Preferred Stock were issued to DGJ for $100. Also in connection with the January
1999 Financing, the Company reserved 30,937,500 shares of authorized but
unissued shares of Common Stock to meet the Company's requirements under the
financing terms of such restructuring.
15
<PAGE>
The Company received net proceeds from the privately placed sale of Common
Stock in 1998 of $1,403,951. The proceeds were used for general corporate
purposes.
Equipment Purchases and Lease Financings
Pursuant to the Agreement, the Company entered into a ten year equipment
lease with DGJ, whereby the Company agreed to lease certain equipment for
$1,224,000 (interest only at 18%) per year, payable in equal monthly
installments. This equipment lease replaced existing equipment leases, which
have been terminated, in which the Company was in default or which were subject
to judgements due to past due payments owed by the Company. The Company is in
default on this equipment lease. See "Liquidity and Capital Resources."
Liquidity
The Company's cash flow was enhanced by $2,891,673 from depreciation and
amortization non-cash charges in 1999. Inventory was increased by $1,979,643 and
accounts receivable by $1,633,503 during the year ended December 31, 1999. The
current asset ratio was 0.51:1 at December 31, 1999, compared to 0.12:1 at
December 31, 1998. The debt-to-equity ratio was 8.5:1 at December 31, 1999 and
4.4:1 at December 31, 1998.
Impact of Inflation
Inflation during the year ended December 31, 1999 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
addressed the internal risk, requirements and budgets for becoming Year 2000
compliant. The Company has completed an inventory of all of its internal
operations and has addressed Year 2000 compliance from its suppliers and other
constituents.
As a result of the Year 2000 compliance project, the Company has upgraded
its financial and accounting system at an investment of approximately $25,000,
and funded the upgrade out of working capital. The finance and accounting system
upgrade was installed and tested on October 22, 1999. The Company 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 its manufacturing systems determined the systems to be Year 2000 compliant.
The Company does not contract out its systems maintenance and design and,
therefore, has no third party risk in this regard.
The Company has not deferred any of its information technology 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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not required of the Company at this time.
16
<PAGE>
Item 8. Financial Statements and Supplementary Data
See Item 14 below and the Index therein for a listing of the financial
statements and supplementary data filed as part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On July 6, 1998, the Company reported on Form 8-K the resignation of
PricewaterhouseCoopers LLP as the Company's independent accountants. In
connection with the audits of the Company's financial statements for the 10
month period ended December 31, 1997 and the fiscal years ended February 28,
1997 and February 23, 1996, and during the subsequent interim period through
July 6, 1998: (i) PricewaterhouseCoopers LLP did not issue an adverse opinion,
disclaimer of opinion, modification or qualification; and (ii) 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.
17
<PAGE>
PART III
Item 10. Directors and Executive Officers of Registrant
The section entitled "Directors and Executive Officers" located in the
Company's Definitive Proxy Statement, to be filed on or before April 28, 2000,
pursuant to Regulation 14A for its Annual Meeting of Stockholders (the "Annual
Meeting Proxy Statement") is incorporated herein by reference.
Item 11. Executive Compensation
The section entitled "Executive Compensation" in the Annual Meeting Proxy
Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Annual Meeting Proxy Statement is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The section entitled "Certain Relationships and Related Transactions" in
the Annual Meeting Proxy Statement is incorporated herein by reference.
18
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements.
The financial statements required to be filed by Item 8 herewith are as
follows:
Page
----
Report of Independent Accountants -- Livingston & Haynes, P.C. F-1
Report of Former Independent Accountants -
PricewaterhouseCoopers LLP F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, December 31, 1998 and the 10 month period
ended December 31, 1997 F-5
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999, December 31, 1998 and the 10 month
period ended December 31, 1997 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, December 31, 1998 and the 10 month period
ended December 31, 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
(a)(3) Exhibits:
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).
4.4 Certificate of Designation of Series C Preferred Stock (13).
19
<PAGE>
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).
20
<PAGE>
10.20 Secured Promissory Note from the Company and RC America, Inc. to
Foothill (10).
10.21 Pledge and Security Agreement by and between the Company and Foothill
(10).
10.22 Continuing Guarantee of Market Media, Inc (10).
10.23 Continuing Guarantee of BPI Packaging (UK) Limited (10).
10.24 Security Agreement by and between Market Media, Inc. and Foothill (10).
10.25 Security Agreement by and between BPI Packaging (UK) Limited and
Foothill (10).
10.26* Settlement Agreement by and between the Company and Mobil Oil
Corporation, dated December 10, 1996 (10).
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)
10.42 Loan and Security Agreement between the Company and LaSalle Business
Credit, Inc., dated as of August 19, 1999 (17).
10.43 Revolving Note from the Company to LaSalle, dated August 19, 1999 (17).
21
<PAGE>
10.44 Intercreditor Agreement between DGJ and LaSalle, dated August 19, 1999
(17).
10.45 Amended and Restated Promissory Note issued by the Company to DGJ,
dated August 19, 1999 (17).
10.46 Amended and Restated Equipment Lease between the Company and DGJ (17).
16 Letter from Pricewaterhouse Coopers LLP to the Securities and Exchange
Commission (11).
21 Subsidiaries of the Company.
27 Financial Data Schedule.
99 Press Release, dated July 7, 1998 (11).
99.1 Press Release, dated January 28, 1999 (14).
99.2 Form of Subscription Certificate (18).
99.3 Form of Notice of Guaranteed Delivery for Subscription Certificate
(18).
99.4 Form of Subscription Agent Agreement by and between the Company and
American Stock Transfer and Trust Company, as Subscription Agent (18).
99.5 Form of letter to stockholders from the Company (18).
99.6 Form of letter to brokers, dealers, commercial banks, trust companies
and other nominees from American Stock Transfer and Trust Company (18).
99.7 Form of letter to clients of brokers, dealers, commercial banks, trust
companies and other nominees (18).
99.8 Nominee Holder Oversubscription Exercise Form (18).
99.9 Press Release, dated February 23, 2000 (19).
- - -------------------
(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.
