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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 33-95318
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PORTOLA PACKAGING, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-1582719
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
890 FAULSTICH COURT
SAN JOSE, CALIFORNIA 95112
(Address of principal executive offices, including zip code)
(408) 453-8840
(Registrant's telephone number, including area code)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. / /
Registrant's voting stock is privately held and the aggregate market value
of the voting stock held by non-affiliates is not calculable.
11,942,733 shares of Registrant's $.001 par value Common Stock, consisting
of 2,134,992 shares of nonvoting Class A Common Stock and 9,807,741 shares in
the aggregate of voting Class B Common Stock, Series 1 and 2 combined, were
outstanding at October 30, 1998.
Documents incorporated by reference: None
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PORTOLA PACKAGING, INC.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures
Trademark acknowledgments
Cap Snap-Registered Trademark-, Snap Cap-Registered Trademark-, Cap Snap
Seal-Registered Trademark-, Portola Packaging-Registered Trademark-,
Nepco-Registered Trademark-, Non-Spill-Registered Trademark- TWIST & SPOUT
- -Registered Trademark-, Cap Profile Logo-Registered Trademark- and the Portola
logo are registered trademarks of Portola Packaging, Inc. (the "Company").
All other product names of the Company are trademarks of the Company.
PART I
Item 1. BUSINESS
Overview
Portola Packaging, Inc. (together with its subsidiaries referred to
hereinafter as the "Company" or "Portola") is a leading designer,
manufacturer and marketer of tamper evident plastic closures and related
equipment used for packaging applications in dairy, fruit juice, bottled
water, sports drinks, institutional food products and other
non-carbonated beverage products. The Company's principal closure
product lines include (i) small closures, (ii) five gallon closures,
(iii) widemouth closures, (iv) fitments and (v) push-pull dispensing
closures. Portola also designs, manufactures and supplies high speed
capping equipment and complete turnkey water bottling systems, which are
marketed by the Company primarily under the tradename "PortaPlant". The
Company's Canadian operations also manufacture a wide variety of blow
molded plastic bottles for food and industrial applications. Portola's
closure products are primarily manufactured through a technologically
advanced, high speed injection molding process at seven modern
manufacturing facilities strategically located throughout the United
States, three facilities located in Canada, one facility located in the
United Kingdom and through joint venture operations located in China,
Mexico and Europe. Management believes that the Company is a leader in
a majority of the markets it serves and that the Company is the sole or
largest supplier of plastic closures for a majority of its customers.
The Company sells over 11.4 billion closures annually under the names
Cap Snap, Nepco, Portola and other brand names to over 3,000 customers.
Most of the Company's customers have been doing business with the
Company for more than ten years. The Company's products are used to cap
such well known consumer products as Borden milk, Dole juices, Poland
Spring bottled water, Pepsi-Cola fountain syrups and Kraft barbecue
sauce. Many features of the Company's closure products are proprietary,
and Portola holds more than 70 patents on the design of container
closures and compatible bottle necks.
History
Portola Packaging, Inc. (together with its subsidiaries referred to
as the "Company" or "Portola") was incorporated in California in 1964,
and reincorporated in Delaware in April 1994. The Company (formerly
known as Cap Snap Seal, Inc.) was acquired from the founding family in
1986 by a group led by Jack L. Watts, the Company's current Chairman of
the Board and Chief Executive Officer. Since Portola was acquired from
the founding family, the size of the Company as measured by sales and
closure unit volume has increased from $26.1 million in sales and 2.1
billion in units sold for fiscal 1987 to $176.2 million in sales and
11.4 billion in units sold for fiscal year 1998. Portola's senior
management has significant experience in the plastic packaging business
and an average tenure of eight years at the Company.
Consistent with the Company's objective to expand through strategic
acquisitions, on June 30, 1994, the Company acquired Northern
Engineering & Plastic Corp. and certain related companies and assets
(collectively, "Nepco") for a purchase price of $43.7 million. The
acquisition of Nepco, a designer, manufacturer and marketer of tamper
evident plastic closures in markets similar to those served by Portola,
has enabled the Company to establish new customer relationships,
diversify and expand its product offerings and customer base and benefit
from Nepco's proprietary product designs. On June 16, 1995, the Company
purchased for $13.6 million the 50% interest it had not previously owned
in Canada Cap Snap Corporation, a British Columbia corporation engaged
in manufacturing and distributing small closures in western Canada,
together with all the capital stock of two affiliated plastic bottle
manufacturers (the "Western Canadian Acquisition"). The companies
acquired in the Western Canadian Acquisition were amalgamated and now
operate under the name "Portola Packaging Canada Ltd.",and were recently
continued under the laws of the Yukon Territory. On September 1, 1996,
the Company purchased for $2.1 million Rapid Plast J-P. Inc. (Rapid
Plast), a company headquarted in Montreal, Quebec (the "Eastern Canadian
Acquisition"). Rapid Plast now operates under the name "Portola
Packaging Ltd." and is engaged in manufacturing and distributing plastic
bottles, primarily in eastern Canada and recently continued under the
laws of the Yukon Territory. The Canadian acquisitions have enabled the
Company to establish a position in the Canadian bottle manufacturing
marketplace and to advance its position in the Canadian closure
marketplace. On September 1, 1995, the Company purchased for $1.5
million the 50% interest it had not previously owned in Cap Snap (U.K.)
Ltd., now known as "Portola Packaging U.K Ltd." (the "U.K.
Acquisition"). The Company leased a manufacturing facility located in
Doncaster, South Yorkshire, England which is being used by Portola
Packaging Ltd. to manufacture closures for distribution primarily in the
United Kingdom, with some exports to Europe.
Disclosures Regarding Forward-Looking Statements
This report includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Act of 1934, as amended. All statements
other than statements of historical facts included in this Form 10-K,
including, without limitation, statements contained in the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" regarding the Company's financing alternatives, financial
position, business strategy, plans and objectives of management of the
Company for future operations, and industry conditions, are
forward-looking statements. Certain statements, including, without
limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," "plans," and words of similar import, constitute
forward-looking statements. Readers are referred to the sections of this
Report entitled "Risk Factors, "Plastic Closure Market", "Raw Materials
and Production" and "Competition". These sections describe risks which
could cause actual results to differ materially from such forward-
looking statements. Although the Company believes that the expectations
reflected in any such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been
correct. Any forward-looking statements herein are subject to certain
risks and uncertainties in the Company's business, including but not
limited to, competition in its markets, and reliance on key customers,
all of which may be beyond the control of the Company. Any one or more
of these factors could cause actual results to differ materially from
those expressed in any forward-looking statement. All subsequent written
and oral forward-looking statements attributable to the Company or any
person acting on its behalf are expressly qualified in their entirety by
the cautionary statements disclosed in this paragraph and elsewhere in
this report.
Business Strategy
The Company's primary strategy is to increase cash flow by
maintaining and extending its leading position in product applications
within the plastic closure and bottling industry. To support this
strategy, the Company focuses on (i) advancing research and development
and product engineering, (ii) providing dedicated customer support and
total product solutions for customers, (iii) continuing to improve
production efficiencies and enhance low cost manufacturing capabilities,
(iv) expanding sales in international markets where significant growth
opportunities exist and (v) where appropriate, seeking strategic
acquisitions that will strengthen the Company's competitive position.
Emphasizing Research and Development and Product Engineering. The
Company is continuing its commitment to research and development, a
commitment that has led to significant product innovations. These
innovations include the original snap cap design and the five gallon
closure, the "tear strip" feature that has become a standard tamper
evident mechanism for food and non-carbonated beverage products,
improved recloseable plastic dispensing fitments for gable-top fruit
juice and milk cartons and the snap-screw cap.
Emphasizing Customer Support and Total Product Solutions. The
Company seeks to preserve its long-term relationships with customers and
attract new customers by providing on-time delivery and technical
service and support and by marketing its products as "total product
solutions." The total product solution approach includes seeking at all
times to provide plastic closures designed to meet customer
specifications, compatible container necks and neck inserts, capping and
filling equipment and on-going service and support.
Continuing to Enhance Low Cost Manufacturing Capabilities. The
Company's operations emphasize minimizing production and raw materials
purchasing costs. The Company has a continuing productivity improvement
program designed to further automate its production flow, streamline its
workforce and upgrade its molds, equipment and systems. See "Raw
Materials and Production."
Expanding Sales in International Markets. The Company expects
significant growth in international markets for plastic closures and
capping and filling equipment, as bottled water and other non-carbonated
water companies in Europe, the Far East, Latin America and elsewhere
adopt more advanced packaging materials and techniques. The Company is
seeking to capitalize on the opportunity for expansion into
international markets through the formation of joint ventures with local
bottle manufacturers, bottlers, and distributors and by increasing
export sales of closures and capping and filling equipment. To date, the
Company has entered into joint ventures in Mexico and China and has
acquired the remaining 50% interest of the Company's joint ventures in
Canada and the United Kingdom. In addition, the Company signed a joint
venture agreement with Greiner A.G. of Austria on October 19, 1998 to
sell five gallon water caps and to produce and sell five gallon water
bottles for the European and Middle Eastern marketplaces. The Company
has no firm plans at this time for expansion into other international
markets although it will continue to evaluate other expansion
opportunities as they arise. See "International Sales and Joint
Ventures."
Seeking Strategic Acquisitions. Portola plans to continue its
program of seeking to acquire businesses serving similar customers using
proprietary product and process technology that offer opportunities to
improve costs or extend the Company's product lines. Since fiscal 1994,
the Company has acquired Nepco and its Canadian and United Kingdom
operations, and entered into joint ventures in Mexico, China and Europe.
Plastic Closure Market
Portola competes in the closure segment of the worldwide container
packaging industry, focusing specifically on proprietary tamper evident
plastic closure applications. Container closure devices have various
applications with designs engineered to meet specific use requirements.
Major product applications for container closures include food,
beverages, toiletries, cosmetics, drugs and pharmaceuticals.
Closure design is a function of the type of container and its
contents. Products which are carbonated, perishable, highly acidic or
susceptible to tampering all require specialized capping applications.
In many instances, it may be necessary for the container to be
resealable, or it may be preferable for the contents to be dispensed
through the closure without the closure being removed. Subject to these
and other packaging requirements, container closures can be made from
either plastic or metal.
The use of plastic closures has grown with the trend toward tamper
evident packaging. A tamper evident feature is highly valued by the food
and beverage market and the pharmaceutical market, and tamper evident
features are experiencing growth in most segments of the closure market.
While certain tamper evident devices can be incorporated into metal
closures, the most sophisticated devices have been developed for plastic
closures. Portola invented the original snap-on cap design as well as
the "tear strip" feature with breakaway bands for plastic closures,
which provided the standard tamper evident mechanism for the food and
non-carbonated beverage industries.
Historically, demand for the Company's products has been a function
of population growth, increasing concerns by the public about the
sanitation of packaged food and beverage products, and the continued
increase in the use of plastic containers, as opposed to glass or metal,
throughout the packaged food industry. For juice, dairy and bottled
water markets, demand is also a function of seasonal climate variations,
warm weather being responsible for increased consumption. In addition,
demand is a function of general economic conditions and business cycles.
See "Products" and "Product Development."
Products
Portola designs, manufactures and markets a wide array of tamper
evident plastic closures for applications in dairy, fruit juice, bottled
water, sport drinks, institutional food products and other
non-carbonated beverage products. The Company also designs, manufactures
and markets (i) high speed capping equipment for use by its plastic
closure customers in their bottling and packaging operations,
(ii) customized bottling systems for returnable water cooler bottles
which it markets primarily under the name "PortaPlant", and (iii) blow
molded bottles for use in the dairy, water, juice and industrial
markets. The Company's sales of plastic closures represented
approximately 86% of total sales in fiscal year 1998 and 89% of total
sales for fiscal years 1996 through 1997. In fiscal year 1998, the
balance of the sales were for equipment ( 6%) and bottles (8%).
Plastic Closures
The Company's plastic closures are broadly grouped into five
categories: (i) small closures used to cap blow-molded plastic bottles,
(ii) closures for five gallon returnable glass and plastic water cooler
bottles, (iii) widemouth closures for institutional food products,
(iv) fitments for gable-top containers (such as conventional paperboard
milk and juice cartons) and (v) push-pull dispensing closures for
bottled water, flavored water and sports drinks. The Company offers a
wide variety of plastic closures under each of its principal product
lines to satisfy specific market application and customer requirements.
Most of the Company's plastic closures offer its snap-on or snap-screw
feature, designs preferred by packagers because they reduce production
costs and leakage. The Company's plastic closures also incorporate tear
strips, breakaway bands or other visible tamper evident devices, a
feature that has become an industry standard for food and non-carbonated
beverage products. The Company's plastic closures range in size from
28mm to 110mm, and conform with international packaging standards. The
Company offers over 34 individual closure products. The Company also
offers 32 standard colors, in addition to custom-blended colors, and
sophisticated printing, embossing and adhesive labeling capabilities to
provide product distinction for its customers.
The following table describes the Company's principal plastic
closure product lines.
Capping Equipment
The Company also designs, manufactures and markets capping equipment
for use in high speed bottling, filling and packaging production lines.
A substantial majority of the Company's plastic closure customers use
the Company's capping equipment. The Company's ability to supply capping
equipment and technical assistance along with its plastic closures
represents an important competitive advantage, as customers are assured
that the Company's plastic closures will be applied properly to provide
leakproof seals, and that any capping problems will be resolved quickly.
PortaPlants
In addition to plastic closures and capping equipment, the Company
also designs, manufactures and markets customized five gallon water
capping and filling systems. The Company's most comprehensive five
gallon water bottling system is its PortaPlant system. The PortaPlant is
a compact bottle washing, filling, capping and conveying system for
glass and plastic water bottles that can, depending on size, process 225
to 3,000 bottles per hour. The PortaPlant's modular design makes it
ideal for new and small water bottling companies as well as established
companies whose growth requires integrated expansion. Portola has
focused its sales efforts for PortaPlants internationally as less
developed countries look for improved distribution of safe and reliable
drinking water.
Plastic Bottles
In Canada, in addition to marketing closures, the Company produces a
wide variety of blow molded high density polyethylene (HDPE) plastic
bottles for use in the dairy, water and juice industries. The ability
to market the closures and bottles together enables the Canadian
operations to provide its customers with a complete packaging system.
.
Product Development
The Company continues to be committed to product development and
engineering. Its research and development group and engineering staff
provide a range of design and development services, focusing primarily
on (i) new products and product enhancements, (ii) tooling and molds
necessary for manufacturing plastic closures and (iii) capping equipment
compatible with the Company's closures and its customers' containers.
Research and development expenditures for fiscal years 1998, 1997 and
1996 were $2.5 million , $2.4 million and $2.2 million, respectively.
The Company has also made a substantial investment in developing new
product applications for existing markets as well as applications for
new markets. To facilitate the process of enhancing and developing new
products and to ensure ultimate market acceptance of such products, the
Company encourages an on-going exchange of ideas with customers,
container manufacturers, machinery manufacturers and sales and service
personnel. This approach has enabled the Company to identify new product
opportunities, including improved closures recently developed for the
fitment and institutional foods industries.
The Company's typical product development cycle has been less than
one year. However, successful introduction of a new closure product can
take two to three years, principally because customers who are
comfortable with their existing closure products are generally slow to
switch to a new design, particularly in light of the relatively small
cost of the closure component to the overall packaging unit.
Raw Materials and Production
The principal raw material for the Company's plastic closures is
injection molding grade low density polyethylene (LDPE) resin, which
generally accounts for at least 50% of the cost of all raw materials
purchased for the Company's plastic closures. The Company believes that
due to its volume purchases it is able to negotiate better pricing with
resin suppliers, although prices for LDPE resin can fluctuate
substantially over relatively short periods of time. The Company has
not experienced any significant difficulties over the past ten years in
obtaining sufficient quantities of LDPE resin. In the past, the Company
has been able to pass substantially all resin price increases on to its
customers on a timely basis. However, significant increases in resin
prices, coupled with an inability to promptly pass such increases on to
customers, would have a material adverse effect on the Company's
financial condition and results of operations. Accordingly, the Company
has recently identified less expensive grades of linear LDPE resin that
it plans to begin using in certain products.
In order to produce plastic closures, the resin, which is delivered
as small pebble-size pellets to large storage silos, is conveyed through
a pipeline system to an injection molding machine, where it is melted
into a thick liquid state. Coloring agents are added as appropriate and
the mixture is injected at high pressure into a specially designed,
multi-cavity mold. The principal equipment in the Company's plants
includes injection molding machines, finishing lines to print and label
caps and line them with foam or foil to meet customer requirements, and
automated systems for handling and processing raw materials and finished
goods. By automating its manufacturing operations, the Company is able
to limit its direct labor costs while meeting the strict sanitary
requirements necessary for producing food and beverage packaging
products.
In the past, the Company designed and manufactured many of its own
molds. However, the increasing size and complexity of certain molds for
new products have caused the Company to out-source its mold construction
needs. The Company still maintains design control over these molds.
Backlog
Production and delivery cycles for closures is very short and the
Company's backlog for closures is generally cancelable on short notice.
Backlog for closures is generally two to three weeks of orders, and is
relatively constant from period to period. Contracts for equipment
purchases generally include cancellation penalties. Due to the short
production and delivery cycles for closures, the Company does not
believe backlog information is a material factor in understanding its
business.
Sales, Marketing and Customer Service
The Company markets its products through its internal sales
department and through domestic and international networks of
independent sales representatives. Calls on customers by these
salespersons and representatives, along with participation at trade
shows, are the primary means of customer contact. A number of the
Company's customers are large corporate clients with numerous production
facilities, each of which may make its own separate purchase decisions.
The Company's most significant customers are processors and packagers of
fluid milk, non-carbonated bottled water, chilled juice, other flavored
drinks and condiments for wholesale and institutional use. The Company's
customer base includes over 3,000 accounts. The Company's top ten
customers and buying groups accounted for approximately 27% of the
Company's sales during the fiscal year ended August 31, 1998, and none
accounted for more than 5% of sales during that period. Most of the
Company's customers have been doing business with the Company for more
than ten years.
Attention to customer service is a critical component of the
Company's marketing effort. The Company's customers operate high-speed,
high-volume production lines, with many handling perishable products. In
order to assure that the production lines operate efficiently and avoid
costly line stoppages, customers rely on the Company's ability to
provide reliable, on-time delivery of its closure products and to
maintain uniform quality of those products. The Company also provides
technical assistance to its customers in the form of an in-house service
team that can be dispatched on short notice to solve a bottling line
problem throughout the world. Several of the Company's field service
representatives have extensive blow-molding technical expertise that is
especially important in resolving bottle leakage problems for customers.
International Sales and Joint Ventures
Although the Company's sales are primarily domestic, the Company has
experienced growth in international sales. International sales have
increased to $46.3 million in 1998 from $41.2 million and $33.6 million
in 1997 and 1996, respectively, due to bottled water companies and other
non-carbonated beverage companies in Europe, the Far East, Latin America
and elsewhere adopting more advanced packaging materials and techniques.
For the fiscal years ended August 31, 1998, 1997 and 1996, export sales
from the United States to unaffiliated customers were $9.4 million,
$12.0 million and $17.6 million, respectively. The Company's export
sales from the United States have declined as the United Kingdom and
Canadian subsidiaries have produced and sold product locally. Sales are
growing in these regions but through local manufacture. (See Note 14 of
the Consolidated Financial Statements).
In the last several years, the Company has utilized joint ventures
with bottle manufacturers, bottlers and distributors to gain footholds
in international markets. By offering plastic closures, capping
equipment and turnkey bottling systems, the Company can provide joint
venture partners with a complete solution to their bottling and capping
requirements. Subsidiaries in Canada and the United Kingdom, now wholly-
owned by Portola, began as joint ventures in which the Company was a
venture partner. Currently the Company has a 50% interest in Portola
Packaging Inc. Mexico (formerly Cap Snap Mexico), a joint venture formed
in Mexico in 1993 with a local producer of plastic bottles and closures.
On November 14, 1997, the Company signed a joint venture agreement
with the Shanghai Aquarius Drinking Water Company (Aquarius) to
manufacture and sell closures and bottles for the Asian marketplace.
Aquarius is a leading bottled water company in the Shanghai Province of
China. In addition, the Company signed a joint venture agreement with
Greiner A.G. of Austria on October 19, 1998 to sell five gallon water
caps and to produce and sell five gallon water bottles for the European
and Middle Eastern marketplaces.
Competition
The Company competes in marketing container closures to the food and
beverage industry on the basis of price, product design, product quality
and reliability, on-time delivery and customer service. Among the
attributes that the Company believes distinguish it from other sellers
of closure systems and provide a competitive advantage are the Company's
proprietary products, the Company's ability to provide its customers
with innovative, low-cost closures and complete capping systems, the
Company's reputation for quality, reliability and service and the
Company's automated and strategically located production facilities.
While no single competitor offers products that compete with all of
the Company's product lines, the Company faces direct competition in
each of its product lines from a number of companies, many of which have
financial and other resources that are substantially greater than those
of the Company. As the Company broadens its product offerings, it can
expect to meet increased competition from additional competitors with
entrenched positions in those product lines. The Company also faces
direct competition from bottling companies and other food and beverage
providers that elect to produce their own closures rather than purchase
them from outside sources. In addition, the packaging industry has
numerous well-capitalized competitors, and there is a risk that these
companies will expand their product offerings, either through internal
product development or acquisitions of any of the Company's direct
competitors, to compete in the niche markets that are currently served
by the Company. These competitors, as well as existing competitors,
could introduce products or establish prices for their products in a
manner that could adversely affect the Company's ability to compete.
