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.
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
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:
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.
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.
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.
Item 2.
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.
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.
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.
PART II
Item 5.
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 ------------- ------------
First Quarter $1.375 $0.688 Second Quarter $1.400 $0.844 Third Quarter $ 0.94 $0.125 Fourth Quarter $ 0.40 $ 0.12
First Quarter $ 0.30 $ 0.14 Second Quarter $ 0.30 $ 0.14 Third Quarter $ 0.30 $ 0.11 Fourth Quarter $ 0.28 $ 0.05
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.
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.
Item 6. Selected Financial Data
The following tables set forth summary financial information for the periods indicated. This information should be read in conjunction with the Company's consolidated financial statements (including the notes thereto) included herein.
STATEMENT OF OPERATIONS DATA
BALANCE SHEET DATA
Item 7.
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.
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,
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.
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
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.
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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not required of the Company at this time.
Item 8.
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.
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.
PART III
Item 10.
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.
Item 11. Executive Compensation
The section entitled "Executive Compensation" in the Annual Meeting Proxy Statement is incorporated herein by reference.
Item 12.
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.
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.
PART IV
Item 14.
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.
Report of Former Independent Accountants - PricewaterhouseCoopers LLP
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31, 1999, December 31, 1998 and the 10 month period ended December 31, 1997
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
Consolidated Statements of Cash Flows for the years ended December 31, 1999, December 31, 1998 and the 10 month period ended December 31, 1997
Notes to Consolidated Financial Statements
(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).
4.5 Pledge Agreement, dated as of January 27, 1999, between DGJ and C. Jill Beresford (13).
4.6 Common Stock Purchase Warrant issued by the Company to Global Financial Services, Inc. (14).
4.7 Common Stock Purchase Warrant issued by the Company to DGJ, L.L.C. (14).
4.8 Common Stock Purchase Warrant issued by the Company to Brantrock (14).
10** 1990 Stock Option Plan (1).
10.1** Form of Employment Agreement of Dennis N. Caufield (3).
10.2** Form of Employment Agreement of C. Jill Beresford (3).
10.3** Form of Employment Agreement of Alex F. Vaicunas (3).
10.4** 1993 Stock Option Plan (3).
10.5 Stock Exchange Agreement by and between the Company and Ronald V. Caufield (4).
10.6** Employment Agreement of Ronald V. Caufield (4).
10.7 Agreement for Purchase and Sale of Assets, dated June 23, 1995, by and among Market Media, Inc., Floor Focus Media, Inc. and Carmen N. Fasula (5).
10.8 Amendment to Promissory Note of Dennis N. Caufield (7).
10.9 Lease for Premises at 455-473 Somerset Ave., North Dighton, Massachusetts (7).
10.10** 1996 Stock Option Plan (8).
10.11 Loan and Security Agreement by and among the Company, RC America, Inc. and Foothill Capital Corporation (9).
10.12 Secured Promissory Note from the Company and RC America to Foothill (9).
10.13 Pledge and Security Agreement by and between the Company and Foothill (9).
10.14 Continuing Guaranty of Market Media, Inc (9).
10.15 Continuing Guarantee of BPI Packaging (UK) Limited (9).
10.16 Security Agreement by and between Market Media, Inc. and Foothill (9).
10.17 Security Agreement by and between BPI Packaging (UK) Limited and Foothill (9).
10.18* Settlement Agreement by and between the Company and Mobil Oil Corporation, dated December 10, 1996 (9).
10.19 Loan and Security Agreement by and among the Company, RC America, Inc. and Foothill Capital Corporation (10).
10.20 Secured Promissory Note from the Company and RC America, Inc. to Foothill (10).
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).
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.
(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.
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 - - ----------------------
BPI PACKAGING TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ----
Report of Independent Accountants -- Livingston & Haynes, P.C.
Report of Former Independent Accountants - PricewaterhouseCoopers LLP
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31, 1999, December 31, 1998 and the 10-month period ended December 31, 1997
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, December 31, 1998 and the 10-month period ended December 31, 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999, December 31, 1998 and the 10-month period ended December 31, 1997
Notes to Consolidated Financial Statements
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
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 through) 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
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.
BPI Packaging Technologies, Inc.
Consolidated Balance Sheet
Liabilities and Stockholders' Equity
The accompanying notes are an integral part of these consolidated financial statements.
BPI Packaging Technologies, Inc.
Consolidated Statement of Operations
The accompanying notes are an integral part of these consolidated financial statements.
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
The accompanying notes are an integral part of consolidated financial statements.
BPI Packaging Technologies, Inc.
Consolidated Statement of Cash Flows
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
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
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,
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
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.
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.
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 ============ ============
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,
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.
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.
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.
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) ============ ============
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.
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
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:
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 ======
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.
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.
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
Valuation and Qualifying Accounts and Reserves For the 10 Month Period Ended December 31, 1998
S-2
Valuation and Qualifying Accounts and Reserves For the 10 Month Period Ended December 31, 1997
S-3