22
<PAGE>
(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, 1998 and filed with the SEC on March 31, 1999.
(17) Incorporated by reference from our Form S-1 Registration Statement (No.
333-89137) declared effective by the SEC on October 28, 1999.
(18) Incorporated by reference from our From S-1 Registration Statement (No.
333-92059) declared effective by the SEC on January 28, 2000.
(19) Incorporated by reference from our Current Report on Form 8-K, dated
February 22, 2000 and filed with the SEC on February 23, 2000.
* Certain information 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 1999 by the Company.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BPI PACKAGING TECHNOLOGIES, INC.
Date: March 30, 2000
By: /s/ James F. Koehlinger
-----------------------
James F. Koehlinger, Acting Chief
Operating Officer, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title Date
- - --------- ----- ----
/s/ Ivan J. Hughes Chairman of the Board March 30, 2000
- - ------------------
/s/ James F. Koehlinger Acting Chief Operating Officer, March 30, 2000
- - ----------------------- Chief Financial Officer, Principal
Accounting Officer and Treasurer
/s/ Richard H. Nurse Vice President of Technology March 30, 2000
- - --------------------
/s/ Peter W. Blackett Senior Vice President of Sales March 30, 2000
- - ---------------------
/s/ David N. Laux Director March 30, 2000
- - -----------------
/s/ Gary R. Edidin Director March 30, 2000
- - ------------------
/s/ Allen S. Gerrard Director March 30, 2000
- - --------------------
/s/ Bruce M. Fleisher Director March 30, 2000
- - ---------------------
/s/ Theodore L. Koenig Director March 30, 2000
- - ----------------------
24
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Page
----
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, 1999 and 1998 F-3
Consolidated Statements of Operations for the years ended December 31,
1999, December 31, 1998 and the 10-month period ended December 31, 1997 F-5
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1999, December 31, 1998 and the 10-month period ended December 31, 1997 F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
December 31, 1998 and the 10-month period ended December 31, 1997 F-8
Notes to Consolidated Financial Statements F-10
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS - LIVINGSTON & HAYNES, P.C.
March 14, 2000
To the Board of Directors and Stockholders
of BPI Packaging Technologies, Inc.
We have audited the accompanying consolidated balance sheets of BPI
Packaging Technologies, Inc., (the "Company") and subsidiaries as of December
31, 1999 and 1998 and the related consolidated statements of operations,
stockholders' equity, cash flows and Schedule II, Valuation and Qualifying
Accounts for the years 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 audits. 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 audits provide 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, 1999 and 1998 and the results of their
operations, their changes in stockholders' equity and cash flows for the years
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 consolidated statements of operations, changes in
stockholders' equity and cash flows for the ten month period ended December 31,
1997 (appearing on pages F5 through F9) present fairly, in all material
respects, the results of operations and cash flows of BPI Packaging
Technologies, Inc., and its subsidiaries for the ten month period ended December
31, 1997, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule on page S-3 presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. 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. We conducted our audit of these financial 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 to 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 estimated
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of BPI
Packaging Technologies, Inc., for any period subsequent to December 31, 1997.
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 maters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
F-2
<PAGE>
BPI Packaging Technologies, Inc.
Consolidated Balance Sheet
Assets
December 31, 1999 December 31, 1998
----------------- -----------------
Current assets:
Cash $ 48,041 $ 73,116
Accounts receivable, net 2,515,892 882,389
Inventories, net 2,697,056 717,413
Prepaid expenses 30,138 51,420
----------- -----------
Total current assets 5,291,127 1,724,338
----------- -----------
Property and equipment, net 16,515,668 15,625,008
----------- -----------
Deposits - leases and equipment purchases 133,425 149,851
Loans to officers, net 6,807 6,072
Other assets 1,305,858 246,696
----------- -----------
1,446,090 402,619
----------- -----------
$23,252,885 $17,751,965
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
BPI Packaging Technologies, Inc.
Consolidated Balance Sheet
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Current liabilities
Note payable $ 3,299,259 $ 814,311
Trade notes payable -- 584,433
Capital lease obligations due within one year -- 3,800,286
Accounts payable 3,285,453 6,597,223
Accrued expenses 1,943,034 2,676,239
Note payable to related party 1,873,585 --
------------ ------------
Total current liabilities 10,401,331 14,472,492
------------ ------------
Long-term liabilities
Capitalized lease obligations 6,902,000 --
Subordinated debt 2,720,000 --
Accounts payable long term 773,000 --
------------ ------------
Total long-term liabilities 10,395,000 --
Stockholders' Equity
Series B convertible preferred stock, $0.01 par value 1,466,954 1,466,954
Series A convertible preferred stock, $0.01 par value 673,936 674,032
Series C preferred stock, $0.01 par value 100 --
Common stock, $0.01 par value; shares
authorized -- 150,000,000 at December
31, 1999 and 60,000,000 at December
31, 1998. Shares issued and outstanding -
28,068,021 at December 31, 1999 and
21,495,621 at December 31, 1998 280,682 214,956
Subscribed Stock 37,480 --
Capital in excess of par value 45,589,623 44,912,833
Accumulated deficit (45,592,221) (43,989,302)
------------ ------------
2,456,554 3,279,473
------------ ------------
$ 23,252,885 $ 17,751,965
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
BPI Packaging Technologies, Inc.