Because of the Company's product concentration, an increase in
competition or any technological innovations with respect to the
Company's specific product applications, such as the introduction of
lower-priced competitive products or products containing technological
improvements over the Company's products, could have a significant
adverse effect on the Company's financial condition and results of
operations.
Employees
As of August 31, 1998, the Company had 1,043 full-time employees, 27
of whom were engaged in product development, 66 in marketing, sales and
customer support, 869 in manufacturing and 81 in finance and
administration. The Company uses seasonal and part-time employees for
training, vacation replacements and other short term requirements. None
of the Company's employees in the United States are represented by any
collective bargaining agreements; approximately 38 of the employees of
one of the Company's Canadian subsidiaries are members of the Teamsters
Union. The Company has never experienced a work stoppage. The Company
believes that its employee relations are good.
Risk Factors
The following risk factors, in addition to the risks described
elsewhere in the description of the Company's business in this report,
including, without limitation, those described under the captions
"Plastic Closure Market", "Raw Materials and Production" and
"Competition" may cause actual results to differ materially from those
in any forward-looking statements contained in such business description
or elsewhere in this report or made in the future by the Company or its
representatives:
Substantial Leverage; Limitations Associated with Restrictive Covenants
At August 31, 1998, the Company had indebtedness outstanding of
approximately $131 million. $110 million of this amount represented the
principal amount of the senior notes issued by the Company in October
1995, which is due in 2005; $15 million of the balance represented funds
drawn under the Company's $35 million line of credit; the remaining
amount of the indebtedness was comprised of foreign subsidiary loans.
The degree to which the Company is leveraged could have important
consequences, including the following: (i) the Company's ability to
obtain financing for future working capital needs or for acquisitions or
other purposes is limited and from time to time in the future may be
limited; (ii) a substantial portion of the Company's cash flow from
operations will be dedicated to debt service, thereby reducing funds
available for operations; (iii) certain of the Company's borrowings,
including borrowings under the Company's credit facility, will be at
variable rates of interest, which could cause the Company to be
vulnerable to increases in interest rates; and (iv) the substantial
indebtedness and the restrictive covenants to which the Company is
subject under the terms of its indebtedness may make the Company more
vulnerable to economic downturns, may reduce its flexibility to respond
to changing business conditions and opportunities and may limit its
ability to withstand competitive pressures. The Company's ability to
make scheduled payments of the principal of and interest on, or to
refinance, its indebtedness will depend upon its future operating
performance and cash flows which are subject to prevailing economic
conditions, market conditions in the packaging industry, prevailing
interest rates and financial, competitive, business and other factors,
many of which may be beyond the Company's control.
Dependence on New Business Development
The Company believes that the domestic markets for its traditional
products have become relatively mature and that, in order to grow, the
Company will increasingly rely on new products, such as fitments and
non-spill closures, as well as expansion into international markets.
Developing new products and expanding into new markets will require a
substantial investment and involve additional risks such as assessing
the values, strengths, weaknesses and potential profitability of
acquisition candidates. There can be no assurance that the Company's
efforts to achieve such development and expansion will be successful.
There are additional risk of potential adverse effects on the Company's
operating results, the diversion of management's attention, the loss of
key personnel and the risks of unanticipated problems and liabilities.
Moreover, as described above, the Company's debt instruments impose
significant restrictions under certain circumstances on the ability of
the Company to make investments.
The Company's international operations are subject to certain risks
associated with doing business in foreign countries, including the
possibility of adverse governmental regulation, additional taxation,
exchange rate fluctuations and other potential risks. There can be no
assurance that the Company's foreign operations will be successful or
will not require additional funding.
Consumer Complaints; Governmental Regulation
Many of the Company's products are used to cap food and beverage
products. It is possible that some of the Company's products, if used
improperly, could cause injury to consumers of food and beverage
products capped with the Company's closures. In such event, the Company
could incur substantial costs in responding to complaints or litigation
related to its products, which could materially adversely affect the
financial condition and operations of the Company. In addition, if any
of the Company's products were found to be defective, the Company could
incur significant costs in correcting any product deficiencies, in
addition to suffering the loss of revenues derived from such products.
The Company's products are subject to governmental regulation,
including regulation by the Federal Food and Drug Administration and
other agencies with jurisdiction over effectiveness of tamper-resistant
devices and other closures for dairy and other food and beverage
products. A change in government regulation could adversely affect the
Company. There can be no assurance that federal or state authorities
will not develop protocols in the future that would materially increase
the Company's costs of manufacturing certain of its products.
Direct Competition
The Company faces direct competition in each of its product lines
from a number of companies, some of which have financial and other
resources that are substantially greater than those of the Company. As
the Company broadens its product offerings, it can expect to meet
increased competition from additional competitors with entrenched
positions in those product lines. The Company also faces some direct
competition from bottling companies and other food and beverage
providers that elect to produce their own closures rather than purchase
them from outside sources. In addition, the packaging industry has
numerous well-capitalized competitors, and there is a risk that these
companies will expand their product offerings, either through internal
product development or acquisitions of any of the Company's direct
competitors, to compete in the niche markets that are currently served
by the Company. These competitors, as well as existing competitors,
could introduce products or establish prices for their products in a
manner that could adversely affect the Company's ability to compete.
Because of the Company's product concentration, an increase in
competition or any technological innovations with respect to the
Company's specific product applications, such as the introduction of
lower-priced competitive products or products containing technological
improvements over the Company's products, could have a significant
adverse effect on the Company's financial condition and results of
operations.
Limited Protection of Intellectual Property
The Company has a number of patents covering various aspects of the
design and construction of its products. The Company presently is a
party to a number of lawsuits challenging the validity of certain of its
patented technology, and in one lawsuit which was settled in 1996 agreed
to pay royalties to another company for a closure product manufactured
by the Company that was alleged to have infringed on certain patents of
the other company. There can be no assurance that the Company will be
successful in protecting its proprietary technology from third party
infringement or that the Company's products will not be found to
infringe upon the proprietary technology of others. Furthermore,
patents do not ensure that competitors will not develop competing
products.
The Company now markets its products internationally, and the
protection offered by the patent laws of foreign countries may be less
than the protection offered by the United States patent laws. The
Company also relies on trade secrets and know-how to maintain its
competitive position. While the Company enters into confidentiality
agreements with employees and consultants who have access to proprietary
information, there can be no assurance that these measures will prevent
the unauthorized disclosure or use of such trade secrets and know-how.
Dependence Upon Key Personnel
The Company believes that its future success is dependent upon
factors such as the knowledge, ability and experience of its personnel,
new product development, product enhancements and ongoing customer
service. The loss of key personnel responsible for managing the Company
or for advancing its product development could adversely affect the
Company's business and financial condition.
Absence of a Public Market for the Company's Securities
There is no public market for the Company's common stock, and it is
not expected that one will develop. In addition, there are substantial
restrictions on the ability of a holder of the Company's common stock to
transfer shares of such stock. Accordingly, it is difficult for a
stockholder of the Company to divest itself of its investment in the
Company. Furthermore, the Company historically has not paid dividends
to its stockholders.
Item 2. PROPERTIES
The Company currently owns or leases nine modern production
facilities located in the United States, which operate five to seven
days a week, 24 hours a day. One of these production facilities
(Bettendorf, Iowa) was closed in July 1997 and has been listed for sale.
In conjunction with a restructuring effective in August 1998, the
Company announced the closing of another facility (Fort Worth, Texas) in
October 1998. The Company's western Canadian subsidiary leases two
production facilities in Richmond, British Columbia, Canada and
Edmonton, Alberta, Canada and the Company's eastern Canadian subsidiary
leases one production facility in Montreal, Quebec, Canada. In addition,
the Company leases a manufacturing facility located in Doncaster, South
Yorkshire, England for use by its United Kingdom subsidiary. The
Company's facilities are highly efficient due to automation and
frequently scheduled maintenance throughout the plants. The Company
believes that these facilities are well-maintained and in good operating
condition and anticipates that, although substantial capital
expenditures will be required to meet the production requirements for
new and developing product lines, the facilities themselves will be
sufficient to meet the Company's needs for the next year or two. There
can be no assurance, however, that unanticipated developments will not
occur that would require the Company to add production facilities sooner
than expected. The following table indicates the locations, functions,
square footage and nature of ownership of the Company's current
facilities.
Nature
of
Square Owner-
Location Functions Feet ship(1)
- ----------------------------- -------------------------------- -------- --------
San Jose, CA................ Executive Office/Closure Mfg./ 154,000 owned
Warehouse Engineering/
Research and Development
Facility and Equipment
Division
Kingsport, TN............... Closure Mfg./Warehouse 76,000 owned
Clifton Park, NY............ Closure Mfg./Warehouse 54,000 leased
Batavia, IL................. Closure Mfg./Warehouse 70,000 leased
New Castle, PA.............. Executive Office/Closure 65,000 owned
Mfg./Warehouse/Fabrication Shop
Sumter, SC.................. Closure Mfg./Warehouse 45,000 owned
Chino, CA................... Closure Mfg./Warehouse 64,000 owned
Fort Worth, TX.............. Closure Mfg./Warehouse 27,000 owned(2)
Bettendorf, IA.............. Closure Mfg./Warehouse 40,000 owned(3)
Richmond, British Columbia,
Canada.................... Bottle & Closure Mfg./Warehouse 49,000 leased
Edmonton, Alberta, Canada... Bottle Mfg./Warehouse 43,000 leased
Montreal, Quebec, Canada.... Bottle Mfg./Warehouse 44,000 leased
Doncaster, South Yorkshire,
England................... Closure Mfg./Warehouse 50,000 leased
- -------------------------
(1) The facilities shown as leased in the table above are subject to
long-term leases or lease options that extend for at least five
years, except as follows: the lease of the Clifton Park facility
expires in November 1998 but has been extended on a monthly basis
until an extension is finalized, the leases for the Richmond and
Edmonton, Canada facilities expire in 2001.
(2) The Company announced the closing of this facility effective October
1998.
(3) The Company closed this facility in July of 1997. This property has
been listed for sale.
Item 3. LEGAL PROCEEDINGS
The plastic closure industry is characterized by frequent litigation
regarding patent and other intellectual property rights. The Company
and certain of its subsidiaries are engaged in patent infringement
litigation with four parties who are seeking to have the court declare
certain patents owned by the Company and such subsidiaries invalid. Two
of these parties have also included allegations of anti-trust violations
in their complaints. The Company believes that its patents and the
patents of its subsidiaries are valid and is contesting these
allegations vigorously. There can be no assurance, however, that the
Company and its subsidiaries will be successful in their defense of
these matters. In addition, there can be no assurance that other
infringement litigation will not be brought in the future against the
Company or its subsidiaries, that any such litigation will not be
expensive and protracted or that, as a result of such litigation, the
Company or its subsidiaries will not be required to terminate a business
practice or seek to obtain a license to the intellectual property of
others. The Company is also party to a number of other lawsuits and
claims arising out of the normal course of business.
Although there can be no assurances, management does not believe the
final disposition of these matters will have a material adverse effect
on the financial position, results of operations or cash flows of the
Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's equity securities are privately held and no class of
voting securities is registered pursuant to Section 12 of the Securities
Exchange Act of 1934. There is no established trading market for any
class of the Company's common equity.
The Company has two classes of common equity, Class A Common Stock
and Class B Common Stock, Series 1 and 2. Shares of Class A Common Stock
are not entitled to vote. The Company's Class B Common Stock, Series 1
and Class B Common Stock, Series 2 have the same voting rights, each
share being entitled to one vote.
As of October 30, 1998, there were two holders of record of the
2,134,992 outstanding shares of Class A Common Stock. Additionally,
there were two holders of record of immediately exercisable warrants to
purchase 2,492,741 shares of Class A Common Stock. As of October 30,
1998, there were approximately 186 holders of record of the 8,636,311
outstanding shares of Class B Common Stock, Series 1 and 13 holders of
record of the 1,171,430 outstanding shares of Class B Common, Series 2.
See Note 10 of the Notes to Consolidated Financial Statements for
additional information on stock and warrants.
The Company has not paid dividends on its Common Stock and presently
intends to continue this policy in order to retain earnings for the
development of the Company's business. Furthermore, certain of the
Company's credit agreements, including the senior notes issued on
October 2, 1995 and the senior revolving credit facility entered into on
October 2, 1995, restrict the Company's ability to pay dividends. In
addition, the Canadian loan agreements prohibit the western Canadian
subsidiary from paying dividends to the parent company.
Item 6. SELECTED FINANCIAL DATA
Selected Historical Condensed Consolidated Financial Data
The selected historical condensed consolidated statement of
operations and balance sheet data set forth in the table below for, and
at the end of, each of the fiscal years in the five year period ended
August 31, 1998 have been derived from, and are qualified by reference
to, the consolidated financial statements of the Company. The
information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements of the Company and
the accompanying notes thereto and other financial information appearing
elsewhere in this report on Form 10-K.
FISCAL YEAR ENDED AUGUST 31,
-------------------------------------------------
1998 1997 1996 1995 1994(A)
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales........................................ $176,234 $170,443 $159,462 $124,650 $70,284
Cost of sales................................ 140,714 135,318 117,592 91,972 51,670
--------- --------- --------- --------- ---------
Gross profit............................... 35,520 35,125 41,870 32,678 18,614
Selling, general and administrative.......... 19,229 19,745 22,035 16,649 8,821
Research and development..................... 2,466 2,428 2,156 1,682 764
Amortization of intangibles(b)............... 3,074 3,322 5,207 3,724 2,025
Write-off of intangibles(c).................. -- -- 7,292 -- --
Restructuring costs.......................... 3,084 4,114 -- -- --
--------- --------- --------- --------- ---------
Income from operations..................... 7,667 5,516 5,180 10,623 7,004
Other (income) expense, net(d)............... (1,132) 208 158 259 477
Interest expense, net........................ 13,297 12,792 11,842 8,483 3,899
Amortization of financing costs.............. 484 559 492 447 433
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item,
cumulative effect of change in
accounting principle and income taxes.... (4,982) (8,043) (7,312) 1,434 2,195
Income tax provision (benefit)(c)............ (571) (632) 865 1,294 1,095
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle..................... (4,411) (7,411) (8,177) 140 1,100
Extraordinary item, net(e)................... -- -- 1,265 -- 790
Cumulative effect of change in accounting
principle(c)............................... -- -- -- -- 85
--------- --------- --------- --------- ---------
Net income (loss)............................ ($4,411) ($7,411) ($9,442) $140 $225
--------- --------- --------- --------- ---------
Net income (loss) per common share........... ($0.37) ($0.63) ($0.80) $0.01 $0.02
--------- --------- --------- --------- ---------
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital.............................. $14,662 $7,315 $21,370 $13,747 $11,049
Total assets................................. 148,860 148,286 152,227 129,315 110,820
Total debt................................... 130,708 122,172 117,913 91,912 77,467
Redeemable warrants(f)....................... 7,959 5,675 4,560 3,665 3,055
Total common stock and other
shareholders' equity (deficit).............. (21,405) (13,049) (3,801) 6,694 5,393
CASH FLOW DATA:
Net cash provided by operating activities.... 9,073 14,744 18,795 8,422 9,351
Net cash used in investing activities........ (16,378) (20,841) (31,271) (24,648) (38,418)
Net cash provided by financing activities.... 7,350 1,566 19,511 14,785 30,099
OPERATING AND OTHER DATA:
Closure unit volume (in millions)(unaudited). 11,447 10,800 9,606 8,476 4,893
Closure unit volume growth(g)(unauditec)..... 6.0% 12.4% 13.3% 73.2% 22.9%
EBITDA....................................... $24,809 $20,349 $20,491 $22,706 $14,451
EBITDA(h).................................... 27,179 24,463 27,783 23,588 14,728
Depreciation and amortization(i)............. 16,494 15,600 15,961 12,789 8,357
Capital expenditures......................... 21,436 23,101 27,194 11,302 6,159
Deficiency of earnings to fixed charges(j)... (4,982) (8,043) (9,422) -- --
Ratio of earnings to fixed charges(j)........ -- -- -- 1.2x 1.2x
- -------------------------
(footnotes on following page)
(a) Includes ten months of operations before the Nepco acquisition on
June 30, 1994 and two months of operations after the acquisition.
(b) Includes amortization of patents, goodwill and covenants not to
compete.
(c) The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 109 "Accounting for Income Taxes" in the fiscal year
ended August 31, 1994 and SFAS No. 121 "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed of" in the fiscal year ended August 31, 1996.
(d) Other (income) expense in 1998 includes gain from the sale of
securities of $750,000, gains from the sale of fixed assets of
$714,000 and other net expenses of $332,000. Other expenses in
fiscal year 1994 includes write-off of financing costs in
connection with a debt offering commenced but not completed and
other expenses, net.
(e) Extraordinary item refers to the loss on extinguishment of certain
debt, net of income tax benefit.
(f) The redeemable warrants entitle the holders thereof to purchase an
aggregate of 2,492,741 shares of the Company's Class A Common
Stock. If the Company does not complete an initial public offering
of its common stock by June 30, 1999 (for certain warrants) or
August 1, 2001 (for other warrants), the holders may require the
Company to repurchase the warrants at the higher of current market
value or an amount computed under the warrant agreement.
(g) These results reflect closure unit volume growth of the Company
including Nepco after June 30, 1994. On a pro forma combined
basis, the closure unit volume growth for Portola and Nepco was
11.6% for the fiscal year ended August 31, 1994.
(h) EBITDA represents, for any relevant period, income (loss) before
income taxes, extraordinary item, cumulative effect of change in
accounting principle, depreciation of property, plant, and
equipment, net interest expense and amortization of intangible
assets. Adjusted EBITDA represents, for any relevant period,
income (loss) before income taxes, extraordinary item, cumulative
effect of change in accounting principle, write-off of intangible
assets, restructuring costs, depreciation of property, plant and
equipment, net interest expense, amortization of intangible assets
and non-recurring legal expenses associated with the Company's
litigation with Scholle Corporation through October 2, 1995. The
non-recurring legal expenses associated with the Scholle
Corporation litigation for the fiscal years ended August 31, 1995
and 1994 were $882,000 and $277,000, respectively. In addition, in
1998, the Company's share of its Mexican joint venture's EBITDA,
approximately $417,000, is included as a separate component of the
Adjusted EBITDA calculation. EBITDA and Adjusted EBITDA are not
intended to represent and should not be considered more meaningful
than, or an alternative to, net income, cash flow or other measure
of performance in accordance with generally accepted accounting
principles. EBITDA and Adjusted EBITDA data are included because
the Company understands that such information is used by certain
investors as one measure of an issuer's historical ability to
service debt and because certain restrictive covenants in the
Indenture will be based on a term very similar to the Company's
Adjusted EBITDA.
(i) Includes amortization of debt financing costs.
(j) For the purpose of calculating the ratio of earnings to fixed
charges, "earnings" represents income before provision for income
taxes and fixed charges. "Fixed charges" consists of interest
expense, amortization of debt financing costs and the portion of
lease expense which management believes is representative of the
interest component of lease expense. The ratio of earnings to
fixed charges for the years ended August 31, 1998, 1997 and 1996
resulted in deficiencies of $5.0 million, $8.0 million, and $9.4
million, respectively.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Portola Packaging, Inc. is a major designer, manufacturer and
marketer of tamper evident plastic closures and related equipment used
for packaging applications in dairy, bottled water, fruit juice, sports
drinks and other non-carbonated beverage products. The Company was
acquired in 1986 through a leveraged acquisition led by Jack L. Watts,
the Company's current Chairman of the Board and Chief Executive Officer.
Since the acquisition, management has focused its efforts on four
principal areas: (i) continuing growth by converting new customers to
its plastic closures, (ii) developing new products and improving
existing products, (iii) achieving productivity improvements in its
manufacturing and material handling operations and (iv) seeking
strategic acquisitions including the acquisition of Nepco in 1994 and
certain companies in Canada and the United Kingdom in 1995 and 1996.
The Company also has interests in joint ventures in China, Mexico and
Austria.
The Company currently has three wholly-owned operating subsidiaries;
two of which are located in Canada and one of which is located in the
United Kingdom. The two Canadian subsidiaries are Portola Packaging
Canada Ltd. (located in western Canada) and Portola Packaging Ltd.
(located in eastern Canada); the United Kingdom subsidiary is Portola
Packaging Ltd. In April 1997, the Company's United Kingdom subsidiary.
and eastern Canadian subsidiary were converted to "restricted
subsidiary" (See Note 2 of the Notes to Consolidated Financial
Statements) status to allow greater flexibility in funding the
operations of these subsidiaries under the terms of the indenture
governing the senior notes issued by the Company in October 1995 and
under the terms of the Company's senior credit facility.
Results of Operations
Fiscal Year Ended August 31, 1998 Compared to Fiscal Year Ended
August 31, 1997
Sales increased $5.8 million, or 3.4%, from $170.4 million for
fiscal 1997 to $176.2 million for fiscal 1998. Of the increase, $4.1
million is attributable to increased sales of closures in the United
Kingdom and $3.6 million is due to increased sales from the Canadian
operations (increased bottle sales of $9.0 million offset by a decrease
in closures sales of $5.4 million). Domestic closure operations also
contributed a $1.7 million increase in sales offset by a decrease of
$3.6 million in equipment sales. The increase in domestic sales was due
mainly to price increases in most product lines offset by sales volume
decreases in fitment and widemouth closures. In the United Kingdom and
Canada sales fluctuations were primarily the result of sales volume
increases rather than pricing.