Consolidated Statement of Operations
<TABLE>
<CAPTION>
10 Month
Fiscal Year Fiscal Year period
Ended Ended Ended
December 31, December 31, December 31,
------------- ------------- ------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $ 18,525,970 $ 10,382,819 $ 13,951,725
Cost of goods sold 16,159,384 8,826,905 17,311,037
------------ ------------ ------------
Gross profit (loss) 2,366,586 1,555,914 (3,359,312)
Operating expenses:
Selling, general and administrative 3,952,806 4,301,842 6,137,985
Bad debt expense -- -- 319,736
------------ ------------ ------------
Loss from operations (1,586,220) (2,745,928) (9,817,033)
Other (expense) income:
Allowance for officer loan -- (68,039) (586,978)
Interest / other expense (1,872,856) (471,166) (984,064)
Interest / other income -- 45,920 49,206
------------ ------------ ------------
Net loss before extraordinary income ($ 3,459,076) ($ 3,239,213) ($11,338,869)
Extraordinary income - gain on debt
restructuring 1,856,157 -- --
------------ ------------ ------------
Net loss after extraordinary income $ (1,602,919) $ (3,239,213) $(11,338,869)
============ ============ ============
Loss per share before extraordinary income:
Basic and diluted net loss per share ($0.15) ($0.16) ($0.73)
Shares used in computing basic and
diluted net loss per share 23,242,165 20,849,356 15,579,747
Loss per share after extraordinary
income: ($0.07) ($0.16) ($0.73)
Basic and diluted net loss per share
Shares used in computing basic and
diluted net loss per share 23,242,165 20,849,356 15,579,747
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
BPI Packaging Technologies, Inc.
Consolidated Statement of Changes in Stockholders' Equity
For the Year Ended December 31, 1999, December 31, 1998 and for the 10 Month
Period Ended December 31, 1997
<TABLE>
<CAPTION>
Series A Convertible Series B Convertible
Common Stock Preferred Stock Preferred Stock
------------ --------------- ---------------
Capital in
Excess of Accumulated
Shares Amount Shares Amount Shares Amount Par Value Deficit Total
------ ------ ------ ------ ------ ------ --------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at February 28,
1997 14,074,428 140,745 347,146 1,213,584 146,695 1,466,954 38,134,612 (29,411,220) 11,544,675
Conversion of Series
A convertible
preferred stock to
common stock 21,663 217 (21,663) (86,652) 86,435 --
Issuance of common
stock based on RC
America FY 97 results 5,280 52 8,527 8,579
Sale of common stock
pursuant to
Regulation S and
Regulation D private
placement offerings,
net of issuance costs 4,991,125 49,911 4,354,080 4,403,991
Issuance of common
stock in exchange
for commission on
private placement
offerings 387,500 3,875 383,626 387,501
Issuance of common
stock in exchange
for consulting
services 33,500 335 33,165 33,500
Warrants granted to
consultants 76,158 76,158
Net loss for the 10
month period ended
December 31, 1997 (11,338,869) (11,338,869)
Balance at December 31,
1997 19,513,496 195,135 325,483 1,126,932 146,695 1,466,954 43,076,603 (40,750,089) 5,115,535
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>
F-6
<PAGE>
<TABLE>
<CAPTION>
Series A Convertible Series B Convertible Series C
Common Stock Preferred Stock Preferred Stock Preferred Stock
------------ --------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998 21,495,621 214,956 212,258 674,032 146,695 1,466,954
Subscribed Stock
Net loss for the year
ended December 31,
1999
Ascribed value of
Series C Preferred
Stock under
refinancing of
1/27/99
Issuance of Stock
during financial
restructuring 1,629,930 100
Conversion of Series A
Convertible
Preferred
Stock to Common
Stock 9,600 96 (9,600) (96)
Warrants exercised
Subscribed Stock 6,563,000 65,630
Balance at December 31,
1999 28,068,221 $280,682 202,658 $673,936 146,695 $1,466,954 1,629,930 $100
==========================================================================================================================
<CAPTION>
Subscribed Stock
Capital in
Excess of Accumulated
Shares Amount Par Value Deficit Total
------ ------ --------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1998 44,912,833 (43,989,302) $3,279,473
Subscribed Stock 7,500,000 300,000 300,000
Net loss for the year
ended December 31,
1999 (1,602,919) (1,602,919)
Ascribed value of
Series C Preferred
Stock under
refinancing of
1/27/99 480,000 480,000
Issuance of Stock
during financial
restructuring (100) 0
Conversion of Series A
Convertible
Preferred
Stock to Common
Stock 0
Warrants exercised
Subscribed Stock (6,563,000) (262,520) 196,890 0
Balance at December 31,
1999 937,000 $37,480 $45,589,623 ($45,592,221) $2,456,554
===============================================================================================
</TABLE>
The accompanying notes are an integral part of
consolidated financial statements.
F-7
<PAGE>
BPI Packaging Technologies, Inc.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
10 Month period
Fiscal Year Ended Fiscal Year Ended ended
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($ 1,602,919) ($ 3,239,213) ($11,338,869)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash
Provided by (used in) operating activities:
Depreciation and amortization 2,891,673 2,538,880 2,186,621
Gain on restructuring of accounts payable (1,856,157) -- --
Inventory reserve -- (290,000) (925,000)
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) in accounts receivable - trade (1,633,503) (161,150) 1,197,521
(Increase) decrease in inventories (1,979,643) 630,453 4,401,587
(Increase) decrease in prepaid expenses and other
current assets 21,282 1,528 217,538
Decrease in other assets, net -- 456,508 840,896
Increase (decrease) in accounts payable (1,267,046) (117,647) 209,020
Increase (decrease) in other accrued expenses 840,723 (291,109) 364,134
------------ ------------ ------------
Total adjustments (2,982,671) 2,767,463 11,007,330
------------ ------------ ------------
Net cash provided by (used in) operating
activities (4,585,590) (471,750) (331,539)
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment (1,877,840) (325) (212,144)
Deposits related to equipment financing 16,426 (8,567) (12,823)
Additions to property and equipment debt
refinancing (1,678,973) -- --
Advances to officers (735) (656) (112,597)
------------ ------------ ------------
Net cash provided by (used in) investing
activities (3,541,122) (9,548) (337,564)
------------ ------------ ------------
Cash flows from financing activities:
Net increase (payments) under note payable-bank 2,484,948 (348,038) (2,571,128)
Capitalized financing costs (1,284,682) -- --
Principal payments on capital lease obligations -- (625,919) (1,492,754)
Refinance of capital and operating leases (5,443,763) -- --
Note payable to related party 1,943,034 -- --
Refinanced capital lease obligation 6,902,000 -- --
Subordinated debt addition 3,200,000 -- --
Net proceeds from sales of stock and exercise of
warrants 300,100 1,403,151 4,800,071
------------ ------------ ------------
Net cash provided by (used in) financing
activities 8,101,637 429,194 736,189
------------ ------------ ------------
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
10 Month period
Fiscal Year Ended Fiscal Year Ended ended
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net increase in cash (25,075) (52,104) 67,086
Cash at beginning of period 73,116 125,220 58,134
------------ ------------ ------------
Cash at end of period $ 48,041 $ 73,116 $ 125,220
------------ ------------ ------------
Cash paid for interest $ 304,288 $ 471,166 $ 900,855
============ ============ ============
</TABLE>
Non-cash investing and financing activities:
During the 10 month period ended December 31, 1997, two trade payables,
totaling $584,433, were converted into trade notes payable (Note 8).
The accompanying notes are an integral part
of these consolidated financial statements
F-9
<PAGE>
BPI PACKAGING TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
Note 1: Organization and Significant Accounting Policies
Organization
BPI Packaging Technologies, Inc. (the "Company") converts commercially
available high molecular weight, high density polyethylene ("HMWHDPE") resins
into thin film, which is either sold directly into industrial or packaging
applications or converted in-house into carryout bags of "T-shirt sack" design
for supermarkets, convenience stores and other retail markets. The Company
utilizes advanced, high quality extrusion, printing and bag making equipment,
which was installed between 1990 and 1999. The Company operated two wholly-owned
subsidiaries: (i) 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 (ii) Market Media
Corporation, which sold and marketed 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 question. 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 $75,090, $42,127, and $113,478 for the year ended
December 31, 1999, December 31, 1998 and the 10 month period ended December 31,
1997.
Basis of Consolidation
The consolidated financial statements include the results of the Company's
two wholly-owned subsidiaries, RC America, Inc., and Market Media Corporation.
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 Corporation were not significant to the
overall operations of the Company. Therefore, RC America, Inc. and Market Media
Corporation 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 periods 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 years ended December 31, 1999,
F-11
<PAGE>
1998 and the 10 month period ended December 31, 1997 computation include
383,687, 649,557, and 783,117 common shares, respectively, issuable upon the
exercise of stock options. Antidilutive potential common shares excluded from
the years ended December 31, 1999, December 31, 1998 and the 10 month period
ended December 31, 1997 computation also included 354,093, 358,953, and 472,178
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 years ended
December 31, 1999, 1998 and the 10 month period ended December 31, 1997
computation included 99,931,632, 120,200 and 109,422 common shares,
respectively, 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 19).
Reclassifications
Certain balances in the prior year financial statements have been
reclassified to conform to the current period presentation.
Note 2: Going Concern and Management's Plan
On January 27, 1999, the Company entered into a Securities Purchase
Agreement (the "Agreement") with DGJ, L.L.C., a Delaware limited liability
company ("DGJ") (the "January 1999 Financing"), under which the Company issued
and sold to DGJ:
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
F-12
<PAGE>
common stock (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.
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 $300,000, in
the aggregate, in the Company's warrants. As of March 20, 2000, 6,563,000 of the
7,500,000 issued warrant shares were converted into Common Stock.
As part of the January 1999 Financing, the Company entered into a
factoring agreement with Franklin Capital Corporation ("Franklin"), an entity
affiliated with Gary Edidin, one of the Company's Directors and a member of DGJ,
whereby the Company, with full recourse, assigned and sold to Franklin its
entire interests in all of its present and future accounts and similar rights
and instruments arising from its sales of goods, then existing or created
thereafter. The Company paid Franklin a factoring fee in an amount equal to 2%
of the gross amount of such receivables, however, the minimum commission for any
receivable was $5.00.
Under this factoring agreement, Franklin was able to advance to the
Company up to 85% of the purchase price of the Company's receivables as they
were created, subject to a maximum advance at any time outstanding of
$2,000,000. Interest was charged for the number of days that advances of the
purchase price of the receivables were made to the Company prior to the date
they were paid and the number of days that the advances from Franklin's account
remain outstanding at the prime rate plus 2% per annum, except that interest was
in no event less than 8% per annum. The Company retired this factoring agreement
on August 19, 1999 when the Company entered into the relationship with LaSalle
Business Credit, Inc. ("LaSalle") and DGJ, as described below.
The Company also issued a demand revolving note to Franklin in the
principal sum of $1,000,000 at an interest rate of 5% above the prime rate,
however, the interest charged could not be less than a minimum annual fixed rate
of 12 3/4%. This note was secured by a security agreement between the Company
and Franklin, which granted Franklin a continuing security interest in the
Company's present and future accounts, inventory, equipment and other property.
Pursuant to the terms of this agreement, the amount eligible to be advanced to
the Company under this revolving note was limited to the lesser of $1,000,000 or
the sum of 50% of eligible inventory and 50% of eligible raw materials. The
Company retired its obligations under this note on August 19, 1999.
The Company also refinanced its equipment, capital and operating leases in
January 1999 when it entered into an equipment lease with DGJ. The new lease
carries no debt reduction obligation and is treated as long-term debt. The
combined monthly payments under the retired leases were reduced from
approximately $305,000 per month to $102,000 per month under the new equipment
lease with DGJ. The term of the lease is ten years and its monthly payment of
$102,000 represents interest only.
The Company is in default on the equipment lease with DGJ as it failed to
make lease payments of $102,000 per month for the months of September 1999
through March 2000, or $714,000 in total. As this has caused an event of
default, as defined in the equipment lease, DGJ is entitled to various rights
and remedies under the equipment lease and the Agreement including, but not
limited to, the right to have any and all remaining sums under the lease become
immediately due and payable and the right to repossess the leased equipment. As
of March 20, 2000, DGJ has indicated a willingness to defer exercising its
rights and remedies upon default pending discussion with the Company regarding
how the equipment lease default is to be cured.
F-13
<PAGE>
Also in January 1999, the Company entered into agreements with most of its
unsecured creditors that provided for a discounted payment in February 1999 or
permitted the Company to pay the entire balance without interest over a
three-year period.