Gross profit increased $395,000, or 1.1%, to $35.5 million for
fiscal 1998, as compared to $35.1 million for fiscal 1997 and decreased
slightly as a percentage of sales from 20.6% in 1997 to 20.2% in 1998.
The margin increase was due primarily to improving margins in the United
Kingdom of $1.5 million and the equipment division in the United States
of $2.4 million, offset by decreases in Canadian and domestic closures
margins. The Company expects its United Kingdom and Canadian operations
to continue to comprise a larger percentage of its sales volume as they
increase market share and become more self sufficient. The United
Kingdom margins improved in fiscal year 1998 as compared to prior years
due to a shift from using outside subcontractors and imported caps to
manufacturing more closures in its own facility. Canadian margins
should improve with planned pricing and volume adjustments related to
new contracts signed with some of the Canadian companies' larger
customers. Equipment margins were low in fiscal year 1997 and have
increased in 1998 due mainly to the favorable settlement of a pricing
contract dispute in 1998 with a former customer. Domestic closures
margins decreased approximately $1.0 million for fiscal year 1998 as
compared to fiscal year 1997 due primarily to increases in labor costs
and depreciation. Overall, direct materials and overhead costs
remained constant at about 42% and 22% of sales, respectively, and labor
costs have increased $2.7 million from fiscal year 1997 to fiscal year
1998.
Selling, general and administrative expense decreased slightly from
$19.7 million in fiscal year 1997 to $19.2 million in fiscal 1998 and
decreased as a percentage of sales from 11.6% for fiscal 1997 to 10.9%
for fiscal 1998. These decreases were primarily due to the decrease in
bonus costs in fiscal 1998 as compared to 1997 as a result of not
achieving certain operating results, offset by increases in consulting
and legal fees and relocation expenses.
Research and development expenses remained constant at $2.4 million
and 1.4% of sales for fiscal year 1998 and fiscal year 1997. These
costs have been affected by increased expenditures for patent and
consulting fees for new product development, offset by fewer costs
associated with prototypes.
Amortization of intangibles (consisting of amortization of patents
and technology licenses, goodwill, customer lists and covenants not to
compete) totaled $3.1 million for fiscal year 1998 as compared to $3.3
million for fiscal 1997. The decrease is primarily due to a decrease in
goodwill and covenant amortization due to the write-off of $1.7 million
of goodwill in 1997.
The Company took measures to improve productivity and quality in
its core business starting in December 1996 when it implemented a
restructuring plan which consolidated its separate closure, packaging
and manufacturing divisions. This restructuring plan included a
reduction in staff positions and the closure of its Portland, Oregon
plant in February 1997 and the closure of its Bettendorf, Iowa facility
in July 1997. The Company recorded a restructuring charge of $2.4
million and wrote-off goodwill of $1.7 million in connection with this
restructuring plan in fiscal 1997. In fiscal year 1998, the Company
took further measures to improve profitability and announced staffing
reductions and the closing of its Fort Worth, Texas facility effective
October 30, 1998. The Company recorded a charge of $3.1 million in 1998
related to this latest restructuring, which consisted primarily of a
write-off of intangible assets of $1.3 million, employee related costs
of $1.2 million and facility writedown and maintenance costs of
$500,000.
Due to the effect of the factors summarized above, income from
operations increased $2.2 million, or 39.0%, to $7.7 million for fiscal
1998, as compared to $5.5 million for fiscal 1997, and increased as a
percentage of sales from 3.2% in fiscal 1997 to 4.4% in fiscal 1998.
Interest income decreased slightly to $498,000 in fiscal year 1998
from $587,000 in fiscal year 1997 due to generally lower levels of
excess cash available for investment.
Interest expense increased $416,000 to $13.8 million in fiscal 1998
as compared to $13.4 million for fiscal 1997. The increase was due to
increased borrowings under the Company's line of credit.
Amortization of debt financing costs decreased $75,000 to $484,000
in fiscal 1998 as compared to $559,000 for the same period in fiscal
1997. Debt financing costs are attributable to the $110 million senior
notes issued in October 1995 and to a lesser extent, debt financing
incurred in western Canada.
Net loss decreased to $4.4 million in fiscal 1998 compared to a $7.4
million loss in fiscal 1997.
Fiscal Year Ended August 31, 1997 Compared to Fiscal Year Ended
August 31, 1996
Sales increased $11.0 million, or 6.9%, from $159.5 million for
fiscal 1996 to $170.4 million for fiscal 1997. Of the increase, $6.2
million was attributable to increased sales volume from the Canadian
operations and $7 million was attributable to increased sales volume
from the United Kingdom operations. Sales from domestic closure
operations remained relatively constant while equipment sales decreased
by $2.4 million. The majority of the increase in sales, $7.6 million,
was due to increases in closures sales volumes, consisting principally
of $4.2 million in increases in sales of small closures, $1.9 million in
increases in sales of fitments and $1.5 million in increases in sales of
5-gallon and widemouth closures. These sales increases were primarily
the result of increased unit sales, and price increases were not a
factor.
Gross profit decreased $6.7 million, or 16.1%, to $35.1 million for
fiscal 1997, as compared to $41.9 million for fiscal 1996. Gross profit
as a percentage of sales decreased from 26.3% for fiscal 1996 to 20.6%
in fiscal 1997. The margin decrease was due to the mix of sales, with a
higher sales volume in units coming from the Canadian and United Kingdom
operations, all of which have experienced relatively low margins. The
Company anticipates sales from its Canadian and United Kingdom
operations to continue to comprise a larger percentage of its total
sales than has been the case in the past and in the near-term the
margins from these operations are anticipated to remain relatively low,
although the Company expects that over time the margins from these
operations will improve. United Kingdom margins will improve as the
United Kingdom subsidiary begins to manufacture products in its own
production facility as opposed to relying on subcontractors. Canadian
margins will increase with planned increased volume and better pricing
with these subsidiaries' largest customers. The gross margin in the
equipment business was down as compared with fiscal 1996. In addition,
the margins in the domestic closure business were down slightly from
fiscal 1997 to fiscal 1996. Total direct materials remained constant
at about 41% of sales and labor decreased slightly as a percentage of
sales from 15.6% in 1996 to 14.8% in 1997. Overhead costs increased as
a percentage of sales from 19.4% in 1996 to 22.7% in 1997. The Company
took measures to improve productivity and quality in its core business,
starting in December 1996 when it implemented a restructuring plan which
consolidated its separate closure, packaging and manufacturing
divisions. This restructuring plan included a reduction in staff
positions and the closure of its Portland, Oregon plant in February 1997
and the closure of its Bettendorf, Iowa facility in July 1997.
Selling, general and administrative expense decreased $2.3 million,
or 10.4%, to $19.7 million for fiscal 1997, as compared to $22.0 million
for fiscal 1996, and decreased as a percentage of sales from 13.8% for
fiscal 1996 to 11.6% for fiscal 1997. These decreases were primarily
due to the decrease in bonus payments from fiscal 1997 to fiscal 1996 as
well as a reduction in staff positions as a result of the restructuring
that occurred during fiscal 1997.
Research and development expenses increased slightly to $2.4 million
for fiscal 1997, as compared to $2.2 million for fiscal year 1996, and
have remained relatively constant as a percentage of sales of 1.4% in
both years. The increase in research and development expenses was due
primarily to increased staffing to address expanded new product
development opportunities and increased expenditures for patent
expenses.
Amortization of intangibles (consisting of amortization of patents
and technology licenses, goodwill and covenants not to compete)
decreased $1.9 million, or 36.2%, to $3.3 million for fiscal 1997, as
compared to $5.2 million for fiscal 1996. The decrease was primarily
due to a decrease in patent amortization due to the write-down of patent
costs in fiscal year 1996.
Total restructuring charges of $2.4 million were recorded in fiscal
1997. In February 1997, the Company recorded a restructuring charge of
$1.1 million primarily for employee severance payments in connection
with the closure of its Portland, Oregon plant in February 1997 in
accordance with its restructuring plan. In addition, the company
recorded a restructuring charge of $1.3 million in connection with the
closure of its Bettendorf, Iowa facility in July 1997.
Income from operations increased $336,000, or 6.5%, to $5.5 million
for fiscal 1997, as compared to $5.2 million for fiscal 1996, and stayed
relatively flat as a percentage of sales at 3.2% for both fiscal 1996
and fiscal 1997. These changes were due to the factors summarized above.
Interest income decreased $655,000 to $587,000 for fiscal 1997 from
$1.2 million in fiscal 1996. This decrease was primarily due to lower
levels of invested cash in fiscal 1997 as compared to fiscal 1996.
Higher levels of cash were available for investment during fiscal 1996
due to completion of the $110 million senior notes financing in early
October 1995.
Interest expense increased $295,000 to $13.4 million in fiscal 1997
as compared to $13.1 million for the same period in fiscal 1996. These
increases were primarily due to a higher level of debt in fiscal 1997
due to the issuance of $110 million of 10.75% senior notes on October 2,
1995, and to a lesser extent to borrowings under the Company's line of
credit.
Amortization of debt financing costs increased $67,000 to $559,000
in fiscal 1997 as compared to $492,000 for the same period in fiscal
1996. Debt financing costs are primarily attributable to the $110
million senior notes issued in October 1995 and to a lesser extent, debt
financing incurred in western Canada.
Income (loss) before extraordinary item improved to a $7.4 million
loss in fiscal 1997 compared to an $8.2 million loss in fiscal 1996.
Net loss improved to a $7.4 million loss in fiscal 1997 as compared to a
$9.4 million loss in fiscal 1996.
An extraordinary item of $1.3 million, net of taxes, was recorded
during fiscal 1996, as loan fees and other costs expensed in connection
with an early extinguishment of debt resulting from the $110 million
senior notes issue in October 1995.
Liquidity and Capital Resources
The Company has relied primarily upon cash from operations and
borrowings from financial institutions and, to a lesser extent, sales of
its common stock to finance its operations, repay long-term indebtedness
and fund capital expenditures and acquisitions. On October 2, 1995,
the Company completed a $110 million senior notes offering that mature
on October 1, 2005 and bear interest at the rate of 10.75% per annum.
The net proceeds of the notes offering were approximately $106 million,
of which $83 million was used to retire the Company's debt then
outstanding under its senior term loans, revolving credit facility and
senior subordinated notes. Subsequent to the closing of the notes
offering, $7.2 million was used to purchase the Company's San Jose
facilities, $11 million was used to purchase machinery and equipment, $3
million was used to collateralize a loan made by a bank to the Company's
50% joint venture in Mexico, and $2 million was used for working capital
needs. At August 31, 1998, the Company had cash and cash equivalents
of $3.6 million, a slight increase from $3.5 million at August 31,
1997.
Cash provided by operations totaled $7.3 million and $14.7 million
in fiscal years 1998 and 1997, respectively. Net cash provided by
operations for both fiscal years was the result of a net loss offset
primarily by non-cash charges for depreciation and amortization.
Working capital increased $3.0 million in fiscal 1998 to $14.7 million,
as compared to $11.7 million in fiscal 1997, primarily as a result of a
decrease in accounts payable and increases in inventories and deferred
income taxes partially offset by an increase in accrued expenses.
Cash used in investing activities was $16.4 million in fiscal year
1998 as compared to $20.8 million in fiscal year 1997. This consisted
primarily of additions to property, plant and equipment of $21.4 million
and $23.1 million in fiscal years 1998 and 1997, respectively, and for
fiscal year 1997, also included the acquisition of the Company's eastern
Canadian subsidiary (formerly Rapid Plast and now named Portola
Packaging, Ltd.) for approximately $2.1 million. Cash used in investing
activities was reduced by $2.4 million in 1998 and $2.5 million in 1997
in proceeds from the sale of property, plant and equipment, primarily
related to the disposition of the Portland, Oregon facilities in 1998.
Cash used in investing activities in fiscal year 1998 was also reduced
by $1.7 million in proceeds from the sale of marketable securities
related to the Company's investment in Suncoast, Inc. In addition, the
Company is subject to certain future obligations regarding noncompete
and bonus arrangements as a result of the Nepco acquisition. At August
31, 1998, the present value of these obligations was $1.1 million.
Until fiscal year 1996, the Company had been the defendant in
litigation with Scholle Corporation ("Scholle") related to alleged
patent infringement on five-gallon non-spill caps. On January 2, 1996,
the court denied further motions and entered the jury's verdict making
the Company liable for damages of $0.01 per closure unit sold. In June
1996, the Company reached a settlement agreement with Scholle, whereby
Scholle granted to the Company a non-exclusive license to use certain of
its patents, and the Company agreed to pay royalties to Scholle of $0.01
per five gallon non-spill closure unit sold. The Company remained
liable for damages of $0.01 per closure unit sold prior to the date of
the settlement agreement, plus interest at a rate of 10% on all past due
amounts. The Company made a payment of $1.7 million to Scholle on July
1, 1996 in settlement of all amounts due, including interest, through
May 31, 1996. Such amounts had been accrued in the Company's financial
statements.
At August 31, 1998, the Company had total indebtedness of $130.7
million. In October 1995, the Company entered into a five-year senior
secured revolving credit facility of up to $35.0 million, subject to a
borrowing base of eligible receivables, inventory, plus property plant
and equipment, net. This credit facility contains covenants and
provisions that restrict, among other things, the Company's ability to:
(i) incur additional indebtedness, (ii) incur liens on its property,
(iii) make investments, (iv) enter into guarantees and other contingent
obligations, (v) merge or consolidate with or acquire another person or
engage in other fundamental changes, (vi) engage in certain sales of
assets, (vii) engage in certain transactions with affiliates and (viii)
make restricted junior payments.
At August 31, 1998, the Company had $3.6 million in cash and cash
equivalents as well as unused borrowing capacity of approximately $19.6
million under the revolving credit facility. Management believes that
these resources, together with anticipated cash flows from operations,
will be adequate to fund the Company's operations, debt service
requirements and capital expenditures through fiscal year 1999.
However, there can be no assurance that additional capital beyond the
amounts currently forecasted by the Company will not be required or that
any such required additional capital will be available on reasonable
terms, if at all, at such time or times as required by the Company.
Inflation
Most of the Company's closures are priced based in part on the cost
of the plastic resins from which they are produced. Historically, the
Company has been able to pass on increases in resin prices directly to
its customers on a timely basis. In recent years, the Company has
benefited from relatively stable or declining prices for raw materials
other than plastic resins.
Seasonality
The Company's sales and earnings reflect a seasonal pattern as a
result of greater sales volumes during the summer months. In fiscal
1998, 46% of sales occurred in the first half of the year (September
through February) while 54% of sales were generated in the second half
(March through August). The effect of seasonality on income from
operations is usually somewhat more pronounced.
Income Taxes
The relationship of income tax expense to income before income taxes
is affected by nondeductible goodwill and other intangibles arising
from the Company's acquisitions.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosure About Segments of an
Enterprise and Related Information". The Company will implement SFAS
No. 130 and 131, which require the reporting and display of certain
information related to comprehensive income and segment reporting, as
required in fiscal year 1999.
In February 1998, the Financial Accounting Standards Board issued
SFAS No. 132, "Employer's Disclosure About Pension and Other Benefits."
SFAS No. 132 revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or
recognition of those plans. SFAS No. 132 is effective for the Company
in fiscal year 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities and requires the
recognition of all derivatives in the balance sheet at their fair market
values. SFAS No. 133 is effective for the Company in fiscal year 2000.
The Company is currently studying the implications of these
statements and has not yet determined the impact of adopting such
statements on the Company's financial statements.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written
using two digits, rather than four, to define the applicable year.
Software programs and hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations causing disruptions of operations, including a temporary
inability to engage in normal business activities.
As a result of ongoing assessments, the Company has determined it
will be required to modify or replace portions of hardware and software
so that those systems properly utilize dates beyond December 31, 1999.
The Company believes that with these modifications and replacements, the
Year 2000 issue will be mitigated. However, if such modifications are
not completed in a timely manner the effects of the Year 2000 issue
could have a material impact on the operations and financial condition
of the Company.
The Company's plan to resolve the Year 2000 issue involves four
phases; inventory and assessment, remediation, implementation and
testing. To date, the Company has substantially completed its inventory
and assessment of all material software systems, including; order entry,
sales, accounting, payroll, costing, shipping/receiving and purchasing;
and concluded that those systems are year 2000 compliant. The Company's
inventory and assessment of hardware, certain communications systems and
machinery used in the production process is more difficult due to the
varied locations of these items. As such, the inventory and assessment
of these items is only 50% complete. Preliminary indications are that
many of these items will be affected in some way; however it is
anticipated that most of the items will not be difficult to remediate.
In addition, a significant portion of the Company's business is
conducted through systems that interact directly with independent sales
representatives. Although the software systems of the Company are year
2000 compliant, an inventory and assessment of the hardware used by the
various sales representatives has not been completed. Total remediation
of the sales representatives' hardware is not expected to be complex. If
this and all of the Company's other year 2000 issues are not resolved on
a timely basis, it could hamper the Company's ability to sell and
produce closures, from which the Company derives most of its revenues.
With regard to the Company's equipment and hardware, the remediation
phase has begun already and is planned to be completed by February 1999.
The Company expects the completion of the testing and implementation
phases as scheduled by August 1999.
With respect to third parties, systems that interface directly with
outside parties are limited to certain payroll, benefits functions and
the sales representatives. The Company is 50% complete with the
inventory and assessment process, which is expected to be completed by
December 1998. Currently, the assessment indicates that these systems
are year 2000 compliant, however, the remediation, implementation and
testing of all systems that directly interface with the Company is not
planned to be completed until August 1999. The Company has queried its
important suppliers, service providers and customers that do not involve
system interface and expects this assessment to be completed by November
1998. Currently, the Company is not aware of any problems at these
entities that would materially impact the results of operations,
liquidity, or capital resources of the Company. However, the Company
has no means of ensuring that these entities will be Year 2000 compliant
and their inability to complete the Year 2000 resolution process could
materially affect the Company, its operations and financial condition.
The Company will use mainly internal resources to resolve its Year
2000 issues. Presently, the total cost of the project is not fully
determinable as the assessment phase has not been completed, but the
cost is to be funded through operating cash flows. Costs incurred to
date by the Company have not been material. Of the total remaining
project costs, approximately $350,000 is attributable to the purchase of
new software and equipment, which will be capitalized. The remaining $
50,000 relates to repair of hardware and software and will be expensed
as incurred.