On August 19, 1999, the Company entered into a series of transactions with
LaSalle and DGJ to refinance the indebtedness incurred as part of the January
1999 Financing. The Company's loan agreement with LaSalle provides the Company
with a $4,000,000 revolving line of credit. This credit facility is secured by a
first priority security interest in its accounts receivable, inventory and
certain other assets. DGJ is the lessor of substantially all the equipment that
the Company uses, under a capital lease, and holds a first priority security
interest in its equipment. LaSalle received a second priority security interest
in the Company's equipment. Certain of the proceeds of this credit facility were
used to retire existing indebtedness the Company owed to Franklin, including the
factoring agreement and revolving note described above, while the remaining
proceeds were used to retire some of the Company's other indebtedness and for
working capital purposes. This credit facility bears interest at a fluctuating
rate equal to 1.5% per annum above the prime rate of LaSalle in effect from time
to time and matures in three years. As of March 20, 2000, the balance
outstanding under this agreement is $2,974,515.
In addition, the Company and DGJ amended and restated the Note since the
Company was unable to fulfill the financial obligations under the terms of the
loan and lease documents with DGJ. To cure the defaults, the Company restated
the Note to include, in addition to the original principal and interest accrued
thereunder at 6%, all amounts outstanding under: (i) an equipment loan made by
DGJ to the Company as of March 1, 1999 in the original principal amount of
$218,665; (ii) a series of advances made to the Company by Franklin during the
second quarter of 1999 (which totaled approximately $900,000, and were reduced
to approximately $660,000 after application of proceeds of the credit facility),
rights to repayment of which were subsequently assigned by Franklin to the
Company; (iii) delinquent payments under the DGJ lease of approximately
$570,000; and (iv) interest on the foregoing. The resulting balance of
$4,773,585 was restated as the principal amount of a new amended promissory
note. The amended promissory note is in the original principal amount of
$4,773,585 and is payable as follows: $3,200,000 of principal is due and payable
on February 1, 2004, or earlier by acceleration, as described in the Agreement,
or otherwise, and $1,573,585 is due and payable pursuant to the terms of an
intercreditor agreement between DGJ and LaSalle. The amended promissory note
bears interest at a rate of 10% per annum, and is secured by all Company assets,
subordinated to LaSalle except as to equipment.
The Company failed to make interest payments to DGJ totaling approximately
$296,000 during the period of September 1999 through March 2000. As this has
caused an event of default, as defined in the amended promissory note, DGJ is
entitled to various rights and remedies under the amended promissory note and
the Agreement including, but not limited to, the right to declare all or any
part of the unpaid principal amount of the amended promissory note outstanding
to be due and payable. As of March 20, 2000, DGJ has indicated a willingness to
defer exercising its rights and remedies upon default pending discussion with
the Company regarding how the amended promissory note default is to be cured.
During the period of September 1, 1999 through March 30, 2000, DGJ made
additional advances to the Company totaling $1,300,000. These loans bear
interest at the rate of 10% per annum with interest payable monthly and the
principal is due and payable on the same date as the maturity date of the
amended promissory note discussed above.
At the Company's annual meeting of stockholders on August 24, 1999, its
stockholders approved the increase in its authorized number of shares of Common
Stock from 60,000,000 to 150,000,000 shares. The Company utilized some of these
newly authorized shares to complete a rights offering of 15,000,000 shares of
its Common Stock in March 2000 resulting in the Company receiving $600,000 of
gross proceeds for working capital and other corporate-related purposes.
F-14
<PAGE>
Note 3: Accounts Receivable-Trade
Accounts receivable-trade consist of the following:
December 31, 1999 December 31, 1998
----------------- -----------------
Accounts receivable-trade $2,646,344 $1,066,841
Allowance for doubtful accounts (55,452) (109,452)
Allowance for credits (75,000) (75,000)
----------- ---------
$2,515,892 $ 882,389
========== =========
Note 4: Inventories
Inventories, net of valuation reserves, consist of the following:
December 31, 1999 December 31, 1998
----------------- -----------------
Raw material $1,133,963 $296,427
Finished goods 1,563,093 420,986
$2,697,056 $717,413
========== ========
Raw material includes virgin high density, high molecular weight
polyethylene ("HDHMWPE") resin, re-processed HDHMWPE material, color inks and
additives, and post-industrial scrap generated during the manufacturing process.
Note 5: Property and Equipment, Net
Property and equipment consist of the following:
December 31, 1999 December 31, 1998
----------------- -----------------
Machinery and equipment $ 29,824,830 $ 25,151,864
Leasehold improvements 2,408,640 3,611,407
Office furniture and fixtures 357,895 303,731
Motor vehicles 52,350 19,900
------------ ------------
32,643,715 29,086,902
Less accumulated depreciation and
Amortization (16,128,047) (13,461,894)
------------ ------------
$ 16,515,668 $ 15,625,008
============ ============
F-15
<PAGE>
Assets recorded under capital leases and included in property and
equipment were as follows:
December 31, 1999 December 31, 1998
----------------- -----------------
Machinery and equipment $ ----- $13,041,270
Less accumulated amortization ----- (5,478,653)
----------
$ ----- $ 7,562,617
===========
Assets secured by first security interest were as follows:
December 31, 1999 December 31, 1998
----------------- -----------------
Machinery and equipment $ 32,643,715 $13,041,270
Less accumulated amortization (16,128,047) (5,478,653)
------------ -----------
$ 16,515,668 $ 7,562,617
============ ===========
Depreciation and amortization expense relating to fixed assets was
$2,891,673, $2,538,880 and $2,186,621 for the years ended December 31, 1999,
1998 and for the 10 month period ended December 31, 1997, respectively, of which
$0, $1,422,682 and $1,185,568, related to amortization of equipment held under
capital leases, respectively.
Note 6: Other Assets
Other assets are comprised of the following:
December 31, 1999 December 31, 1998
----------------- -----------------
Public financing costs, net of
accumulated amortization $1,289,515 $ --
Other assets 16,343 246,696
---------- --------
$1,305,858 $246,696
========== ========
Note 7: Accrued Expenses
Accrued expenses consist of the following:
December 31, 1999 December 31, 1998
----------------- -----------------
Accrued trade payables $1,234,158 $ --
Employee compensation and benefits 139,433 50,750
Accrued lease expense -- 1,643,377
State taxes and penalties 246,873 299,096
Professional fees 43,000 47,000
Other 279,570 636,016
---------- ----------
$1,943,034 $2,676,239
========== ==========
Note 8: 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,
F-16
<PAGE>
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 in January 1999 (Note 2).
Note 9: 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% (14.5% 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).
On August 19, 1999, the Company entered into a credit line agreement with
a bank that provides the Company with $4,000,000 of financing secured by the
Company's accounts receivables, inventory and other certain assets. The loan
facility bears interest at a rate of 1.5% above the bank's prime rate. At
December 31, 1999, the balance outstanding under this agreement was $3,299,259
(Note 2).
Note 10: Note Payable--Related Party
On January 27, 1999 the Company issued a promissory note in the aggregate
principal amount of $3,200,000 to DGJ, L.L.C. ("DGJ") (Note 2). The Note matures
on February 1, 2004, had an interest rate of 6% per annum payable monthly in
arrears and is secured by all assets of the Company. As part of the new
financing agreement obtained with a bank on August 19, 1999, the Company entered
into an amended loan agreement with DGJ (the "Amended Note"), which restates the
Note and includes $1,573,585, representing subsequent advances made to the
Company, an equipment loan made in March 1999 and past due interest on
obligations of the Company to DGJ. The Amended Note bears interest at 10% per
annum. The addition to the Note is payable on demand. An intercreditor agreement
with the bank providing credit line financing as of August 19, 1999, provides
certain terms that must be met by the Company before DGJ can collect on its
obligations. The Company failed to make interest payments to DGJ totaling
$1,296,000 during the period of September 1999 through March 2000. As this has
caused an Event of Default, as defined in the Amended Note, DGJ is entitled to
various rights and remedies under the Amended Note and the Agreement, including,
but not limited to, the right to declare all or any part of the unpaid principal
amount of the Amended Note outstanding to be due and payable. As of March 30,
2000, DGJ has indicated a willingness to defer exercising its rights and
remedies upon default pending discussion with the Company regarding how the
Amended Note default is to be cured. DGJ made additional advances to the Company
totaling $1,300,000 covering the period of September 1, 1999 through March 31,
2000.
F-17
<PAGE>
Note 11: Capital Lease Obligations
The Company's capital lease obligations consist of the following:
December 31, 1999 December 31, 1998
----------------- -----------------
Total minimum lease payments $19,142,000 $ 4,307,824
Less amount representing interest 12,240,000 507,538
----------- -----------
Obligations under capital leases 6,902,000 3,800,286
Less amounts due within one year -- 3,800,286
----------- -----------
Long-term portion $ 6,902,000 $ --
=========== ===========
As all capital leases were in default as of December 31, 1998 and 1997,
all future payments have been classified as current. In January 1999, these
capital lease obligations were satisfied in connection with the financial
restructuring (Note 2).
The capital lease with DGJ was in default as of December 31, 1999. DGJ is
entitled to various rights and remedies as a result of the default. As of March
20, 2000, DGJ has indicated a willingness to defer exercising its rights and
remedies upon default pending discussions with management to determine how the
lease default is to be cured.
Note 12: Stockholders' Equity
As of December 31, 1999 the Company had 28,068,221 shares of common stock
outstanding. 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 three 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, 1999, December 31, 1998 and the
10 month period ended December 31, 1997, there were 202,658, 212,258 and
325,483 shares issued and outstanding, respectively.
Series B, 6% Non-Cumulative, Non-Voting Convertible Preferred Stock
("Series B Preferred Stock"), redeemable and convertible at any time at
$10 per share. Such stock retains a liquidation preference over the Series
A Preferred Stock at a rate of $10 per share plus any declared but unpaid
dividends. At December 31, 1999, December 31, 1998 and the 10 month period
ended December 31, 1997, there were 146,695 shares of Series B Preferred
Stock issued and outstanding.
F-18
<PAGE>
Series C, 6% Non-Cumulative, Non-Voting Convertible Preferred Stock
("Series C Preferred Stock"), redeemable but not convertible into shares
of common stock and has no preferences upon liquidation, dissolution,
winding up, or insolvency. The holders of the 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 common stock
as a single class on each matter submitted to a vote of our stockholders,
with each share of the Series C Preferred Stock having 30 votes.
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 19), upon the conversion of preferred stock and in
connection with the agreement with RC America, Inc. For the years ended December
31, 1999, 1998 and the 10 month period ended December 31, 1997, no shares of
common stock were issued.
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 13: Warrants to Purchase Securities of the Company
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.
F-19
<PAGE>
Settlement expense in the amount of $240,400 was recorded for the 10 month
period ended December 31, 1997.
All warrants issued in 1998 have been issued at the current market price
at date of issuance.
On January 27, 1999, the Company issued 80,000,000 warrants to DGJ, LLC
convertible into shares of Common Stock, with a conversion price of $0.04 per
share of Common Stock. The warrants are exercisable until January 27, 2009.
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 $300,000, in
the aggregate, in the Company's warrants. As of March 24, 2000, 6,563,000 of the
7,500,000 warrant shares were converted into Common Stock.
In March 2000, the Company completed a rights offering for 15,000,000
shares of its Common Stock to its stockholders of record as of the close of
business on December 2, 1999. The Common Stock underlying the rights were
registered under the Securities Act of 1933, as amended, on January 28, 2000.
The Company will use the $600,000 of gross proceeds for working capital and
other corporate-related purposes. The purpose of the rights offering was to give
the Company's non-affiliated stockholders an opportunity to make an additional
investment in the Company at the same price per share ($.04) as given to DGJ as
part of the January 1999 Financing.