The Company's plans to complete the Year 2000 modifications are
based on management's best estimates, which were derived utilizing
numerous assumptions of future events including the continued
availability of certain resources, and other factors. Estimates on the
status of completion and the expected completion dates are based on
planned timetables and costs incurred to date. However, there can be no
guarantee that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause
such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes and similar
uncertainties.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Balance Sheets as of August 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended
August 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the Years Ended
August 31, 1998, 1997, and 1996
Consolidated Statements of Shareholders' Equity (Deficit)
for the Years Ended August 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Portola Packaging, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity
(deficit) and cash flows present fairly, in all material respects, the
financial position of Portola Packaging, Inc. and its Subsidiaries at
August 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended August 31,
1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
November 8, 1998
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
August 31,
-------------------
1998 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents........................... $3,570 $3,471
Investments......................................... -- 841
Accounts receivable, net of allowance for doubtful
accounts of $1,727 and $1,170, respectively....... 22,887 23,339
Inventories......................................... 11,260 9,918
Other current assets................................ 1,356 1,644
Deferred income taxes............................... 2,516 1,032
--------- ---------
Total current assets.............................. 41,589 40,245
Property, plant and equipment, net.................... 85,874 79,779
Goodwill, net of accumulated amortization of
$4,620 and $3,451, respectively................... 12,086 15,044
Patents, net of accumulated amortization of
$4,722 and $4,512, respectively................... 1,814 2,024
Covenants not to compete, net of accumulated
amortization of $5,286 and $4,179, respectively... 607 2,183
Debt financing costs, net of accumulated
amortization of $1,332 and $881, respectively..... 2,982 3,433
Other assets.......................................... 3,908 5,578
--------- ---------
Total assets...................................... $148,860 $148,286
========= =========
LIABILITIES, REDEEMABLE WARRANTS,
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt................... $2,772 $2,655
Accounts payable.................................... 8,138 9,908
Accrued liabilities................................. 7,353 8,870
Accrued compensation................................ 3,440 2,161
Accrued interest.................................... 5,224 4,978
--------- ---------
Total current liabilities......................... 26,927 28,572
Long-term debt, less current portion.................. 127,936 119,517
Other long term obligations........................... 777 1,543
Deferred income taxes................................. 6,666 6,028
--------- ---------
Total liabilities................................. 162,306 155,660
--------- ---------
Commitments and contingencies (Note 9)
Redeemable warrants to purchase Class A common stock.. 7,959 5,675
--------- ---------
Common stock and other shareholders' deficit:
Class A convertible common stock of $.001 par value:
Authorized: 5,203 shares in 1998 and 1997;
Issued and outstanding: 2,135 shares in 1998
and 1997......................................... 2 2
Class B, Series 1, common stock of $.001 par value:
Authorized: 17,715 shares in 1998 and 1997;
Issued and outstanding: 8,636 shares in 1998
and 8,481 shares in 1997......................... 8 8
Class B, Series 2, convertible common stock of
$.001 par value:
Authorized: 2,571 shares; Issued and
outstanding: 1,171 shares in 1998 and 1997....... 1 1
Additional paid-in capital............................ 7,797 8,661
Notes receivable from shareholders.................... (463) (440)
Cumulative foreign currency translation adjustments... (1,039) (173)
Net unrealized loss on marketable securities.......... -- (92)
Accumulated deficit................................... (27,711) (21,016)
--------- ---------
Total common stock and other shareholders'
deficit......................................... (21,405) (13,049)
--------- ---------
Total liabilities, redeemable warrants,
common stock and other shareholders' deficit.... $148,860 $148,286
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended August 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
Sales................................... $176,234 $170,443 $159,462
Cost of sales........................... 140,714 135,318 117,592
---------- ---------- ----------
Gross profit.......................... 35,520 35,125 41,870
---------- ---------- ----------
Selling, general and administrative..... 19,229 19,745 22,035
Research and development................ 2,466 2,428 2,156
Amortization of intangibles............. 3,074 3,322 5,207
Write-off of intangibles................ -- -- 7,292
Restructuring costs..................... 3,084 4,114 --
---------- ---------- ----------
27,853 29,609 36,690
---------- ---------- ----------
Income from operations................ 7,667 5,516 5,180
---------- ---------- ----------
Other (income) expense:
Interest income....................... (498) (587) (1,242)
Interest expense...................... 13,795 13,379 13,084
Amortization of debt financing costs.. 484 559 492
Gain from sale of securities.......... (750) -- --
Loss (gain) from sale of property,
plant and equipment................. (714) 88 171
Other (income) expense, net........... 332 120 (13)
---------- ---------- ----------
12,649 13,559 12,492
---------- ---------- ----------
Loss before extraordinary
item and income taxes............... (4,982) (8,043) (7,312)
Income tax (benefit) provision.......... (571) (632) 865
---------- ---------- ----------
Loss before extraordinary item........ (4,411) (7,411) (8,177)
Extraordinary item-loss on
extinguishment of debt, net of
income tax benefit of $845 (Note 7)... -- -- 1,265
---------- ---------- ----------
Net loss................................ ($4,411) ($7,411) ($9,442)
========== ========== ==========
Number of shares used in computing
per share amounts..................... 11,792 11,766 11,800
========== ========== ==========
Loss per common share:
Loss before extraordinary item........ ($0.37) ($0.63) ($0.69)
Net loss.............................. ($0.37) ($0.63) ($0.80)
The accompanying notes are an integral part of these consolidated financial
statements.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended August 31,
-----------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net income (loss)............................... ($4,411) ($7,411) ($9,442)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization................. 16,494 15,600 15,961
Write-off of intangibles and impairment losses 1,658 1,720 7,292
Extraordinary loss on extinguishment of debt.. -- -- 1,781
Deferred income taxes......................... (846) (764) 19
Loss on property and equipment dispositions... (714) 88 171
Gain on sale of marketable securities......... (750) -- --
Provision for doubtful accounts............... 379 823 450
Provision for excess and obsolete inventories. (115) 32 26
Changes in working capital:
Accounts receivable......................... (322) 267 (3,425)
Inventories................................. (1,363) 1,956 (1,810)
Other current assets........................ (378) 477 451
Accounts payable............................ (3,980) (508) 1,653
Accrued liabilities......................... 3,156 2,485 1,465
Accrued interest............................ 265 (21) 4,203
--------- --------- ---------
Net cash provided by operating activities... 9,073 14,744 18,795
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment...... (21,436) (23,101) (27,194)
Proceeds from sale of property, plant and
equipment...................................... 2,410 2,500 646
Payment for UK acquisition...................... -- -- (1,463)
Payment for Rapid Plast acquisition............. -- (2,138) --
Proceeds from short term investments............ 1,744 -- 1,000
Payment for short term investments.............. -- -- (994)
Repayment of notes receivable................... 127 117 262
Increase (decrease) in other assets............. 777 1,781 (3,528)
--------- --------- ---------
Net cash used in investing activities......... (16,378) (20,841) (31,271)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under debt arrangements.............. 11,473 15,551 115,212
Repayments of debt arrangements................. (2,554) (11,727) (89,922)
Payment of loan fees............................ -- (47) (4,189)
Sales of common stock........................... 313 319 75
Increase in notes receivable from shareholders.. (23) (15) (63)
Payments on covenants not to compete............ (682) (1,347) (1,602)
Repurchase of common stock...................... (1,177) (939) --
--------- --------- ---------
Net cash provided by financing activities..... 7,350 1,795 19,511
--------- --------- ---------
Effect of exchange rate changes on cash........... 54 (24) (1)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents.. 99 (4,326) 7,034
Cash and cash equivalents at beginning of period.. 3,471 7,797 763
--------- --------- ---------
Cash and cash equivalents at end of period........ $3,570 $3,471 $7,797
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Notes Cumula- Net Total
and tive Unreal- Common
Other Foreign ized Stock
Class B Receiv- Currency Loss on and
----------------------------- Addi- able Trans- Market- Other
Class A Series 1 Series 2 tional from lation able Accumu- Share-
-------------- -------------- -------------- Paid-in Share- Adjust- Secur- lated holders'
Shares Amount Shares Amount Shares Amount Capital holders ments ities Deficit Deficit
------- ------ ------- ------ ------- ------ --------- -------- -------- -------- --------- ---------
Balance, August 31, 1995. -- $ -- 9,225 $9 2,571 $3 $9,205 ($362) ($8) $ -- ($2,153) $6,694
Conversion of Class B
shares to Class A..... 2,135 2 (735) -- (1,400) (2) 67 -- -- -- -- 67
Issuance of Class B
Common stock at $4.50
per share............. -- -- 15 -- -- -- 8 -- -- -- -- 8
Exercise of stock
options............... -- -- 2 -- -- -- -- -- -- -- -- --
Increase in value of
stock purchase
warrants.............. -- -- -- -- -- -- -- -- -- -- (895) (895)
Increase in notes
receivable from
shareholders.......... -- -- -- -- -- -- -- (63) -- -- -- (63)
Net unrealized loss
on marketable
securities............ -- -- -- -- -- -- -- -- -- (170) -- (170)
Net loss............... -- -- -- -- -- -- -- -- -- -- (9,442) (9,442)
------- ------ ------- ------ ------- ------ --------- -------- -------- -------- --------- ---------
Balance, August 31, 1996. 2,135 2 8,507 9 1,171 1 9,280 (425) (8) (170) (12,490) (3,801)
Repurchases of common
stock................. -- -- (178) (1) -- -- (938) -- -- -- -- (939)
Exercise of stock
options............... -- -- 152 -- -- -- 319 -- -- -- -- 319
Net loss............... -- -- -- -- -- -- -- -- -- -- (7,411) (7,411)
Increase in value
of stock purchase
warrants.............. -- -- -- -- -- -- -- -- -- -- (1,115) (1,115)
Increase in notes
receivable from
shareholders.......... -- -- -- -- -- -- -- (15) -- -- -- (15)
Change in net
unrealized loss on
marketable securities. -- -- -- -- -- -- -- -- -- 78 -- 78
Cumulative translation
adjustment............ -- -- -- -- -- -- -- -- (165) -- -- (165)
------- ------ ------- ------ ------- ------ --------- -------- -------- -------- --------- ---------
Balance, August 31, 1997. 2,135 2 8,481 8 1,171 1 8,661 (440) (173) (92) (21,016) (13,049)
Repurchases of common
stock................. -- -- (223) -- -- -- (1,177) -- -- -- -- (1,177)
Issuance of common
stock................. -- -- 19 -- -- -- 94 -- -- -- -- 94
Exercise of stock
options............... -- -- 359 -- -- -- 219 -- -- -- -- 219
Net loss............... -- -- -- -- -- -- -- -- -- -- (4,411) (4,411)
Increase in value
of stock purchase
warrants.............. -- -- -- -- -- -- -- -- -- -- (2,284) (2,284)
Increase in notes
receivable from
shareholders.......... -- -- -- -- -- -- -- (23) -- -- -- (23)
Change in net
unrealized loss on
marketable securities. -- -- -- -- -- -- -- -- -- 92 -- 92
Cumulative translation
adjustment............ -- -- -- -- -- -- -- -- (866) -- -- (866)
------- ------ ------- ------ ------- ------ --------- -------- -------- -------- --------- ---------
Balance, August 31, 1998. 2,135 $2 8,636 $8 1,171 $1 $7,797 ($463) ($1,039) $-- ($27,711) ($21,405)
======= ====== ======= ====== ======= ====== ========= ======== ======== ======== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Operations:
Portola Packaging, Inc. and Subsidiaries (the "Company") designs,
manufactures and markets tamper-evident plastic closures and related
equipment used for packaging applications in dairy, fruit juice, bottled
water, institutional foods and other non-carbonated beverage products.
The Company's Canadian subsidiaries also design, manufacture and market
plastic bottles. The Company has production facilities throughout the
United States, Canada, the United Kingdom and Mexico (through a joint
venture).
Principles of Consolidation:
The consolidated financial statements include the financial
statements of the Company and its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated.
Revenue Recognition:
The Company recognizes revenue upon product shipment.
Cash Equivalents:
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Investments:
Investments at August 31, 1997 consisted of equity securities in one
company. The investments were considered to be available-for-sale and
therefore were carried at fair market value. Unrealized holding gains
and losses on such securities, were reported net of related taxes as a
separate component of common stock and other shareholders' equity
(deficit). Realized gains and losses on sales of all such investments
were reported in earnings and computed using the specific cost
identification method. The Company realized gains of $750,000 on the
sale of securities in March 1998.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost and depreciated on
the straight-line basis over estimated useful lives, which range from
three to thirty-five years. The cost of maintenance and repairs is
charged to income as incurred. Leasehold improvements are amortized on
a straight-line basis over their useful lives or the lease term,
whichever is shorter (generally five to ten years). When assets are
disposed of, the cost and related accumulated depreciation are removed
from the accounts and the resulting gains or losses are included in the
results of operations.
Joint Venture:
The Company maintains a joint venture and license arrangement in
Mexico. This investment, which is included in other assets, is
accounted for by the equity method (see Note 15). The Company's share
of income (loss) from the joint venture is reflected in operations and
is not material.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intangible Assets:
Patents and covenants not-to-compete are valued at cost and are
amortized on a straight-line basis over the lesser of their remaining
useful or contractual lives (generally five to thirteen years).
Goodwill, representing the excess of cost over the net tangible and
identifiable intangible assets, recorded in connection with acquisitions
of Nepco, Portola Packaging Canada Ltd., Portola Packaging Ltd. and
Portola Packaging Ltd. (U.K.) (Note 2) is amortized on a straight-line
basis over 15, 25, 25 and 5 years, respectively.
Debt Financing Costs:
Debt financing costs are amortized using the interest method over the
term of the related loans.
Research and Development Expenditures:
Research and development expenditures are charged to operations as
incurred.
Income Taxes:
The Company accounts for income taxes under the liability method
which requires that deferred taxes be computed annually on an asset and
liability basis and adjusted when new tax laws or rates are enacted.
Deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
Concentrations of Credit Risk and Other Risks and Uncertainties:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, short-term investments and trade receivables. The
Company's cash and cash equivalents and investments are concentrated
primarily in several United States banks. At times, such deposits may
be in excess of insured limits. Management believes that the financial
institutions which hold the Company's investments are financially sound
and, accordingly, minimal credit risk exists with respect to these
financial instruments.
The Company's products are principally sold to entities in the food
and beverage industries in the United States, Canada and the United
Kingdom. Ongoing credit evaluations of customers' financial condition
are performed and collateral is generally not required. The Company
maintains reserves for potential credit losses which, on a historical
basis, have not been significant.
The majority of the Company's products are molded from various
plastic resins which comprise a significant portion of the Company's
cost of sales. These resins are subject to substantial price
fluctuations, resulting from shortages in supply, changes in prices in
petrochemical products and other factors. Significant increases in
resin prices coupled with an inability to promptly pass such increases
on to customers would have a material adverse impact on the Company.
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.
Foreign Currency Translation:
The Company's foreign subsidiaries use the local currency as their
functional currency. Assets and liabilities are translated at year-end
exchange rates. Items of income and expense are translated at average
exchange rates for the
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
relevant year. Translation gains and losses are not included in
determining net income (loss) but are accumulated as a separate
component of common stock and shareholders' equity (deficit). Net
losses arising from foreign currency transactions for the years ended
August 31, 1998, 1997 and 1996 totaled $380,000, $120,000 and $0,
respectively.
Computation of Earnings (Loss) Per Common Shares:
Effective for the quarter ended February 28, 1998, the Company
adopted Financial Accounting Standards Board Standard No. 128, "Earnings
Per Share", and accordingly has restated earnings per share (EPS) for
prior periods from previously reported EPS. Basic EPS is computed as
net income (loss) divided by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through stock
options, warrants and other convertible securities. Common equivalent
shares are excluded from the computation of net loss per share as their
effect is antidilutive.
The following is a reconciliation of the net loss and the number of
shares used in the basic and diluted EPS calculations (in thousands,
except per share data):
Year ended August 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
Net loss................................. ($4,411) ($7,411) ($9,442)
========== ========== ==========
Shares used in per share calculations.... 11,792 11,766 11,800
========== ========== ==========
Basic and Diluted EPS.................... ($0.37) ($0.63) ($0.80)
========== ========== ==========
Carrying Value of Long-Lived Assets:
Long-lived assets, including goodwill related to those assets and
goodwill unrelated to specific assets are evaluated for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosure About Segments of an
Enterprise and Related Information". SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in
a full set of general purpose financial statements. SFAS No. 131
changes current practice under SFAS No. 14 by establishing a new
framework on which to base segment reporting and also requires interim
reporting of segment information. The Company will implement SFAS No.
130 and 131, which require the reporting and display of certain
information related to comprehensive income and segment reporting, as
required in fiscal year 1999.
In February 1998, the Financial Accounting Standards Board issued
SFAS No. 132, "Employer's Disclosure About Pension and Other Benefits".
SFAS No. 132 revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or
recognition of those plans. It is effective for the Company in fiscal
year 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities and requires the
recognition of all derivatives in the balance sheet at their fair market
values. It is effective for the Company in fiscal year 2000.
The Company is currently studying the implications of these
statements and has not yet determined the impact of adopting such
statements on the Company's financial statements.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value of Financial Instruments:
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts payable and other
liabilities approximate fair value due to their short maturities. Based
on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of long term debt except for the
Senior Notes, approximates fair value. The fair value of the Senior
Notes is estimated to be approximately $94.0 million (see Note 7).
Reclassifications:
Certain prior year balances have been reclassified to conform with
the current year financial statement presentation. These
reclassifications had no effect on net loss.
2. Acquisitions:
On September 1, 1996, the Company completed the acquisition of Rapid
Plast for a purchase price of $2.1 million. Rapid Plast was
amalgamated with the company formed to acquire the capital stock of
Rapid Plast, and now operates under the name Portola Packaging Ltd.
Portola Packaging Ltd. is engaged in manufacturing and distributing
plastic bottles, primarily in eastern Canada. The transaction has been
accounted for as a purchase and the results of operations subsequent to
the acquisition date have been consolidated with the Company.
Portola Packaging Ltd. is being operated as a "restricted subsidiary"
pursuant to the terms of the Senior Revolving Credit Facility and the
Senior Note Indenture entered into in October 1995.
Consideration for the acquisition was allocated as follows (in
thousands):
Consideration for the acquisition was allocated as follows (in thousands):
Total consideration paid........... $2,138
Fair value of assets acquired...... 1,584
---------
Goodwill........................... $554
=========
On September 1, 1995, the Company completed the acquisition of the
50% interest it had not previously owned in Cap Snap (U.K.) Ltd., now
known as Portola Packaging Ltd. ("Portola Packaging Ltd. (U.K.)") for a
purchase price of approximately $1.5 million. Portola Packaging Ltd.
(U.K.) is a British corporation engaged in manufacturing and
distributing small closures in the United Kingdom. The transaction has
been accounted for as a purchase and results of operations subsequent to
the acquisition date have been consolidated with the Company.
Portola Packaging Ltd. (U.K.) was operated as a "unrestricted
subsidiary" pursuant to the terms of the Senior Revolving Credit
Facility and the Senior Note Indenture until fiscal year 1997, when it
was designated by the board of directors as a "restricted subsidiary" in
accordance with the terms of the same agreements.
Consideration for the acquisition was allocated as follows (in
thousands):
Consideration for the acquisition was allocated as follows (in thousands):
Total consideration paid........... $1,463
Fair value of assets acquired...... 1,294
---------
Goodwill........................... $169
=========
3. Write-off of Intangibles:
In the fourth quarter of fiscal 1996, the Company elected early
adoption of the provisions of Statement of Financial Accounting
Standards Board (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of " (SFAS 121)
issued by the Financial Accounting Standards Board in March 1995. SFAS
121 requires the Company to review for impairment of long-lived assets,
certain identifiable
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
intangibles, and goodwill related to those assets whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
This statement requires impairment losses to be recognized for assets
that do not have realizable carrying values, and requires valuation of
impairments at the lowest level of identifiable cash flows. Previously,
the Company evaluated long-lived assets on a divisional or group basis
using undiscounted cash flows.
Due to changes in market conditions in certain markets and
manufacturing facilities in 1996, the Company evaluated portions of its
goodwill recorded in connection with its previous acquisitions and
recorded impairment losses of $421,000 and $2.3 million in fiscal 1996,
related to goodwill recorded in the acquisition of Nepco and Portola
Packaging Canada Ltd., respectively.
As a result of the adoption of SFAS 121, the Company undertook a
detailed study of its patents and began to evaluate cash flows on an
individual product family basis for impairment. Previously, patents
were evaluated on a group basis for impairment. This change in
methodology was implemented to be consistent with SFAS 121's requirement
to evaluate cash flows from intangibles at the lowest identifiable level
and resulted in a writedown of $4.5 million in fiscal 1996. The fair
value of the patents was estimated using discounted cash flows.
The effect of adopting SFAS 121 on the financial statements was an
increase in fiscal 1996 expenses of $7.3 million. Consistent with the
provisions of SFAS 121, the additional expense related to adoption is
included in fiscal 1996 results of operations. This writedown had no
effect on cash flows from operations or cash available for debt service.
In fiscal year 1997, the Company also wrote-off $1.7 million of
goodwill related to its Portland, Oregon facility, which was closed in
February 1997. In addition, in fiscal year 1998, the Company wrote-off
$1.3 million of intangible assets related to the closing of its Fort
Worth, Texas facility effective October 1998. These write-offs are
included in restructuring costs in the accompanying consolidated
statements of operations.
SFAS 121 requires ongoing evaluations of impairments whenever events
or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. It is at least reasonably possible that
future impairments could occur, and those impairments could create a
material effect on the financial position and results of operations of
the Company.
4. Restructuring:
The Company took measures to improve productivity and quality in its
core business starting in December 1996 when it implemented a
restructuring plan which consolidated its separate closure, packaging,
and manufacturing divisions. This restructuring plan included a
reduction in staff positions and the closure of its Portland, Oregon
plant in February 1997 and its Bettendorf, Iowa plant in July 1997. The
Company recorded a restructuring charge of $4.1 million in fiscal 1997,
which consisted primarily of employee severance, impairment loss on
intangible assets and loss on property, plant and equipment in
connection with this restructuring plan.
In fiscal year 1998, the Company took further measures to improve
profitability and announced staffing reductions and the closing of its
Fort Worth, Texas facility effective October 1998. The Company recorded
a restructuring charge of $3.1 million in fiscal year 1998, which
consisted primarily of impairment loss on intangible assets, loss on
property, plant and equipment and employee severance costs.
5. Inventories (in thousands):
5. INVENTORIES (in thousands):
August 31,
-----------------------
1998 1997
----------- -----------
Raw materials........................... $5,429 $5,251
Work in process......................... 1,606 442
Finished goods.......................... 4,225 4,225
----------- -----------
$11,260 $9,918
=========== ===========
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Property, Plant and Equipment (in thousands):
August 31,
-----------------------
1998 1997
----------- -----------
Building and land....................... $21,146 $21,403
Machinery and equipment................. 116,569 100,739
Leasehold improvements.................. 4,204 3,713
----------- -----------
141,919 125,855
Less accumulated depreciation and
amortization.......................... (56,045) (46,076)
----------- -----------
$85,874 $79,779
=========== ===========
Depreciation charged to operations was $12.9 million, $11.8 million and
$10.3 million for the years ended August 31, 1998, 1997 and 1996,
respectively.
7. DEBT:
CURRENT PORTION OF LONG-TERM DEBT (in thousands):
August 31,
-----------------------
1998 1997
----------- -----------
United Kingdom Term Loan Note........... $370 $400
Canadian Term Loan Note................. 1,753 1,802
Canadian Revolver Loan Note............. 311 229
Canadian Regional Development Loan...... 51 --
Capital Lease Obligations............... 287 224
----------- -----------
$2,772 $2,655
=========== ===========
LONG-TERM DEBT (in thousands):
August 31,
-----------------------
1998 1997
----------- -----------
Senior Notes............................ $110,000 $110,000
Senior Revolving Credit Facility........ 15,450 4,358
United Kingdom Term Loan Note........... 370 654
Canadian Term Loan Note................. 1,754 3,963
Canadian Regional Development Loan...... 103 233
Capital Lease Obligations............... 259 309
----------- -----------
$127,936 $119,517
=========== ===========
Senior Notes:
On October 2, 1995, the Company completed an offering of $110 million
of senior notes that mature on October 1, 2005 and bear interest at
10.75%. Interest of approximately $5.9 million is payable semi-annually
on April 1 and October 1 of each year, commencing on April 1, 1996. The
senior notes' indenture contains covenants and provisions that restrict,
among other things, the Company's ability to: (i) incur additional
indebtedness, (ii) incur liens on its property, (iii) make investments,
(iv) enter into guarantees and other contingent obligations, (v) merge
or consolidate with or acquire another person or engage in other
fundamental changes, (vi) engage in certain sales of assets, (vii)
engage in certain transactions with affiliates, (viii) make restricted
junior payments and (ix) declare or pay dividends.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Senior Revolving Credit Facility:
Concurrently with the offering of senior notes, in October 1995, the
Company entered into a new five-year senior revolving credit facility of
up to $35.0 million, subject to a borrowing base of eligible
receivables, inventory, plus net property, plant and equipment, which
serve as collateral for the line. The credit facility, which expires
September 30, 2000, contains covenants and provisions that restrict,
among other things, the Company's ability to: (i) incur additional
indebtedness, (ii) incur liens on its property, (iii) make investments,
(iv) enter into guarantees and other contingent obligations, (v) merge
or consolidate with or acquire another person or engage in other
fundamental changes, or in certain sales of assets, (vii) engage in
certain transactions with affiliates, (viii) make restricted junior
payments and (ix) declare or pay dividends. An unused fee is payable on
the facility based on the total commitment amount less the balance
outstanding at the rate of 0.375% per annum. In addition, interest
payable is based on either the Bank Prime Loan rate or the LIBOR loan
rate. The interest rate on the facility based on the Bank Prime Loan
rate was 9.75% at August 31, 1998.
United Kingdom Term Loan Note:
Portola Packaging Ltd. (U.K.) entered into a term loan agreement on
November 29, 1996 in connection with a joint venture closure development
project. The first principal payment was paid on November 29, 1997 in
the amount of $400,000. Annual payments of $370,000 are due in fiscal
years 1999 and 2000. The term note bears interest at 9%.
Canadian Term Loan Note:
On June 16, 1995, Portola Packaging Canada Ltd. entered into a $7.0
million term note agreement. Principal payments for the term note are
due quarterly, with the next payment due on November 30, 1998 in the
amount of $439,000, with final payment due on August 31, 2000. Interest
is payable monthly based on the Canadian prime rate and/or bankers
acceptances. At August 31, 1998 and 1997, the interest rate was 9.0%
and 7.0%, respectively. The loan agreement calls for mandatory
prepayments after August 31, 1996, based upon financial calculations
including excess cash flow calculations. As of August 31, 1998, based
upon the financial calculations, no prepayments were required under the
agreement. The agreement also restricts the payment of cash dividends
and principal amounts on subordinated debt. At August 31, 1998, Portola
Packaging Canada Ltd., had violated certain financial covenants of its
debt agreements and is currently in negotiations with the bank regarding
the receipt of a waiver.
Canadian Revolver Loan Note:
Concurrently with entering into the Canadian term loan note, Portola
Packaging Canada Ltd. entered into a revolving credit facility to
finance working capital requirements. The facility, which expires
August 31, 2000, provides for borrowings based on eligible accounts
receivable and inventories up to the commitment amount of $1.9 million.
The principal is payable upon demand. A standby fee is payable on the
facility based upon the total commitment amount less the balance
outstanding at a variable standby fee rate. The standby fee rate at
August 31, 1998 was 0.25% per year. In addition, interest is payable
monthly based on the Canadian prime rate and/or bankers acceptances. At
August 31, 1998 and 1997, the interest rate was 8.75% and 6.0%,
respectively. At August 31, 1998, Portola Packaging Canada Ltd., had
violated certain financial covenants of its debt agreements and is
currently in negotiations with the bank regarding the receipt of a
waiver.
Canadian Regional Developmental Loan:
On September 1, 1996, Portola Packaging Ltd. assumed a $233,000
development loan from the Federal Office of Regional Development, in
conjunction with the acquisition of Rapid Plast. The note is non-
interest bearing, and is payable in eight semi-annual equal payments of
$25,750 beginning in February 1998.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Capital Lease Obligations:
The Company acquired certain machinery and office equipment under
noncancelable capital leases. Property, plant and equipment includes
the following items held under capital lease obligations (in thousands):
August 31,
-----------------------
1998 1997
----------- -----------
Equipment............................... $975 $663
Less accumulated amortization........... (283) (144)
----------- -----------
$692 $519
=========== ===========
Extraordinary Item:
In connection with the Company's early extinguishment of debt in
fiscal 1996, certain costs, consisting primarily of loan fees of
approximately $2.1 million were written-off. These transactions have
been reported as an extraordinary item in the 1996 consolidated
statement of operations, net of an income tax benefit of approximately
$845,000.
Aggregate Maturities of Long-Term Debt:
The aggregate maturities of long-term debt as of August 31, 1998 are
as follows (in thousands):
Fiscal Years Ending August 31, Total
- ------------------------------------------ -----------
1999................................... $2,772
2000................................... 2,341
2001................................... 15,582
2002................................... 9
2003................................... 4
Thereafter............................. 110,000
-----------
$130,708
===========
8. Other Long-Term Obligations:
The Company has incurred certain liabilities in connection with
agreements entered into, which include provisions for guaranteed bonuses
and covenants not-to-compete, and development grants as follows (in
thousands):
August 31,
-----------------------
1998 1997
----------- -----------
Covenants under the acquisition of Nepco.. $1,064 $1,634
Covenants under the purchase of Portola
Packaging Canada, Ltd................... -- 660
United Kingdom Development Grant.......... 609 693
----------- -----------
Total obligations......................... 1,673 2,987
Less current portion (included in
accrued liabilities).................... (896) (1,444)
----------- -----------
$777 $1,543
=========== ===========
9. Commitments and Contingencies:
The Company leases certain office, production and warehouse
facilities under operating lease agreements expiring on various dates
through 2021. Under the terms of the facilities' leases, the Company is
responsible for common area maintenance expenses which include taxes,
insurance, repairs and other operating costs.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At August 31, 1998, future minimum rental commitments under
agreements with terms in excess of twelve months were as follows (in
thousands):
Fiscal Years Ending August 31, Total
- ------------------------------------------ -----------
1999................................... $1,219
2000................................... 1,115
2001................................... 839
2002................................... 839
2003................................... 839
Thereafter............................. 7,119
-----------
$11,970
===========
Base rent expense for the years ended August 31, 1998, 1997 and 1996
totaled $1.7 million, $1.9 million and $1.8 million, respectively, of
which $0, $0 and $291,000 was paid to Three Sisters (Note 15) for the
years ended August 31, 1998, 1997 and 1996, respectively.
The Company was previously engaged in patent litigation with Scholle
Corporation ("Scholle"), which commenced an action against the Company
in the United States District Court, Northern District of California in
July 1992 alleging that the Company infringed upon certain patents of
Scholle relating to five-gallon non-spill closures. In February 1995, a
jury rendered a verdict adverse to the Company and in favor of Scholle,
which verdict was entered by the court on January 2, 1996, making the
Company liable for damages of $0.01 per closure unit sold. In June
1996, the Company entered into a settlement agreement with Scholle, the
terms of which provide for the grant by Scholle of a non-exclusive
license to use certain of its patents and the payment by the Company of
a royalty in the amount of $0.01 per five gallon non-spill closure unit.
The Company remained liable for damages of $0.01 per closure unit sold
prior to the date of execution and delivery of the settlement agreement,
plus interest at a rate of 10% on all past due amounts. The Company
made a payment of $1.7 million to Scholle on July 1, 1996 in settlement
of all amounts due, including interest, through May 31, 1996. Such
amount had been previously accrued in the Company's financial
statements.
The Company and certain of its subsidiaries are currently engaged in
other patent infringement litigation with four parties who are seeking
to have the court declare certain patents owned by the Company and such
subsidiaries invalid. Two of these parties have also included
allegations of anti-trust violations in their complaints. The Company
believes that its patents and the patents of its subsidiaries are valid
and is contesting these allegations vigorously. There can be no
assurance, however, that the Company and its subsidiaries will be
successful in their defense of these matters. The Company is also party
to a number of other lawsuits and claims arising out of the normal
course of business.
While there can be no assurances, management does not believe the
final disposition of these matters will have a material adverse effect
on the financial position, results of operations or cash flows of the
Company.
10. Redeemable Warrants:
The Company has outstanding two warrants to purchase an aggregate of
2,492,741 shares of its Class A Common Stock which are held by certain
of the Company's shareholders and senior lenders. A warrant to purchase
2,052,526 shares of common stock is exercisable, in whole or in part,
through June 30, 2004 at sixty and two-third cents per share, subject to
certain antidilution provisions. After June 30, 1999, if the Company
has not completed an initial public offering of its common stock, the
warrant holder may require the Company to purchase the warrant at a
price equal to the higher of the current fair value per share of the
Company's common stock or an amount computed under an earnings formula
in the warrant agreement. The purchase obligation may be suspended
under certain circumstances including restrictions on such payments as
specified in the senior credit agreements. After December 31, 2001, the
Company has the right to repurchase the warrant at a price equal to the
higher of the fair value per share of the Company's common stock or an
amount computed under an earnings formula in the warrant agreement
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The earnings formula is based on income before interest, taxes and debt
outstanding to calculate an estimated value per share. At August 31,
1998, 1997 and 1996 the accretion was determined using the fair market
value of the common stock.
A second warrant to purchase 440,215 shares of Class A Common Stock
may be exercised at any time at $2.50 per share, until its expiration on
June 30, 2004. After August 1, 2001, if the Company has not completed
an initial public offering of its common stock, the holder may require
the Company to purchase its warrant at a price equal to the higher of
the current fair value price per share of the Company's common stock or
the net book value price per share of the Company's common stock or the
net book value per share as computed under a valuation formula set forth
in the warrant. The purchase obligation may be suspended under certain
circumstances including restriction on such payments as specified in the
Company's senior credit agreements. On or after August 1, 2003, the
Company has the right to repurchase the warrant at a price equal to the
higher of the current fair value per share of the Company's common stock
or the net book value per share. The earnings formula is based on
earnings before interest and taxes and debt outstanding to calculate an
estimated value per share. At August 31, 1998, 1997 and 1996, the
accretion was determined using the fair value of the common stock.
Generally accepted accounting principles require that an adjustment
of the warrant from the value assigned at the date of issuance to the
highest redemption price of the warrant be accreted over the period of
the warrant. At August 31, 1998, the estimated redemption value of the
warrants exceeds their carrying value. The difference is being charged
to accumulated deficit over the period from the date of issuance to the
earliest put date of the warrants. Charges to accumulated deficit
related to the warrants amounted to $2.3 million, $1.1 million and
$895,000 during the years ended August 31, 1998, 1997 and 1996,
respectively.
11. Shareholders' Equity (Deficit):
Class A and B Common Stock :
The Company has authorized 5,203,000 shares of Class A Common Stock,
of which 2,492,741 shares are reserved for the warrants described in
Note 10. Class A common shareholders are not entitled to elect members
of the Board of Directors. In the event of an aggregate public offering
exceeding $10 million, the Class A and Class B, Series 2 Common Stock is
automatically converted into Class B, Series 1 Common Stock, based on a
one to one ratio. The Class B common shareholders have the right to
elect members of the Board of Directors, with the holders of Series 1
having one vote per share, and the holders of Series 2 having a number
of votes equal to the number of shares into which the Series 2 shares
are convertible into Series 1 shares.
In the event of liquidation or dissolution in which the value of the
Company is less than $1.75 per share of common stock, the holders of
Class B, Series 2 will receive 60% of the proceeds until they have
received $1.75 per share. All other amounts available for distribution
shall be distributed to the Class B, Series 1 and Series 2 holders pro
rata based on the number of shares outstanding. If the value of the
Company is greater than or equal to $1.75 per share, the holders of all
classes of common stock are entitled to a pro rata distribution based on
the number of shares outstanding.
The Company is required to reserve shares of Class B, Series 1 stock
for the conversion of Class A and Class B, Series 2 into Class B,
Series 1 Common Stock.
Directors' Agreements:
The Company entered into Directors' Agreements dated September 1989,
as amended in January 1990 and August 1991, with certain directors who
are also shareholders of the Company. The agreements provide that the
Company is to pay up to $22,000 per year to each individual for serving
as a director, and granted each director the right to purchase up to
22,000 shares per year of Class B, Series 1 Common Stock at $1.00 per
share through fiscal 1992. In October 1990, the Company entered into a
Director's Agreement with another director, who is also a shareholder of
the Company. The agreement provides that the Company is to pay up to
$22,000 per year for services as a director. In January 1996, the
Company began paying an additional $4,000 per year to directors who
serve as
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
members and alternates of committees. The Board of Directors
currently has two committees, the audit committee and the compensation
committee. In May 1996, the Company entered into a Director's Agreement
with another director, who is also a shareholder of the Company,
providing for the payment by the Company of up to $22,000 per year for
services as a director. During the years ended August 31, 1998, 1997
and 1996, the Company paid $223,000, $230,000 and $96,000, respectively,
in director fees and related expenses.
Stock Option Plan:
The Company has reserved 2,866,200 and 2,000,000 shares of Class B,
Series 1 Common Stock for issuance under the Company's 1988 and 1994
stock option plans, respectively. Under both plans, stock options are
granted by the Board of Directors at prices not less than 85% of fair
market value of the Company's stock at the date of grant for non-
qualified options and not less than 100% of the fair market value of the
Company's stock at the date of grant for incentive options.
Aggregate option activity is as follows (in thousands, except per
share data):
Options Outstanding
-----------------------
Weighted
Average
Available Number of Exercise
for Grant Shares Price
----------- ----------- -----------
Balances, August 31, 1995................ 734 1,512 $1.96
Granted................................ (622) 622 $4.60
Exercised.............................. -- (2) $4.00
Canceled............................... 48 (48) $4.31
----------- -----------
Balances, August 31, 1996................ 160 2,084 $2.69
Reservation of shares.................. 1,000 --
Granted................................ (242) 242 $4.87
Exercised.............................. -- (152) $2.10
Canceled............................... 360 (360) $3.94
----------- -----------
Balances, August 31, 1997.......... 1,278 1,814 $2.78
Granted................................ (764) 764 $5.29
Exercised.............................. -- (359) $0.61
Canceled............................... 234 (234) $2.85
----------- -----------
Balances, August 31, 1998................ 748 1,985 $4.14
=========== ===========
At August 31, 1998, 1997 and 1996, vested options to purchase
approximately 802,000, 1.1 million and 1.1 million shares, respectively,
were unexercised.
During fiscal year 1998 eight employees of the Company, including
three executive officers, namely Laurie D. Bassin, Douglas L. Cullum and
Rodger A. Moody, exercised an aggregate of 359,000 stock options at an
excercise price of $0.61 per share under the Company's 1988 Stock Option
Plan. 40,000, 55,000 and 40,000 option shares were exercised by Ms.
Bassin and Messrs. Cullum and Moody, respectively. Pursuant to a
procedure authorized by the Board of Directors for select holders of
options granted under the 1988 Stock Option Plan, the option holders
elected a cashless exercise of the options whereby shares previously
owned by the optionees or shares acquired by the optionees upon exercise
of the options were surrendered to satisfy withholding taxes and the
exercise cost of the shares.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes information about fixed stock options
outstanding at August 31, 1998 (shares in thousands):
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Prices Outstanding (Years) Price Exercisable Price
- --------------------- ----------- ----------- ---------- ----------- ----------
$0.61 - $ 1.75 340 2.91 $1.31 340 $1.31
$2.50 - $ 3.75 180 5.87 2.85 162 2.79
$4.00 - $ 5.25 1,465 9.61 4.95 326 4.49
The Company has adopted the disclosure-only provisions of the
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-based Compensation". Accordingly, no compensation
expense has been recognized for the Company's stock plans. Had
compensation expense for the stock plans been determined based on the
fair value at the grant date for options granted in 1998, 1997 and 1996
consistent with the provisions of SFAS No. 123, the pro forma net income
would have been reported as follows (in thousands):
1998 1997 1996
----------- ----------- -----------
Net loss as reported...................... ($4,411) ($7,411) ($9,442)
Net loss--proforma........................ ($4,696) ($7,561) ($9,487)
Net loss per share as reported............ ($0.37) ($0.63) ($0.80)
Net loss per share--proforma.............. ($0.40) ($0.64) ($0.80)
These results are not likely to be representative of the effects on
reported net income (loss) for future years.
The fair value of each option grant is estimated at the date of grant
using the Black-Scholes pricing model with the following weighted
average assumptions for grants in 1998, 1997 and 1996:
1998 1997 1996
----------- ----------- -----------
- Risk-free Interest Rate.......... 5.62% 6.13% 6.12%
- Expected Life.................... 5 years 5 years 5 years
- Volatility....................... n/a n/a n/a
- Dividend Yield................... -- -- --
The weighted average fair value per share of those options granted
in 1998, 1997 and 1996 was $4.02, $3.62 and $3.42, respectively.
12. Employee Benefit Plans:
The Company maintains a defined contribution plan which covers all
full time employees of the Company who are age twenty-one or older,
have completed one year of service and are not covered by a collective
bargaining agreement. Profit sharing contributions are at the
discretion of the Board of Directors and amounted to $117,000 $203,000
and $661,000 for the years ended August 31, 1998, 1997 and 1996,
respectively. Administrative expense in connection with the plan
amounted to $10,000, $16,000 and $47,000 for the years ended August 31,
1998, 1997 and 1996, respectively.
The Board of Directors approved an Employee Stock Purchase Plan (the
ESPP) under which 750,000 shares of Class B, Series 1 Common Stock have
been reserved for issuance to employees meeting minimum employment
criteria. Employees may participate through payroll deductions in
amounts related to their base compensation. The fair value of shares
made available to any employee for purchase under the ESPP may not
exceed $25,000 in any calendar year. The participant's purchase price
is 85% of the lower of the fair market value at the beginning or the end
of the offering period. The Plan shall continue until terminated by the
Board of Directors, until all of the share
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
reserved for issuance under the Plan have been issued or until January
1, 2007, whichever shall first occur. Shares purchased under the Plan
are issued by the Company once a year, at calendar year end. As of
December 31, 1997, 13,203 shares had been issued to employees under the
Plan at an aggregate purchase price of $59,000.
13. Income Taxes:
Income tax provision (benefit), excluding extraordinary items, for
each of the three years ended August 31, 1998 consisted of the
following (in thousands):
Years Ended August 31,
-----------------------------------
1998 1997 1996
----------- ----------- -----------
Current:
Federal............................... $237 $118 $747
State................................. 38 14 187
Foreign............................... -- -- 26
----------- ----------- -----------
275 132 960
----------- ----------- -----------
Deferred:
Federal............................... (737) (522) (392)
State................................. (109) (242) 260
Foreign............................... -- -- 37
----------- ----------- -----------
(846) (764) (95)
----------- ----------- -----------
($571) ($632) $865
=========== =========== ===========
A reconciliation setting forth the differences between the effective
tax rate of the Company and the U.S. federal statutory tax rate is as
follows:
Years Ended August 31,
-----------------------------------
1998 1997 1996
----------- ----------- -----------
Federal statutory rate (benefit)........ -34.0% -34.0% -34.0%
State taxes............................. -4.0% -5.2% -5.1%
Nondeductible amortization and
depreciation.......................... 19.0% 13.3% 46.2%
Nondeductible permanent items........... 2.0% 0.9% 0.7%
Foreign losses without tax benefit...... 3.0% 12.2% --
Other................................... 3.0% 4.9% 4.0%
----------- ----------- -----------
Effective income tax rate............... -11.0% -7.9% 11.8%
=========== =========== ===========
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the net deferred tax liabilities are as follows (in
thousands):
August 31,
-----------------------
1998 1997
----------- -----------
Deferred tax assets:
Federal credits..................... $240 $240
Accounts receivable................. 362 417
Intangible assets................... 561 710
Other liabilities................... 2,376 1,262
----------- -----------
Total assets...................... 3,539 2,629
----------- -----------
Deferred tax liabilities:
Property, plant and equipment....... 7,615 7,550
Foreign taxes, net.................. 74 75
----------- -----------
Total liabilities................. 7,689 7,625
----------- -----------
Net deferred tax liabilities........ $4,150 $4,996
=========== ===========
14. Export Sales and Geographical Information:
Export sales from the United States to unaffiliated customers were
$9.4 million, $12.0 million and $17.6 million for the years ended
August 31, 1998, 1997 and 1996, respectively. Export sales are
predominantly to North America, Europe, the Middle East and the Pacific
Rim. During fiscal 1998, export sales to North America, South America,
Europe, the Middle East and the Pacific Rim accounted for 27%, 24%,
19%, 5% and 25% of total export sales, respectively.