Note 14: Income Taxes
Due to the taxable loss incurred and the availability of net operating
losses, there was no tax provision or benefit recorded for the year ended
December 31, 1999. Accordingly, the effective tax rate is zero percent as
compared to the Federal statutory rate of 34% because the Company has placed a
full valuation allowance on its net deferred tax assets. Cumulative temporary
differences under SFAS No. 109 are as follows:
December 31, 1999 December 31, 1998
----------------- -----------------
Deferred tax assets:
Allowance for uncollectible accounts $ 292,295 $ 310,655
Net operating loss carryforward 13,804,388 13,270,876
Inventory 53,522 53,522
Write-down of fixed assets 1,114,955 1,114,955
Write-down of patents 367,862 367,862
Allowance for lease losses 689,606 685,606
Investment tax credit 528,200 528,200
Other items 482,291 482,291
------------ ------------
Total deferred tax assets $ 17,333,119 $ 16,813,967
============ ============
Deferred tax liabilities:
Excess depreciation $ 162,376 $ 162,376
Prepaid rent -- 99,345
------------ ------------
Net deferred tax assets $ 17,170,743 $ 16,552,246
Deferred tax asset valuation allowance $(17,170,743) $(16,552,246)
============ ============
F-20
<PAGE>
A valuation allowance is required to be established for deferred tax
assets if, based on the weight of available evidence, it is more likely than not
that some portion or all of the deferred tax asset will not be realized. The
Company has determined that a valuation allowance is required as it is not
certain that the results of future operations will generate sufficient taxable
income to realize the deferred tax asset.
At December 31, 1999 the Company had available for federal and state
income tax purposes unused net operating loss (NOL) carry-forwards of
approximately $36,556,000 and $34,956,000, respectively. The federal
carry-forwards expire in various amounts beginning in the year 2003, and the
state carry-forwards expire in various amounts from 2000 through 2005. The
Company has available state investment tax credit carry-forwards of
approximately $528,000 expiring in various amounts from 2000 to 2005, and
approximately $113,000 in carry-forwards 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 carry-forwards 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
carry-forwards. The Company's ability to use its federal NOL carry-forwards may
be further impacted by transactions in January 1999 and in the rights offering
completed in March 2000 (Note 2).
Note 15: Major Customers
During the year ended December 31, 1999, sales to three customers
represented 20%, 19% and 15% of total sales. During the year ended December
31, 1998, sales to two customers represented 20% and 10% of total sales. For
the 10 month period ended December 31, 1997, no customer represented more
than 10% of total sales.
Note 16: Related Party Transactions
Loans made to a former officer totaled $586,978 at December 31, 1997 and
bears 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. A reserve
of $586,978 has been established for this loan as of December 31, 1997.
During the year ended December 31, 1998, additional payments totaling
$68,039 were made to and on behalf of this former officer. An additional reserve
of $68,039 has been established for this loan as of December 31, 1999. This
officer is in default of a note payable of $36,000, which represents a portion
of these above advances.
Loans made to another officer totaled $6,807, $6,072 and $5,416 at
December 31, 1999, 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.
F-21
<PAGE>
attaining certain levels of pre-tax earnings. RC America, Inc. ceased operations
during the year ended December 31, 1998.
Ivan J. Hughes, Chairman of the Board of Directors of the Company is the
President of the Plastics Division and a Director and a member of the Executive
Compensation Committee of Duro Bag Manufacturing Company ("Duro"). For the year
ended December 31, 1999, Duro accounted for approximately 20% of the Company's
sales. There were no sales to Duro for the year ended December 31, 1998 and the
10 month period ended December 31, 1997.
Note 17: Employment Agreements
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 18: 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. During
the year ended December 31, 1999, the Company entered into a lease agreement for
additional warehouse space through December 31, 2000.
The future minimum rental commitments under non-cancelable operating
leases as of December 31, 1998 are as follows:
Operating
Fiscal Year Leases
----------- ------
2000 365,060
2001 315,060
2002 315,060
2003 315,060
2004 315,060
Thereafter 945,180
----------
$2,570,480
==========
Expense under operating leases was $495,817, $937,340, and $1,410,000 for
the years ended December 31, 1999, 1998 and the 10 month period ended December
31, 1997, respectively. All operating leases and real-estate leases were in
default as of December 31, 1997. In January 1999, the Company reached agreement
with all lessors as part of its financial restructuring. (Note 2).
Note 19: 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
F-22
<PAGE>
calendar year. Options granted under the stock option plan generally expire ten
years from the date of grant.
There was no activity under the 1996 Stock Option Plan during the years
ended December 31, 1999, 1998 and the 10 month period ended December 31, 1997.
Transactions under the 1990 and 1993 Stock Option Plans during the years ended
December 31, 1999, 1998 and the 10 month period ended December 31, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
December 31, 1999 December 31, 1998
----------------- -----------------
Weighted Average Weighted Average
Options Shares Exercise Price Shares Exercise Price
- - ------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 383,687 $2.71 783,117 $3.54
Options granted whose exercise price
equal the market price of the stock on
grant date 25,000 $1.25
Options granted whose exercise price
is greater than the market price of the
stock on grant date
Canceled (424,430) $2.23
--------
Outstanding at year end 383,687 $2.71 383,687 $2.71
======= ========
Options exercisable at period end 371,187 358,687
======= ========
Weighted average fair value of options
granted during the period $1.25
</TABLE>
F-23
<PAGE>
In April of 1997, the Company changed the exercise price for selected
options granted in prior periods from $6.25, $4.00, $3.88 and $3.00 to $2.50 per
share.