Summarized data by geographic area for fiscal years 1998, 1997 and
1996 is as follows (in thousands):
Summarized data by geographic area for fiscal 1998, 1997 and 1996 is
as follows(in thousands):
United Elimina-
States Canada Europe Tions Total
--------- --------- --------- --------- ---------
Revenues................... 1998 $145,098 $20,138 $16,767 ($5,769) $176,234
1997 144,010 16,484 12,704 (2,755) 170,443
1996 145,614 10,303 5,695 (2,150) 159,462
Income (loss) from
operations............... 1998 7,745 (622) 544 -- 7,667
1997 6,817 (992) (309) -- 5,516
1996 8,301 (1,476) (1,645) -- 5,180
Identifiable assets........ 1998 134,552 15,414 17,140 (18,246) 148,860
1997 130,600 15,116 14,126 (11,556) 148,286
1996 142,084 11,040 4,648 (5,545) 152,227
15. Related Party Transactions:
As of August 31, 1998 and 1997, the Company maintained $3.0 million
in a United States Bank to collateralize a bank loan by a Mexican bank
to the Company's 50% joint venture in Mexico (Portola Packaging Mexico
or PPI Mexico). The Company's joint venture partner (Partner) has
guaranteed to repay 50% of the loan balance ($1.5 million) to the
Company in the event PPI Mexico is unable to repay the loan. The
Partner has collateralized this guarantee by pledging 25% of its stock
interest in PPI Mexico. The loan matured on November 6, 1998 and was
not repaid by PPI Mexico. The Company, the Partner and the banks are in
the process of extending the due date of the loan to November 30, 1998
or beyond. Currently, the Company and the Partner are discussing
various alternatives regarding the loan and their investment in PPI
Mexico, including the possibility of converting the
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
loan to an additional equity interest in PPI Mexico. Accordingly, the
$3.0 million is included in other non-current assets in the consolidated
balance sheets.
In addition to a base salary of $12,000, the Company paid $253,000
and $146,000 for the years ended August 31, 1998 and 1997, respectively,
to Themistocles G. Michos, Vice President and General Counsel of the
Company, for legal services rendered.
The Company paid $249,000, $608,000 and $618,000, for the years ended
August 31, 1998, 1997 and 1996, respectively, to a law firm for legal
services rendered. A general partner of the aforementioned firm,
Timothy Tomlinson, is also a director and secretary of the Company.
The Company paid $42,000 for the years ended August 31, 1998, 1997
and 1996 to a corporation for management fees. A shareholder of the
aforementioned corporation, Jack L. Watts, is also an officer, a
director and significant shareholder of the Company.
The Company had amounts receivable from an officer and director, Jack
L. Watts, at an interest rate of 10%, which amounted to $463,000,
$424,000 and $404,000 as of August 31, 1998, 1997 and 1996.
On March 31, 1997, LJL Cordovan Partners, L.P., an entity controlled
by Jack L. Watts, transferred 10,000 shares of Class B Common Stock,
Series 1, to Jeffrey D. Pfeffer, Ph.D., a director of the Company, at a
price per share of $5.25.
The Company had amounts receivable from the non-consolidated
affiliated companies which amounted to $729,000, $85,000 and $358,000
as of August 31, 1998, 1997 and 1996, respectively.
In fiscal year 1996, the Company purchased its San Jose facilities
from Three Sisters Ranch Enterprises (Three Sisters) for $7.2 million.
Certain general partners in Three Sisters are also minority shareholders
in the Company (less than 5%).
On February 14, 1997, the Company redeemed 95,238 shares of Class B
Common Stock, Series 1 held of record by LJL Cordovan Partners, L.P., an
entity controlled by Jack L. Watts. The redemption price paid by the
Company was $5.25 per share.
16. Supplemental Cash Flow Disclosures:
The Company paid $48,000 and $1.7 million in income taxes during the
years ended August 31, 1998 and 1996, respectively. The Company was
refunded $36,000 of income taxes during the year ended August 31, 1997.
The Company paid $13.1 million, $13.1 million and $9.6 million in
interest during the years ended August 31, 1998, 1997 and 1996,
respectively.
During fiscal years 1998, 1997 and 1996, the Company acquired
$328,000, $436,000 and $346,000, respectively, of equipment under
capital lease.
During fiscal 1998, 1997 and 1996, the Company wrote-off fully
depreciated property, plant and equipment totaling $1.9 million , $2.6
million and $3.3 million, respectively.
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Subsidiaries
Under the terms of the indenture governing the senior notes (Note 7),
the Company must designate subsidiaries as restricted or unrestricted
subsidiaries. Included in the indenture are formulas required to be met
prior to reclassification of a subsidiary. Unrestricted subsidiaries do
not guarantee the senior notes and are allowed to borrow money from
third parties, but there are restrictions on the funds that the Company
can transfer to or guarantee on behalf of these subsidiaries.
Restricted subsidiaries guarantee the senior notes and have some
restrictions on borrowing money, but there are fewer restrictions on the
funds that the Company can transfer to or guarantee on behalf of these
subsidiaries. Portola Packaging Canada Ltd. (western Canada) is an
unrestricted subsidiary; Portola Packaging Ltd. (eastern Canada) and
Portola Packaging Ltd. (U.K.) have been restricted subsidiaries since
fiscal year 1997. The table below provides consolidating financial
information for the years ended August 31, 1998 and 1997 (in thousands):
Unre- Re-
stricted stricted Total
Parent Subsi- Subsi- Elimina- Consol-
Company diares diares Tions idated
--------- --------- --------- --------- ---------
Statement of operations data:
Sales .................... 1998 $145,098 $12,711 $24,194 ($5,769) $176,234
1997 144,010 10,411 18,777 (2,755) 170,443
Gross Profit............... 1998 32,800 1,182 1,538 -- 35,520
1997 31,978 1,620 1,527 -- 35,125
Income (loss) from
operations................. 1998 7,745 (221) 143 -- 7,667
1997 6,816 (459) (841) -- 5,516
Balance sheet data:
Cash and cash equivalents.. 1998 2,376 (802) 1,996 -- 3,570
1997 2,528 (649) 1,592 -- 3,471
Current assets............. 1998 35,637 2,654 9,545 (6,247) 41,589
1997 32,113 1,653 7,555 (1,076) 40,245
Total Assets............... 1998 134,552 7,643 24,911 (18,246) 148,860
1997 131,679 9,649 20,033 (13,075) 148,286
Current Liabilities........ 1998 6,662 7,164 19,348 (6,247) 26,927
1997 11,254 5,949 12,445 (1,076) 28,572
Total Liabilities.......... 1998 138,968 8,991 20,594 (6,247) 162,306
1997 132,556 9,995 14,185 (1,076) 155,660
Cash flow data:
Operating activities....... 1998 1,044 1,249 6,780 -- 9,073
Investing activities....... 1998 (10,643) 161 (5,896) -- (16,378)
Financing activities....... 1998 9,447 (1,620) (477) -- 7,350
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The current directors and executive officers of the Company are as
follows:
Years
With
Com-
Name Age pany Position
- -------------------------- ---- ----- ------------------------------------------
Jack L. Watts............. 50 12 Chairman of the Board and Chief Executive
Officer
Laurie D. Bassin.......... 49 12 Vice President Corporate Development
Douglas L. Cullum......... 44 12 President, North American Operations
E. Scott Merritt.......... 43 3 Vice President, U.S. Operations
Themistocles G. Michos.... 66 2 Vice President and General Counsel
Rodger A. Moody........... 45 23 Vice President, International Sales
Robert L. Plummer......... 39 4 President, International Division
James A. Taylor........... 52 0 Vice President, Finance, Chief Financial
Officer
Christopher C. Behrens.... 37 4 Director
Jeffrey Pfeffer, Ph.D.(1). 52 2 Director
Timothy Tomlinson(1)(2)... 48 12 Secretary and Director
Larry C. Williams(1)(2)... 49 9 Director
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee. Mr. Tomlinson serves as an
alternate member of the Audit Committee.
Mr. Watts has been Chairman of the Board and Chief Executive Officer
of the Company since January 1986. From 1982 to 1985, he was Chairman of
the Board of Faraday Electronics, a supplier of integrated circuits and
board level microprocessors.
Ms. Bassin has been Vice President, Corporate Development of the
Company since February 1993. From August 1986 to February 1993, she was
Director of Marketing of the Company. Prior to that time, she was
employed in the Consumer Service and Marketing Department of Collagen
Corporation, a biomedical company.
Mr. Cullum has been President, North American Operations since March
1997. From April 1996 to March 1997, he was President of the Packaging
Division of the Company. He was Vice President, Manufacturing Technology
of the Company from November 1994 to April 1996. He joined the Company
in 1986 and became Vice President, Operations of the Cap Snap Division
in April 1987.
Mr. Merritt has been Vice President, US Operations since July 1997.
He was Vice President of Manufacturing Technology from April 1996 to
July 1997. He was President and General Manager, Fitment Equipment from
February 1995 until April 1996. From August 1992 to February 1995, he
was an Advisor, General Assembly for New United Motor
Manufacturing, Inc., an automobile manufacturing joint venture between
General Motors and Toyota. From 1978 to August 1992, he was employed by
General Motors of Canada, Ltd., where he held various positions, most
recently as Manufacturing Superintendent, Components Plant.
Mr. Michos has been Vice President and General Counsel since November
1996. Prior to that time, he was a partner in the law firm of Collette
& Erickson LLP.
Mr. Moody has been Vice President, International Sales since January
of 1997. He was Managing Director, International Division of the Company
from October 1994 to January 1997. He has been with the Company since
1975 and has worked in a variety of functional areas, including
production, administration, marketing/sales, equipment and general
management.
Mr. Plummer has been President of the International Division since
July 1997. He was President, Dispensing Closure Products and U.S.
Closure Manufacturing Division from August 1996 to July 1997. From
May 1994 to April 1996, he was Vice President and General Manager,
Equipment Division of the Company. In addition, he assumed
responsibilities as President, Nepco Division in September 1995, a
position he held through August 1996. From May 1989 to May 1994 he was
employed by General Motors Corporation; from February 1993 to May 1994
as an Assembly Advisor for New United Motor Manufacturing, Inc., an
automobile manufacturing joint venture between General Motors and
Toyota, and from May 1989 to February 1993 as Product Manager of the
Harrison Division of General Motors Corporation, which produces
automotive engine cooling and heating, ventilating, and air conditioning
systems.
Mr. Taylor has been Vice President and Chief Financial Officer of the
Company since July 1998. From February 1996 to July 1998, he was Vice
President, Finance and Treasurer at Seagate Technologies, Inc., an
international manufacturer and distributor of computer disk drives. He
joined Seagate Technologies following its acquisition of Conner
Peripherals, Inc. where he had been Vice President and Treasurer from
December 1993 through February 1996. Conner also manufactured and
distributed computer disk drives globally.
Mr. Behrens has been a director of the Company since June 1994. He
has been an officer of The Chase Manhattan Bank, N.A. since 1986 and an
officer of Chase Capital Partners (the private equity affiliate of Chase
Manhattan Corp.) since 1990. Mr. Behrens is a director of The
Pantry, Inc. and numerous private companies.
Dr. Pfeffer has been a director of the Company since May 1996. He has
been a professor in the Graduate School of Business at Stanford
University since 1979, except for the 1981-1982 academic year, when he
served as the Thomas Henry Carroll-Ford Foundation Visiting Professor of
Business Administration at the Harvard Business School, and currently
holds the Thomas D. Dee Professor of Organizational Behavior chair. Dr.
Pfeffer is a director of SonoSight, a publicly traded company and
Resumix, a privately held company.
Mr. Tomlinson has been Secretary and a director of the Company since
January 1986. He also serves as a director of Oak Technology, Inc., a
designer and marketer of multimedia semiconductors and related software,
and of VeriSign, Inc. a provider of digital certificate services and
products for electronic commerce. Mr. Tomlinson is a director of
several private companies as well. He has been a partner in the law firm
of Tomlinson Zisko Morosoli & Maser LLP since 1983.
Mr. Williams has been a director of the Company since January 1989.
He co-founded The Breckenridge Group, Inc., an investment banking firm
in Atlanta, Georgia, in April 1987 and is one of its principals.
Each director listed above was elected at the Company's Annual
Meeting of Shareholders held in January 1998 and will serve until his
successor has been elected and qualified or until his earlier
resignation or removal.
Compliance Under Section 16(a) of the Securities Exchange Act of
1934
The Company does not have a class of equity securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934.
Accordingly, no persons are presently required to file reports with the
SEC pursuant to Section 16(a) of the Exchange Act.
Item 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table summarizes all compensation awarded to, earned by
or paid for services rendered to the Company in all capacities during
the fiscal years ended August 31, 1998, 1997 and 1996 by the Company's
Chief Executive Officer and the Company's five other most highly
compensated executive officers during fiscal 1998 (together, the "Named
Officers").
SUMMARY COMPENSATION TABLE
Long Term
Compensation Awards
----------------------
Annual Compensation Other All
---------------------------- Annual Securities Other
Compen- Underlying Compen-
Name and Principal Position Year Salary Bonus(1) sation(2) Options sation(3)
- ---------------------------------------- -------- --------- --------- ---------- ----------- ---------
Jack L. Watts ......................... 1998 $299,988 $13,125 $41,800 50,000 --
Chairman of the Board and 1997 294,820 86,418 41,800 -- 2,850
Chief Executive Officer 1996 269,348 37,500 50,493 100,000 3,600
Douglas L. Cullum ..................... 1998 203,893 37,500 -- 56,736 --
President, North American Operations 1997 166,347 35,000 -- 50,000 2,850
1996 149,093 7,500 -- 20,000 3,600
Joseph T. Mayernick (4)................ 1998 185,000 84,688 -- 150,000 2,492
Robert L. Plummer ..................... 1998 164,319 3,375 -- -- --
President, International Division 1997 159,581 10,000 -- -- 3,550
1996 152,137 8,750 -- 10,500 3,600
E. Scott Merritt ...................... 1998 150,330 2,625 -- 30,000 --
Vice President, U.S. Operations (5) 1997 143,077 20,000 -- -- 2,850
1996 154,631 11,650 -- 20,000 1,500
Rodger A. Moody ....................... 1998 138,991 3,375 -- 10,000 --
Vice President, International 1997 134,038 20,000 -- -- 4,250
Sales 1996 124,269 39,940 -- -- 1,500
- ------------------------
(1) With respect to each fiscal year, bonuses paid each year are
for services rendered in the prior fiscal year, except for Mr.
Mayernick. With respect to fiscal year 1998, all bonuses relate to
profit sharing distributions, except for Mr. Mayernick and $30,000
related to Mr. Cullum.
(2) With respect to each fiscal year, includes $41,800 in
consulting fees with respect to Mr. Watts paid to PPI Management
Inc., a corporation of which Mr. Watts is the sole shareholder and
employee.
(3) Represents a Company profit-sharing contribution of up to
$2,100 for fiscal 1997 and 1996 and a Company 401(k) matching
contribution of up to $1,500 for fiscal 1997 and 1996. Also includes
$700 travel allowance with respect to Mr. Plummer and Mr. Moody for
fiscal 1997.
(4) Mr. Mayernick joined the Company in August 1997 as Vice
President, Finance and Chief Financial Officer, and received $50,000
as a bonus at that time. Also includes $2,492 car allowance and
$34,688 profit bonus with respect to Mr. Mayernick for fiscal 1998.
He recently resigned his duties as Vice President, Finance and Chief
Financial Officer and is employed by the Company in another capacity.
(5) Includes $7,200 in housing allowance with respect to Mr. Merrit
for the fiscal year 1996
The following table sets forth information concerning individual
grants of stock options made during fiscal year 1998 to the Named
Officers.
The following table sets forth information concerning individual grants of
stock options made during fiscal year 1998 to the Named Officers.
OPTION GRANTS IN FISCAL 1998
% of
Total Potential Realizable
Options Value at Assumed
Number of Granted Annual Rates of Stock
Securities to Exercise Price Appreciation for
Underlying Employees or Base Expir- Option Term
Options in Fiscal Price ation ---------------------
Name Granted(1) Year ($/SH)(2) Date 5%($) 10%($)(3)
- ------------------------- ---------- ---------- --------- ----------- ---------- ----------
Jack L. Watts .......... 50,000 6.7% $5.78 11/09/07 $138,835 $392,107
Douglas L. Cullum ...... 56,376 7.6% 5.25 03/31/08 187,325 474,719
Joseph T. Mayernick .... 150,000 20.0% 5.25 09/26/07 495,254 1,255,072
Robert L. Plummer ...... -- -- -- -- -- --
E. Scott Merritt ....... 30,000 4.0% 5.25 03/31/08 99,050 251,014
Rodger A. Moody ........ 10,000 1.3% 5.25 03/31/08 33,017 83,671
- ------------------------
(1) The options were granted under the Company's 1994 Stock
Option Plan. The options become exercisable for 20% of the shares on
the first anniversary of the date of grant and the balance vests 5%
for each calendar quarter of the individual's employment thereafter.
(2) Except for Jack Watts, the exercise price on the date of
grant was equal to 100% of the fair market value as determined by the
Board of Directors on the date of grant. Mr. Watts' options were
granted at 110% of fair market value or $5.78.
(3) The 5% and 10% assumed rates of appreciation are mandated by
the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the future common
stock price.
The following table sets forth certain information regarding option
exercises during fiscal year 1998 and the number of shares covered by
both exercisable and unexercisable stock options as of August 31, 1998
for each of the Named Officers.
AGGREGATED OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR-END OPTION VALUES
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised In-the-Money Options
on Options at August 31, 1998 at August 31, 1998(1)
Exercise Value --------------------------- ---------------------------
Name (2) Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------- --------- --------- ------------ ------------- ------------ -------------
Jack L. Watts.......... -- -- 40,000 110,000 $12,000 $18,000
Douglas L. Cullum...... 55,000 $255,200 18,000 108,736 6,000 9,000
Joseph T. Mayernick.... -- -- -- 150,000 -- --
Robert L. Plummer...... -- -- 70,600 33,900 137,150 48,225
E. Scott Merritt....... -- -- 36,000 54,000 37,750 27,250
Roger A. Moody......... 40,000 185,600 -- 10,000 -- --
- ------------------------
(1) The value of an "in-the-money" option represents the difference
between the estimated fair market value of the underlying securities
at August 31, 1998 of $5.25 per share, as determined by the Company's
Board of Directors, minus the exercise price of the option.
(2) Shares were acquired via a cashless exercise of options at an
option price of $0.61 per share.
Director Compensation
Each of Dr. Pfeffer and Messrs. Tomlinson and Williams receives as
compensation for his services as a director $2,500 per quarter, and
$2,000 for each meeting of the Board attended, and is reimbursed for his
reasonable expenses in attending Board meetings up to $22,000 per year.
None of the other Board members is compensated as such. Mr. Williams
receives an annual retainer for his services as a member of the Audit
Committee of the Board in the amount of $4,000, which is paid on a
quarterly basis. Mr. Tomlinson receives an annual retainer for his
services as an alternate member of the Audit Committee of $4,000 paid on
a quarterly basis. Each of Dr. Pfeffer and Messrs. Tomlinson and
Williams receives an annual retainer for his services as a member of the
Compensation Committee of the Board of Directors in the amount of $4,000
paid on a quarterly basis.
Employment and Change of Control Arrangements
Certain of the stock option agreements entered into pursuant to the
1994 Stock Option Plan provide for acceleration of vesting of options
governed thereby in the event of a "change in control," as defined in
such stock option agreements. In this regard, certain options granted
to Dr. Pfeffer and each of Messrs. Tomlinson, Watts and Williams in
fiscal year 1998 and in prior years, provide for acceleration of vesting
upon a change of control of the Company.
In addition, certain options granted in fiscal 1998 to Mr. Mayernick,
the former Chief Financial Officer of the Company, provide for
acceleration of vesting upon a change in control of the Company.
Further, the terms of Mr. Mayernick's employment with the Company
provide for certain payments to be made to Mr. Mayernick upon a change
in control of the Company.
Additional Information with Respect to Compensation Committee
Interlocks and Insider Participation in Compensation Decisions
The members of the Compensation Committee of the Company's Board of
Directors are Jeffrey Pfeffer, Ph.D., Timothy Tomlinson and Larry C.
Williams. Mr. Tomlinson is also the Company's Secretary.
For a description of transactions between the Company and members of
the Compensation Committee and entities affiliated with such members,
please see "Certain Relationships and Related Transactions" under Item
13 of this report on Form 10-K and Note 15 to the consolidated financial
statements included under Item 8 of this report on Form 10-K.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of each class of the Company's voting securities as
of October 30, 1998 by (i) each person known by the Company to be the
beneficial owner of more than 5% of such class, (ii) each director,
(iii) each Named Officer and (iv) all executive officers and directors
as a group. The Company's equity securities are privately-held and no
class of voting securities of the Company is registered pursuant to
Section 12 of the Securities Exchange Act of 1934.
Amount and
Nature of Percent
Name and Address of Beneficial of
Title of Class(1) Beneficial Owner Ownership(2) Class(2)
- -------------------------------------- ----------------------------- ------------ ---------
Class B Common Stock, Series 1..... Jack L. Watts(3) 3,847,963 39.0%
Class B Common Stock, Series 1..... Christopher C. Behrens(4) 1,553,333 15.8%
Class B Common Stock, Series 1..... Chase Manhattan Capital
Corporation(5) 1,552,333 15.8%
Class B Common Stock, Series 2..... Christopher C. Behrens(6) 815,715 8.3%
Class B Common Stock, Series 2..... Chase Manhattan Capital
Corporation(5) 815,715 8.3%
Class B Common Stock, Series 1..... Gary L. Barry(7) 607,965 6.2%
Class B Common Stock, Series 1..... Timothy Tomlinson(8) 238,984 2.4%
Class B Common Stock, Series 1..... Robert L. Plummer(9) 88,525 *
Class B Common Stock, Series 1..... Roger A. Moody (10) 84,329 *
Class B Common Stock, Series 1..... Larry C. Williams(11) 71,871 *
Class B Common Stock, Series 1..... Douglas L. Cullum(12) 59,268 *
Class B Common Stock, Series 1..... E. Scott Merritt(13) 44,750 *
Class B Common Stock, Series 1..... Joseph T. Mayernick(14) 37,500 *
Class B Common Stock, Series 1..... Jeffrey Pfeffer, Ph.D.(15) 30,500 *
Class B Common Stock, Series 1 All executive officers and 7,055,329 69.2%
and Series 2..................... directors as a group
(13 persons)(16)
- ------------------------
* Less than one percent.
(1) The Company's Class B Common Stock, Series 1 and Class B Common
Stock, Series 2 have the same voting rights, each share being
entitled to one vote. The Class B Common Stock, Series 2 has a
liquidation preference equal to $0.60 on each distributed dollar in
the event that the value of the Company's assets available for
distribution is less than $1.75 per share. Each share of Class B
Common Stock, Series 2 is convertible at any time at the option of
the holder into one share of Class B Common Stock, Series 1 and will
be automatically converted into one such share (i) in the event that
shares of Class B Common Stock, Series 1 shall be sold in a firm
commitment public offering in which the aggregate public offering
price is not less than $10 million or (ii) immediately prior to the
effectiveness of a merger or consolidation in which the Company is
not the surviving entity and in which the value of the property to
be received by the shareholders shall be not less than $1.75 per
share. As of October 30, 1998, there were 9,807,741 shares of
Class B Common Stock issued and outstanding, consisting of 8,636,311
shares of Class B Common Stock, Series 1 and 1,171,430 shares of
Class B Common Stock, Series 2. As of October 30, 1998, there were
2,134,992 shares of Class A Common Stock issued and outstanding.
Additionally, immediately exercisable warrants to purchase 2,492,741
shares of Class A Common Stock were outstanding. Chase Manhattan
Capital Corporation holds 2,052,526 of such warrants and Heller
Financial, Inc. holds 440,215 of such warrants. The Class A Common
Stock is non-voting and each share of Class A Common Stock may be
converted into one share of Class B Common Stock, Series 1 in the
event that shares of Class B Common Stock, Series 1 shall be sold in
a firm commitment public offering in which the aggregate public
offering price is not less than $10 million or there is a capital
reorganization or reclassification of the capital stock of the
Company.
(2) In accordance with the rules of the Securities and Exchange
Commission, shares are beneficially owned by the person who has or
shares voting or investment power with respect to such shares.
Unless otherwise indicated below, the persons and entities named in
the table have sole voting and sole investment power with respect to
all shares beneficially owned, subject to community property laws
where applicable. Shares of common stock subject to options that are
exercisable within 60 days of October 30, 1998 are deemed to be
outstanding and to be beneficially owned by the person holding such
option for the purpose of computing the percentage ownership of such
person but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. Percent of
Class computation reflects percentage ownership of Class B Common
Stock, Series 1 and Class B Common Stock, Series 2 combined.
(3) Includes 55,000 shares subject to options that are exercisable
within 60 days of October 30, 1998. Also includes 424,474 shares
held by LJL Cordovan Partners, L.P., of which Mr. Watts is the
general partner, and 52,132 shares held by trusts for the benefit of
Mr. Watts' children. Mr. Watt's address is 890 Faulstich Court, San
Jose, California 95112.
(4) Mr. Behrens is a principal of Chase Capital Partners, an affiliate
of Chase Manhattan Capital Corporation. Includes 1,552,333 shares
held of record by Chase Manhattan Capital Corporation and
affiliates, and 1,000 shares subject to options held by Mr. Behrens
that are exercisable within 60 days of October 30, 1998. Does not
include warrants held by Chase Manhattan Capital Corporation to
purchase 2,052,526 shares of Class A Common Stock at $0.60667 per
share, which shares are non-voting. Mr. Behrens disclaims beneficial
ownership of the 1,552,333 shares of Class B Common Stock, Series 1
and the 815,715 shares of Class B Common Stock, Series 2 owned by
Chase Manhattan Capital Corporation and affiliates. The address of
this shareholder is Chase Capital Partners, 380 Madison Avenue, New
York, New York 10017.
(5) With respect to Class B Common Stock, Series 1, includes 149,047
shares held by Archery Partners and 99,800 shares held by Baseball
Partners, affiliates of Chase Manhattan Capital Corporation. With
respect to Class B Common Stock, Series 2, includes 39,620 shares
held by Archery Partners and 50,000 shares held by Baseball
Partners. Does not include warrants held by Chase Manhattan Capital
Corporation to purchase 2,052,526 shares of Class A Common Stock at
$0.60667 per share, which shares are non-voting. The address of this
shareholder is Chase Capital Partners, 380 Madison Avenue, New York,
New York 10017.
(6) Mr. Behrens is a principal of Chase Capital Partners, an affiliate
of Chase Manhattan Capital Corporation. Comprised of 726,095 shares
held of record by Chase Manhattan Capital Corporation, 39,620 shares
held of record by Archery Partners and 50,000 shares held of record
by Baseball Partners, affiliates of Chase Manhattan Capital
Corporation. Does not include warrants held by Chase Manhattan
Capital Corporation to purchase 2,052,526 shares of Class A Common
Stock at $0.60667 per share, which shares are non-voting.
Mr. Behrens disclaims beneficial ownership of the 1,552,333 shares
of Class B Common Stock, Series 1 and the 815,715 shares of Class B
Common Stock, Series 2 owned by Chase Manhattan Capital Corporation
and affiliates. The address of this shareholder is Chase Capital
Partners, 380 Madison Avenue, New York, New York 10017.
(7) Mr. Barry's address is 640 Menlo Avenue, Suite 5, Menlo Park,
California 95025.
(8) Includes 26,000 shares held by First TZMM Investment Partnership, of
which Mr. Tomlinson is a general partner, 62,500 shares held by TZM
Investment Fund of which Mr. Tomlinson is a general partner, 4,000
shares held by trusts for the benefit of Mr. Tomlinson's children,
the trustee of which is Mr. Tomlinson. Excludes 5,000 shares held by
The Allison A. Zisko 1996 Trust and 5,000 shares held by The Natalie
L. Zisko 1996 Trust, the trustee of each of which is Mr. Tomlinson.
Mr. Tomlinson disclaims beneficial ownership of the 4,000 shares of
Class B Common Stock, Series 1, owned by the Tomlinson trusts.
Includes 125,484 shares subject to options held by TZM Investment
Fund that are exercisable within 60 days of October 30, 1998.
Mr. Tomlinson's address is 200 Page Mill Road, Second Floor, Palo
Alto, California 94306.
(9) Includes 78,525 shares subject to options that are exercisable
within 60 days of October 30, 1998. Mr. Plummer's address is 1902
New Butler Road, New Castle, Pennsylvania 16107.
(10) Mr. Moody's address is 890 Faulstich Court, San Jose, California,
95112.
(11) Includes 21,550 shares subject to options exercisable within
60 days of October 30, 1998. Does not include (i) 123,756 shares and
(ii) 41,976 shares subject to options exercisable within 60 days of
October 30, 1998, held in the individual names of four other
principals of The Breckenridge Group, Inc., of which Mr. Williams is
a principal. Mr. Williams' address is Resurgens Plaza, Suite 2100,
945 E. Paces Ferry Road, Atlanta, Georgia 30326.
(12) Includes 21,500 shares subject to options exercisable within 60 days
of October 30, 1998. Mr. Cullum's address is 890 Faulstich Court,
San Jose, California 95112.
(13) Includes 5,000 shares of Class B Common Stock, Series 1 held
by a trust for the benefit of Mr. Merritt's family and 39,750 shares
subject to options exercisable within 60 days of October 30, 1998.
Mr. Merritt's address is 890 Faulstich Court, San Jose, California
95112.
(14) Consists entirely of 37,500 shares subject to options that
are exercisable within 60 days of October 30, 1998. Mr. Mayernick
recently resigned from his position, as Vice President, Finance and
Chief Financial Officer, but remains an employee of the Company.
Mr. Mayernick's address is 890 Faulstich Court, San Jose,
California 95112.
(15) Includes 5,500 shares subject to options exercisable within
60 days of October 30, 1998. Dr. Pfeffer's address is Graduate
School of Business, Stanford University, Stanford, California
94305.
(16) Includes all of the shares shown as included in footnotes
(3), (4), (6) and (8) through (15).
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Loans to Senior Management and Other Employees
In January 1992, the Company loaned Jack L. Watts, Chairman of the
Board and Chief Executive Officer, $250,000 represented by a secured
promissory note. The note plus accrued interest was originally due in
January 1993, and originally accrued interest at a rate equal to 2%
above the Company's borrowing rate on its revolving credit facility. In
January 1997, the rate was changed to equal the Short Term Applicable
Federal Rate for January 1997 compounded annually. In November 1998, the
Board of Directors agreed to extend until January 17, 2000 the due date
of all principal and accrued interest owing to the Company. The loan is
secured by a pledge of certain shares of Class B Common Stock, Series 1
owned by Mr. Watts. Principal plus accrued interest outstanding at
August 31, 1998 was approximately $463,000.
The Company's policy is that it will not make loans to, or enter into
other transactions with, directors, officers or other affiliates unless
such loans or transactions are approved by a majority of the Company's
disinterested directors, may reasonably be expected to benefit the
Company and, except to the extent that loans to officers of the Company
have been entered into in part in recognition of the value of the
officers' services to the Company, are on terms no less favorable to the
Company than could be obtained in arms'-length transactions with
unaffiliated third parties. From time to time, the Company has agreed to
make loans to employees of the Company who are not members of senior
management to enable such employees to purchase their residences. In
this regard, in November 1991, the Company loaned Daniel Luch, Vice
President of Research and Development, $109,000 towards the purchase of
a home, and in May 1996, the Company loaned Joseph F. Jahn, formerly
Vice President-Operations, $100,000 towards the purchase of a home. Mr.
Jahn left the employ of the Company in connection with the restructuring
plan implemented by the Company in fiscal 1997. The loan to Mr. Jahn
was forgiven by the Company in September 1997, in payment of certain
severance amounts payable to Mr. Jahn by the Company.
Transactions with Executive Officers
During fiscal year 1998, eight employees of the Company, including
three executive officers, namely Laurie D. Bassin, Douglas L. Cullum and
Rodger A. Moody, exercised an aggregate of 359,000 stock options at an
exercise price of $0.61 per share under the Company's 1988 Stock Option
Plan. 40,000, 55,000 and 40,000 option shares were exercised by Ms.
Bassin and Messrs. Cullum and Moody, respectively. Pursuant to a
procedure authorized by the Board of Directors for select holders of
options granted under the 1988 Stock Option Plan, the option holders
elected a cashless exercise of the options whereby shares previously
owned by the optionees or shares acquired by the optionees upon exercise
of the options were surrendered to satisfy withholding taxes and the
exercise cost of the shares.
Transactions with Entities Affiliated with Directors
In June 1994, Chase Manhattan Capital Corporation purchased shares of
Class B Common Stock, Series 1 from the Company and certain insiders of
Company, and shares of Class B Common Stock, Series 2 from Robert
Fleming Nominees, Ltd. ("RFNL"). In connection with these purchases,
Chase Capital, RFNL and Heller Financial, Inc., the lender under a
credit facility entered into with the Company, received certain demand
and piggyback registration rights. In addition, Chase Capital became a
participant in an earlier agreement between the Company and RFNL under
which (i) the Company has the right of first offer to purchase any
shares of the Company's capital stock that either shareholder proposes
to sell to any nonrelated party and (ii) each shareholder has a right of
first offer to purchase any Class B Common Stock, Series 1 that the
Company proposes to sell. Chase Capital is also a party to certain
shareholders agreements providing for certain rights of first refusal as
described below under the heading "Shareholders Agreements." In
addition, the parties to these shareholders agreements have granted to
Chase Capital certain co-sale rights to participate in the sale by any
such shareholders of more than 25% of the outstanding shares of the
Company's common stock. One of the shareholders agreements also provides
that the Company is prohibited from (i) entering into any merger,
consolidation or repurchase of capital stock, (ii) making certain
amendments to its Bylaws or Certificate of Incorporation or
(iii) entering into certain other significant transactions, without the
approval of Chase Capital. Pursuant to that agreement, Jack L. Watts,
RFNL and their permitted transferees have agreed to vote their shares in
favor of a nominee of Chase Capital as a director of the Company.
Mr. Behrens is Chase Capital's current nominee.
The Company retains as its legal counsel the law firm of Tomlinson
Zisko Morosoli & Maser LLP, of which Timothy Tomlinson is a general
partner. For legal services rendered during fiscal 1998, the Company
paid Mr. Tomlinson's law firm fees and expenses in the aggregate amount
of $249,092. Mr. Tomlinson is corporate secretary, a director of the
Company, a member of the Compensation Committee and an alternate member
of the Audit Committee.
In addition to a base salary of $12,000, the Company paid its Vice
President and General Counsel, Themistocles G. Michos, $253,000 in
fiscal year 1998 for legal services rendered.
Shareholders Agreements
A majority of the Company's shares, including shares held by Jack L.
Watts and his affiliates, are subject to shareholders agreements under
which the Company has a right of first refusal in the event of a
proposed transfer of such shares of the Company's common stock to a
transferee not related to the shareholder. In the event the Company does
not exercise its right of first refusal, the other shareholders that are
parties to the agreements have similar first refusal rights.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following financial statements of Portola Packaging, Inc. and
the Report of Independent Accountants are filed herewith:
Report of Independent Accountants
Consolidated Balance Sheets as of August 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended
August 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the Years Ended
August 31, 1998, 1997, and 1996
Consolidated Statements of Shareholders' Equity (Deficit)
for the Years Ended August 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedules are filed herewith and should be read in conjunction with the
consolidated financial statements:
Report of Independent Accountants on Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or
the required information is shown on the consolidated financial
statements or notes thereto.
(a)(3) Exhibits. The following exhibits are filed as part of, or
incorporated by reference into, this Form 10-K:
Exhibit
Number Exhibit Title
3.01 Certificate of Incorporation (filed with Secretary of State of
Delaware on April 29, 1994, as amended and filed with Secretary of
State of Delaware on October 4, 1995)(1)
3.02 Bylaws(2)
4.01 Indenture, dated as of October 2, 1995, by and between the
Registrant and American Bank National Association, as trustee
(including form of Note)(1)
4.02 Form of Stock Certificate evidencing ownership of Registrant's
Class B Common Stock, Series 1(3)
10.01 Underwriting Agreement(4)
10.02 Shareholders Agreement, dated as of June 23, 1988, by and among
the Registrant, Chase Manhattan Investment Holdings, Inc. and
certain shareholders and warrant holders, amended by Amendment to
Shareholders Agreement, dated as of May 23, 1989, further amended
by Second Amendment to Shareholders Agreement, dated November
29,1989, and further amended by Amendment to Shareholders
Agreement, dated as of June 30, 1994(2)
10.03 Shareholders Agreement, dated as of June 30, 1994, by and
among the Registrant, Chase Manhattan Capital Corporation, and
certain shareholders and warrant holders(2)
Exhibit
Number Exhibit Title
10.04 Stock Purchase Agreement, dated as of March 19, 1994, by and
among the Registrant, Nepco, Robert Crisci and Harry Crisci(5)
10.05 Share Purchase Agreement, dated June 16, 1995, by and among
3154823 Canada Inc. and Shareholders of B.C. Plastic Industries
Ltd., Alberta Plastic Industries Ltd. and Canada Cap Snap
Corporation(6)
10.06 Amalgamation Agreement, dated June 16, 1995, by and among
3154823 Canada Inc., B.C. Plastic Industries Ltd., Alberta Plastic
Industries Ltd. and Canada Cap Snap Corporation(7)
10.07 First Offer Agreement, dated as of October 17,1990, by and
among the Registrant, Chase Manhattan Investment Holdings, Inc.,
Chase Manhattan Capital Corporation and Robert Fleming Nominees,
Ltd., as amended by Amendment to First Offer Agreement, dated as
of June 30, 1994(2)
10.08 $109,000 Non-Recourse Promissory Note, dated November 13,
1991, made by Daniel Luch and Mary Jeanne Luch in favor of the
Registrant(2)
10.09 $250,000 Secured Promissory Note, dated January 17, 1992,
made by Jack L. Watts in favor of the Registrant(8)
10.10 Director's Agreement, dated October 5, 1990, by and between
the Registrant and Martin Imbler(9)
10.11 Director's Agreement, dated September 1, 1989, by and
between the Registrant and Larry C. Williams, as amended by
Amendment to Director's Agreement, dated January 16, 1990 and
Amendment Number Two to Director's Agreement, dated August 31,
1991(10)
10.12 Director's Agreement, dated as of September 1, 1989, by and
between the Registrant and Timothy Tomlinson, as amended by
Amendment to Director's Agreement, dated January 16, 1990 and
Amendment Number Two to Director's Agreement, dated August 31,
1991(11)
10.13 Stock Purchase Agreement, dated October 17, 1990, by and
among the Registrant, Robert Fleming Nominees, Ltd., Jack Watts,
John Lemons and LJL Cordovan Partners(12)
10.14 Stock Purchase Agreement, dated as of June 30, 1994, by and
among the Registrant, Jack L. Watts, LJL Cordovan Partners, Robert
Fleming Nominess, Ltd., Chase Manhattan Capital Corporation, and
certain other selling shareholders (13)
10.15 Credit Agreement, dated as of June 16, 1995, by and between
3154823 Canada Inc. as borrower (subsequently amalgamated into
Portola Packaging Canada Ltd.) and Canadian Imperial Bank of
Commerce as lender and agent(14)
10.16 Limited Recourse Guarantee, dated as of June 16, 1995,
between the Registrant as guarantor and Canadian Imperial Bank of
Commerce(15)
10.17 Master Supply Agreement, dated March 29, 1995, by and
between the Registrant and Tetra Rex Packaging Systems, Inc.(16)
10.18 Form of Subscription Agreement by and between the Registrant
and the related director or officer (said form being substantially
identical to the form of Subscription Agreement utilized by the
Registrant for certain officers and directors of the
Registrant)(17)
10.19 Form of Indemnification Agreement by and between the
Registrant and the related director or officer (said form being
substantially similar to the form of Indemnification Agreement
utilized by the Registrant for certain officers and directors of
the Registrant) (18)
Exhibit
Number Exhibit Title
10.20 Stock Purchase Agreement, dated as of June 9, 1995, by and
among the Registrant, Oakley T. Hayden Corp., Lyn Leigers as
Executor of the Estate of Oakley T. Hayden, Chase Manhattan
Capital Corporation and Heller Financial, Inc.(19)
10.21 Second Amended and Restated Registration Rights Agreement,
dated as of June 9, 1995, by and among the Registrant, Heller
Financial, Inc., Chase Manhattan Capital Corporation and Robert
Fleming Nominees, Ltd.(20)
10.22 Second Amended and Restated Credit and Security Agreement,
dated as of October 2, 1995, by and between the Registrant and
Heller Financial, Inc.(21)
10.23 Stock Purchase Agreement, dated October 10, 1995, by and
among the Registrant, Jack L. Watts, John L. Lemons, Mary Ann
Lemons, LJL Cordovan Partners, L.P., Robert Fleming Nominees,
Ltd., Suez Equity Investors, L.P. and SEI Associates.(22)
10.24 Amendment to Investors' Rights Agreements, dated as of
October 10, 1995, by and among the Registrant, Jack L. Watts, John
L. Lemons, Mary Ann Lemons, LJL Cordovan Partners, L.P, Robert
Fleming Nominees, Ltd., Suez Equity Investors, L.P. SEI Associates
and Chase Manhattan Capital Corporation.(23)
10.25 Third Amended and Restated Registration Rights Agreement,
dated as of October 10, 1995, by and among the Registrant , Heller
Financial, Inc., Chase Manhattan Capital Corporation, Robert
Fleming Nominees, Ltd., Suez Equity Investors, L.P. and SEI
Associates.(24)
10.26 1988 Stock Option Plan and related documents(25)
10.27 1994 Stock Option Plan and related documents(26)
10.28 Settlement Agreement, dated June 1996, by and between the
Registrant and Scholle Corporation(27)
10.29 Director's Agreement, dated as of May 20, 1996, by and
between the Registrant and Jeffrey Pfeffer(28)
10.30 Form of Indemnification Agreement by and between the
Registrant and the related director or officer(29)
10.31 Form of Amendment to Indemnification Agreement by and
between the Registrant and certain directors and officers of the
Registrant(30)
10.32 Registrant's 1996 Employee Stock Purchase Plan, together
with related documents(31)
10.33 Registrant's Senior Executive Bonus Plan for fiscal year
1997(32)
10.34 Registrant's Management Incentive Plan for fiscal year
1997(33)
10.35 Registrant's Management Deferred Compensation Plan Trust
Agreement(34)
10.36 Registrant's Management Deferred Compensation Plan(35)
10.37 First Amending Agreement, dated November 26, 1997, to Credit
Agreement, dated as of June 16, 1995, by and among Portola
Packaging Canada Ltd., Registrant and Canadian Imperial Bank of
Commerce, as Lender and agent(36)
10.38 Support Agreement, dated as of November 26, 1997, by and
among Registrant, Portola Packaging Canada Ltd. and Canadian
Imperial Bank of Commerce, as agent(37)
10.39 Letter Agreement, Dated July 22, 1997, by and between Registrant
and Joseph T. Mayernick, as acknowledged and agreed to on August
15, 1997 (38)
Exhibit
Number Exhibit Title
10.40 Summary Description of Company Bonus Plan and Company Profit
Sharing Plan (39)
12.01 Computation of Ratio of Earnings to Fixed Charges
21.01 Subsidiaries of the Registrant
23.01 Consent of PricewaterhouseCoopers LLP
24.01 Power of Attorney (included as part of the signature page to
this report)
27.01 Financial Data Schedule
_____________________
(1) Incorporated herein by reference to the exhibit with the same
number included in the Registrant's Quarterly Report on Form 10-Q
for the period ended November 30, 1995, as filed with the Securities
and Exchange Commission on January 16, 1996.