Ten Month Period Ended
December 31, 1997
-----------------
Weighted Average
Shares Exercise Price
------ --------------
Options
-------
Outstanding at beginning of year 773,830 $3.98
Options granted whose exercise price equal
the market price of the stock on grant date 156,000 1.75
Options granted whose exercise price is
greater than the market price of the
stock on grant date
Canceled (146,713) 3.98
--------
Outstanding at year end 783,117 3.54
========
Options exercisable at period end 629,317
========
Weighted average fair value of options
granted during the period $1.75
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, 1999:
Options Outstanding
-------------------
Weighted Average
Range of Exercise Number Outstanding at Remaining Weighted Average
Prices December 31, 1999 Contractual Life Exercise Price
------ ----------------- ---------------- --------------
$1.25 - 3.00 336,937 3.79 $2.42
3.88 - 4.75 24,250 3.78 4.13
5.50 - 5.75 22,500 5.10 5.58
------
383,687 34.86 2.71
======
F-24
<PAGE>
Options Exercisable
Range of Exercise Number Exercisable at Weighted Average
Prices December 31, 1999 Exercise Price
------ ----------------- --------------
$1.25 - 3.00 324,437 $2.46
3.88 - 4.75 24,250 4.13
5.50 - 5.75 22,500 5.58
------
371,187 2.76
======
Fair Value Disclosures
At December 31, 1999, the Company had three option plans, which are
described above. The Company applies APB 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its stock option plans. Had compensation cost for the Company's three stock
option plans been determined based on the fair value at the grant dates for
awards under those plans consistent with the method of FASB Statement 123, the
Company's net loss and loss per share would have been increased to the pro forma
amounts indicated below:
Fiscal Year Ended Fiscal Year Ended
December 31, 1999 December 31, 1998
----------------- -----------------
Net Loss As reported ($1,602,919) ($3,239,213)
Pro forma ($1,614,128) ($3,245,145)
Basic and diluted As reported ($0.07) ($0.16)
Net loss per share Pro forma ($0.07) ($0.16)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the applicable periods: dividend yield of
0.0% for both periods; risk free interest rate of 5.16% for options granted
during the year ended December 31, 1998 and 5.81% for options granted and
re-priced during the 10 month period ended December 31, 1997; a weighted average
expected option term of 10 years for options granted during the year ended
December 31, 1998, and 10 years for options granted during the 10 month period
ended December 31, 1997; and expected volatility of 153.87% for options granted
during the year ended December 31, 1998 and 67.57% for options granted during
the 10 month period ended December 31, 1997, respectively.
Note 20: 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 dollar for
dollar of annual 401 (k) contributions up to 3% and $0.50 for a dollar for the
next 2% of their salary. Contributions to the plan were $41,844, $33,165, and
$47,604 for the years ended December 31, 1999, 1998 and the 10 month period
ended December 31, 1997, respectively.
F-25
<PAGE>
Note 21: 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 22: Significant Fourth Quarter Adjustments to the Ten Month Period Ending
December 31, 1997
All capital, operating and real estate leases were in default as of
December 31, 1997. All future capital lease payments have been classified as
current. As a result of these defaults and based on negotiations which began in
1997, total expenses of $1,643,400 were accrued as of December 31, 1997 for
interest, penalties and extension fees related to the default of the capital and
operating leases (Note 12 and 19).
Loans made to a former officer totaled $586,979 at December 31, 1997 and
bear interest at a rate of 9.5%. The loans are due and payable January 1, 2001.
The officer had agreed to apply any bonus payments received under the Company's
executive bonus plan to reduce the amounts outstanding under the loan. As the
Company has suffered recurring net losses and operating cash flow deficiencies,
a reserve of $586,978 has been established for this loan as of December 31,
1997.
Management decided to exit the traditional T-shirt bag business during the
10 month period ended December 31, 1997. Accordingly, an analysis of the fair
value of assets related to these product lines was performed during the fourth
quarter of fiscal year 1997 which resulted in a write-down of impaired assets
and recognition of related expenses totaling $5,897,648.
Note 23: 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 disposition in connection with this
potential claim will not have a material effect on its operations.
One of the group of investors, describe above, has filed suit alleging
breach of contract with regards to the registration of shares it purchased. The
investor is seeking approximately $1,013,000 plus interest, costs and expenses
of the lawsuit. Subsequent to the year end, the Company was advised that this
action was dismissed without prejudice based upon improper venue.
A wrongful death lawsuit has been filed by the estate of a former
temporary employee. The Company believes its insurance coverage is sufficient to
cover its exposure.
F-26
<PAGE>
BPI Packaging Technologies, Inc.
Schedule II
Rule 12-09 Valuation and Qualifying Accounts and Reserves
For the Year Ended December 31, 1999
Column A Column B Column C Column D Column E
Additional Deductions
Balance at Charged to Accounts Balance at Description
Description 1/1/99 Expenses Written-Off 12/31/99 of Changes
----------- ------ -------- ----------- -------- ----------
Reserve for 75,000 0 0 75,000
Accounts
Receivable
Credits
Allowance for 109,453 0 (54,000) 55,452 Allowance
Doubtful was reduced
Accounts based on
evaluation
of Accounts
Receivable
at 12/31/99
S-1
<PAGE>
Valuation and Qualifying Accounts and Reserves
For the 10 Month Period 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 Description of
Description 1/1/98 Expenses Written-Off 12/31/98 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 Increased based
on evaluation of
Accounts
Receivable at
12/31/98
Inventory Reserve 290,000 0 (290,000) 0 Reserve was
reduced based on
evaluation of
Inventory at
12/31/98
</TABLE>
S-2
<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 Description of
Description 1/1/98 Expenses Written-Off 12/31/97 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-3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 48,041
<SECURITIES> 0
<RECEIVABLES> 2,646,344
<ALLOWANCES> 130,453
<INVENTORY> 2,697,056
<CURRENT-ASSETS> 5,291,127
<PP&E> 32,643,715
<DEPRECIATION> 16,128,047
<TOTAL-ASSETS> 23,252,885
<CURRENT-LIABILITIES> 10,401,331
<BONDS> 0
2,140,890
100
<COMMON> 280,682
<OTHER-SE> 34,882
<TOTAL-LIABILITY-AND-EQUITY> 23,252,885
<SALES> 18,525,970
<TOTAL-REVENUES> 18,525,970
<CGS> 16,159,384
<TOTAL-COSTS> 16,159,384
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,872,856
<INCOME-PRETAX> (3,459,076)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,459,076)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,856,157
<CHANGES> 0
<NET-INCOME> (1,602,919)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