(2) Incorporated herein by reference to the exhibit with the same
number included in the Registrant's Registration Statement on Form
S-1 (Commission File No. 33-95318), as filed with the Securities and
Exchange Commission on August 1, 1995.
(3) Incorporated herein by reference to the exhibit with the same
number included in the Registrant's Quarterly Report on Form 10-Q
for the period ended November 30, 1996, as filed with the Securities
and Exchange Commission on January 13, 1997.
(4) Incorporated herein by reference to exhibit 1.01 included in
pre-effective Amendment No. 2 to the Registrant's Registration
Statement on Form S-1 (Commission File No. 33-95318), as filed with
the Securities and Exchange Commission on September 25, 1995.
(5) Incorporated herein by reference to exhibit 2.01 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(6) Incorporated herein by reference to exhibit 2.02 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(7) Incorporated herein by reference to exhibit 2.03 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(8) Incorporated herin by reference to exhibit 10.10 included in the
Registrant's Registstration Statement on Form S-1 (Commission File
No. 33-95318), as filed with the Securities and Exchange Commission
on August 1, 1995.
(9) Incorporated herein by reference to exhibit 10.12 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(10) Incorporated herein by reference to exhibit 10.13 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(11) Incorporated herein by reference to exhibit 10.14 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
Exhibit
Number Exhibit Title
(12) Incorporated herein by reference to exhibit 10.15 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(13) Incorporated herein by reference to exhibit 10.16 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(14) Incorporated herein by reference to exhibit 10.17 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(15) Incorporated herein by reference to exhibit 10.18 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(16) Incorporated herein by reference to exhibit 10.19 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(17) Incorporated herein by reference to exhibit 10.20 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(18) Incorporated herein by reference to exhibit 10.21 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(19) Incorporated herein by reference to exhibit 10.22 included in pre-
effective Amendment No. 2 to the Registrant's Registration Statement
on Form S-1 (Commission File No. 33-95318), as filed with the
Securities and Exchange Commission on September 25, 1995.
(20) Incorporated herein by reference to exhibit10.23 included in pre-
effective Amendment No. 2 to the Registrant's Registration Statement
on Forms S-1 (Commission File No. 33-95318), as filed with the
Securities and Exchange Commission on September 25, 1995.
(21) Incorporated herein by reference to exhibit 10.24 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1995, as filed with the Securities and Exchange
Commission on January 16, 1996.
(22) Incorporated herein by reference to exhibit 10.25 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1995, as filed with the Securities and Exchange
Commission on January 16, 1996.
(23) Incorporated herein by reference to exhibit 10.26 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1995, as filed with the Securities and Exchange
Commission on January 16, 1996.
(24) Incorporated herein by reference to exhibit 10.27 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1995, as filed with the Securities and Exchange
Commission on January 16, 1996.
(25) Incorporated herein by reference to exhibit 4.03 to the
Registrant's Registration Statement on Form S-8 (Commission File No.
333-17533), as filed with the Securities and Exchange Commission on
December 10, 1996.
Exhibit
Number Exhibit Title
(26) Incorporated herein by reference to exhibit 4.04 to the
Registrant's Registration Statement on Form S-8 (Commission File No.
333-17533), as filed with the Securities and Exchange Commission on
December 10, 1996.
(27) Incorporated herein by reference to exhibit 10.34 with the same
number included in the Registrant's Quarterly Report on Form 10-Q
for the period ended May 31, 1996, as filed with the Securities and
Exchange Commission on July 11, 1996.
(28) Incorporated herein by reference to exhibit 10.36 included in the
Registrant's Annual Report on Form 10-K for the period ended August
31, 1996, as filed with the Securities and Exchange Commission on
November 25, 1996.
(29) Incorporated herein by reference to exhibit 10.37 included in the
Registrant's Annual Report on Form 10-K for the period ended August
31, 1996, as filed with the Securities and Exchange Commission on
November 25, 1996.
(30) Incorporated herein by reference to exhibit 10.38 included in the
Registrant's Annual Report on Form 10-K for the period ended August
31, 1996, as filed with the Securities and Exchange Commission on
November 25, 1996.
(31) Incorporated herein by reference to exhibit 4.05 to the
Registrant's Registration Statement on Form S-8 (Commission File No.
333-17533), as filed with the Securities and Exchange Commission on
December 10, 1996.
(32) Incorporated herein by reference to exhibit 10.41 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1996, as filed with the Securities and Exchange
Commission on January 13, 1997.
(33) Incorporated herein by reference to exhibit 10.42 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1996, as filed with the Securities and Exchange
Commission on January 13, 1997.
(34) Incorporated herein by reference to exhibit 10.43 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1996, as filed with the Securities and Exchange
Commission on January 13, 1997.
(35) Incorporated herein by reference to exhibit 10.44 with the same
number included in Post-Effective Amendment No. 2 to Registrant's
Registration Statement on Form S-1 (Commission File No. 33-95318),
as filed with the Securities and Exchange Commission on March 11,
1997.
(36) Incorporated herein by reference to exhibit 10.44 included in the
Registrant's Annual Report on Form 10-K for the period ended August
31, 1997, as filed with the Securities and Exchange Commission on
December 1, 1997.
(37) Incorporated herein by reference to exhibit 10.45 included in the
Registrant's Annual Report on Form 10-K for the period ended August
31, 1997, as filed with the Securities and Exchange Commission on
December 1, 1997.
(38) Incorporated herein by reference to exhibit 10.46 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1997, as filed with the Securities and Exchange
Commission on January 14, 1998.
(39) Incorporated herein by reference to exhibit 10.47 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
February 28, 1998, as filed with the Securities and Exchange
Commission on April 14, 1998
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PORTOLA PACKAGING, INC.,
a Delaware Corporation
By: /s/ JACK L. WATTS
-----------------------------------------
Jack L. Watts
November 20, 1998 CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Jack L. Watts, Joseph T. Mayernick and Timothy
Tomlinson, and each of them, his true and lawful attorneys-in-fact, each with
full power of substitution, for him in any and all capacities, to sign any
amendments to this report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or their substitute or substitutes may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
PRINCIPAL EXECUTIVE OFFICER:
/s/ JACK L. WATTS November 20, 1998
-------------------------------------------
Jack L. Watts
CHIEF EXECUTIVE OFFICER, CHAIRMAN OF THE BOARD AND
A DIRECTOR
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ James A. Taylor November 20, 1998
-------------------------------------------
James A. Taylor
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
DIRECTORS:
/s/ CHRISTOPHER C. BEHRENS November 20, 1998
-------------------------------------------
Christopher C. Behrens
/s/ JEFFREY PFEFFER, PH.D. November 20, 1998
-------------------------------------------
Jeffrey Pfeffer, Ph.D.
/s/ TIMOTHY TOMLINSON November 20, 1998
-------------------------------------------
Timothy Tomlinson
/s/ LARRY C. WILLIAMS November 20, 1998
-------------------------------------------
Larry C. Williams
Supplemental Information to be Furnished with Reports Filed
Pursuant to Section 15(d) of the Act by Registrants Which Have
Not Registered Securities Pursuant to Section 12 of the Act
No annual report for the Registrant's last fiscal year or proxy
material has been sent to security holders of the Registrant. If any
such report or proxy material is sent to Registrant's security holders
subsequent to the filing of this report on Form 10-K, the Registrant
shall supplementally furnish copies of any such material to the
Commission when it is sent to security holders. Any such material shall
not be deemed to be "filed" with the Commission or otherwise subject to
the liabilities of Section 18 of the Securities Exchange Act of 1934, as
amended.
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
Portola Packaging, Inc. and Subsidiaries:
Our report on the consolidated financial statements of Portola Packaging
Inc. and Subsidiaries is included on page 22 of this form 10-K. In
connection with our audits of such financial statements, we have also
audited the related financial statement schedule on page 64 of this
form 10-K.
In our opinion, the financial statement schedule referred to above
when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
PricewaterhouseCoopers LLP
November 8, 1998
PORTOLA PACKAGING, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Balance Balance
at Charged to at
Allowance for Doubtful Beginning Costs and Deduc- End of
Accounts of Period Expenses Other tions Period
- ----------------------------- --------- ---------- -------- -------- ---------
Year ended August 31, 1996.. $813 $450 $ -- $446 $817
Year ended August 31, 1997.. $817 823 -- 470 1,170
Year ended August 31, 1998.. $1,170 379 678 500 1,727
Balance Balance
at Charged to at
Beginning Costs and Deduc- End of
Restructuring Reserve of Period Expenses Other tions Period
- ----------------------------- --------- ---------- -------- -------- ---------
Year ended August 31, 1996.. $ -- $ -- $ -- $ -- $ --
Year ended August 31, 1997.. -- 2,394 -- 2,121 273
Year ended August 31, 1998.. $273 1,426 -- 588 1,111
- ------------------------
(1) Write off of bad debts
(2) Restructuring items charged against reserve
(3) Reclassification of various amounts into reserve balances
EXHIBIT INDEX
Exhibit
Number Exhibit Title
3.01 Certificate of Incorporation (filed with Secretary of State of
Delaware on April 29, 1994, as amended and filed with Secretary of
State of Delaware on October 4, 1995)(1)
3.02 Bylaws(2)
4.01 Indenture, dated as of October 2, 1995, by and between the
Registrant and American Bank National Association, as trustee
(including form of Note)(1)
4.02 Form of Stock Certificate evidencing ownership of Registrant's
Class B Common Stock, Series 1(3)
10.01 Underwriting Agreement(4)
10.02 Shareholders Agreement, dated as of June 23, 1988, by and among
the Registrant, Chase Manhattan Investment Holdings, Inc. and
certain shareholders and warrant holders, amended by Amendment to
Shareholders Agreement, dated as of May 23, 1989, further amended
by Second Amendment to Shareholders Agreement, dated November
29,1989, and further amended by Amendment to Shareholders
Agreement, dated as of June 30, 1994(2)
10.03 Shareholders Agreement, dated as of June 30, 1994, by and
among the Registrant, Chase Manhattan Capital Corporation, and
certain shareholders and warrant holders(2)
10.04 Stock Purchase Agreement, dated as of March 19, 1994, by and
among the Registrant, Nepco, Robert Crisci and Harry Crisci(5)
10.05 Share Purchase Agreement, dated June 16, 1995, by and among
3154823 Canada Inc. and Shareholders of B.C. Plastic Industries
Ltd., Alberta Plastic Industries Ltd. and Canada Cap Snap
Corporation(6)
10.06 Amalgamation Agreement, dated June 16, 1995, by and among
3154823 Canada Inc., B.C. Plastic Industries Ltd., Alberta Plastic
Industries Ltd. and Canada Cap Snap Corporation(7)
10.07 First Offer Agreement, dated as of October 17,1990, by and
among the Registrant, Chase Manhattan Investment Holdings, Inc.,
Chase Manhattan Capital Corporation and Robert Fleming Nominees,
Ltd., as amended by Amendment to First Offer Agreement, dated as
of June 30, 1994(2)
10.08 $109,000 Non-Recourse Promissory Note, dated November 13,
1991, made by Daniel Luch and Mary Jeanne Luch in favor of the
Registrant(2)
10.09 $250,000 Secured Promissory Note, dated January 17, 1992
made by Jack L. Watts in favor of the Registrant(8)
10.10 Director's Agreement, dated October 5, 1990, by and between
the Registrant and Martin Imbler(9)
10.11 Director's Agreement, dated September 1, 1989, by and
between the Registrant and Larry C. Williams, as amended by
Amendment to Director's Agreement, dated January 16, 1990 and
Amendment Number Two to Director's Agreement, dated August 31,
1991(10)
10.12 Director's Agreement, dated as of September 1, 1989, by and
between the Registrant and Timothy Tomlinson, as amended by
Amendment to Director's Agreement, dated January 16, 1990 and
Amendment Number Two to Director's Agreement, dated August 31,
1991(11)
10.13 Stock Purchase Agreement, dated October 17, 1990, by and
among the Registrant, Robert Fleming Nominees, Ltd., Jack Watts,
John Lemons and LJL Cordovan Partners(12)
Exhibit
Number Exhibit Title
10.14 Stock Purchase Agreement, dated as of June 30, 1994, by and
among the Registrant, Jack L. Watts, LJL Cordovan Partners, Robert
Fleming Nominess, Ltd., Chase Manhattan Capital Corporation, and
certain other selling shareholders (13)
10.15 Credit Agreement, dated as of June 16, 1995, by and between
3154823 Canada Inc. as borrower (subsequently amalgamated into
Portola Packaging Canada Ltd.) and Canadian Imperial Bank of
Commerce as lender and agent(14)
10.16 Limited Recourse Guarantee, dated as of June 16, 1995,
between the Registrant as guarantor and Canadian Imperial Bank of
Commerce(15)
10.17 Master Supply Agreement, dated March 29, 1995, by and
between the Registrant and Tetra Rex Packaging Systems, Inc.(16)
10.18 Form of Subscription Agreement by and between the Registrant
and the related director or officer (said form being substantially
identical to the form of Subscription Agreement utilized by the
Registrant for certain officers and directors of the
Registrant)(17)
10.19 Form of Indemnification Agreement by and between the
Registrant and the related director or officer (said form being
substantially similar to the form of Indemnification Agreement
utilized by the Registrant for certain officers and directors of
the Registrant)(18)
10.20 Stock Purchase Agreement, dated as of June 9, 1995, by and
among the Registrant, Oakley T. Hayden Corp., Lyn Leigers as
Executor of the Estate of Oakley T. Hayden, Chase Manhattan
Capital Corporation and Heller Financial, Inc.(19)
10.21 Second Amended and Restated Registration Rights Agreement,
dated as of June 9, 1995, by and among the Registrant, Heller
Financial, Inc., Chase Manhattan Capital Corporation and Robert
Fleming Nominees, Ltd.(20)
10.22 Second Amended and Restated Credit and Security Agreement,
dated as of October 2, 1995, by and between the Registrant and
Heller Financial, Inc.(21)
10.23 Stock Purchase Agreement, dated October 10, 1995, by and
among the Registrant, Jack L. Watts, John L. Lemons, Mary Ann
Lemons, LJL Cordovan Partners, L.P., Robert Fleming Nominees,
Ltd., Suez Equity Investors, L.P. and SEI Associates.(22)
10.24 Amendment to Investors' Rights Agreements, dated as of
October 10, 1995, by and among the Registrant, Jack L. Watts, John
L. Lemons, Mary Ann Lemons, LJL Cordovan Partners, L.P, Robert
Fleming Nominees, Ltd., Suez Equity Investors, L.P. SEI Associates
and Chase Manhattan Capital Corporation.(23)
10.25 Third Amended and Restated Registration Rights Agreement,
dated as of October 10, 1995, by and among the Registrant , Heller
Financial, Inc., Chase Manhattan Capital Corporation, Robert
Fleming Nominees, Ltd., Suez Equity Investors, L.P. and SEI
Associates.(24)
10.26 1988 Stock Option Plan and related documents(25)
10.27 1994 Stock Option Plan and related documents(26)
10.28 Settlement Agreement, dated June 1996, by and between the
Registrant and Scholle Corporation(27)
10.29 Director's Agreement, dated as of May 20, 1996, by and
between the Registrant and Jeffrey Pfeffer(28)
10.30 Form of Indemnification Agreement by and between the
Registrant and the related director or officer(29)
Exhibit
Number Exhibit Title
10.31 Form of Amendment to Indemnification Agreement by and
between the Registrant and certain directors and officers of the
Registrant(30)
10.32 Registrant's 1996 Employee Stock Purchase Plan, together
with related documents(31)
10.33 Registrant's Senior Executive Bonus Plan for fiscal year
1997(32)
10.34 Registrant's Management Incentive Plan for fiscal year
1997(33)
10.35 Registrant's Management Deferred Compensation Plan Trust
Agreement(34)
10.36 Registrant's Management Deferred Compensation Plan(35)
10.37 First Amending Agreement, dated November 26, 1997, to Credit
Agreement, dated as of June 16, 1995, by and among Portola
Packaging Canada Ltd., Registrant and Canadian Imperial Bank of
Commerce, as Lender and agent (36)
10.38 Support Agreement, dated as of November 26, 1997, by and
among Registrant, Portola Packaging Canada Ltd. and Canadian
Imperial Bank of Commerce, as agent (37)
10.39 Letter Agreement, Dated July 22, 1997, by and between Registrant
and Joseph T. Mayernick, as acknowledged and agreed to on August
15, 1997 (38)
10.40 Summary Description of Company Bonus Plan and Company Profit
Sharing Plan (39)
12.01 Computation of Ratio of Earnings to Fixed Charges
21.01 Subsidiaries of the Registrant
23.01 Consent of PricewaterhouseCoopers LLP
24.01 Power of Attorney (included as part of the signature page to
this report)
27.01 Financial Data Schedule
_____________________
(1) Incorporated herein by reference to the exhibit with the same
number included in the Registrant's Quarterly Report on Form 10-Q
for the period ended November 30, 1995, as filed with the Securities
and Exchange Commission on January 16, 1996.
(2) Incorporated herein by reference to the exhibit with the same
number included in the Registrant's Registration Statement on Form
S-1 (Commission File No. 33-95318), as filed with the Securities and
Exchange Commission on August 1, 1995.
(3) Incorporated herein by reference to the exhibit with the same
number included in the Registrant's Quarterly Report on Form 10-Q
for the period ended November 30, 1996, as filed with the Securities
and Exchange Commission on January 13, 1997.
(4) Incorporated herein by reference to exhibit 1.01 included in pre-
effective Amendment No. 2 to the Registrant's Registration Statement
on Form S-1 (Commission File No. 33-95318), as filed with the
Securities and Exchange Commission on September 25, 1995.
(5) Incorporated herein by reference to exhibit 2.01 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
Exhibit
Number Exhibit Title
(6) Incorporated herein by reference to exhibit 2.02 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(7) Incorporated herein by reference to exhibit 2.03 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(8) Incorporated herin by reference to exhibit 10.10 included in the
Registrant's Registstration Statement on Form S-1 (Commission File
No. 33-95318), as filed with the Securities and Exchange Commission
on August 1, 1995.
(9) Incorporated herein by reference to exhibit 10.12 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(10) Incorporated herein by reference to exhibit 10.13 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(11) Incorporated herein by reference to exhibit 10.14 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(12) Incorporated herein by reference to exhibit 10.15 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(13) Incorporated herein by reference to exhibit 10.16 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(14) Incorporated herein by reference to exhibit 10.17 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(15) Incorporated herein by reference to exhibit 10.18 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(16) Incorporated herein by reference to exhibit 10.19 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(17) Incorporated herein by reference to exhibit 10.20 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(18) Incorporated herein by reference to exhibit 10.21 included in the
Registrant's Registration Statement on Form S-1 (Commission File No.
33-95318), as filed with the Securities and Exchange Commission on
August 1, 1995.
(19) Incorporated herein by reference to exhibit 10.22 included in pre-
effective Amendment No. 2 to the Registrant's Registration Statement
on Form S-1 (Commission File No. 33-95318), as filed with the
Securities and Exchange Commission on September 25, 1995.
Exhibit
Number Exhibit Title
(20) Incorporated herein by reference to exhibit number 10.23 included
in pre-effective Amendment No. 2 to the Registrant's Registration
Statement on Forms S-1 (Commission File No. 33-95318), as filed with
the Securities and Exchange Commission on September 25, 1995.
(21) Incorporated herein by reference to exhibit 10.24 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1995, as filed with the Securities and Exchange
Commission on January 16, 1996.
(22) Incorporated herein by reference to exhibit 10.25 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1995, as filed with the Securities and Exchange
Commission on January 16, 1996.
(23) Incorporated herein by reference to exhibit 10.26 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1995, as filed with the Securities and Exchange
Commission on January 16, 1996.
(24) Incorporated herein by reference to exhibit 10.27 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1995, as filed with the Securities and Exchange
Commission on January 16, 1996.
(25) Incorporated herein by reference to exhibit 4.03 to the
Registrant's Registration Statement on Form S-8 (Commission File No.
333-17533), as filed with the Securities and Exchange Commission on
December 10, 1996.
(26) Incorporated herein by reference to exhibit 4.04 to the
Registrant's Registration Statement on Form S-8 (Commission File No.
333-17533), as filed with the Securities and Exchange Commission on
December 10, 1996.
(27) Incorporated herein by reference to exhibit with the same number
included in the Registrant's Quarterly Report on Form 10-Q for the
period ended May 31, 1996, as filed with the Securities and Exchange
Commission on July 11, 1996.
(28) Incorporated herein by reference to exhibit 10.36 included in the
Registrant's Annual Report on Form 10-K for the period ended August
31, 1996, as filed with the Securities and Exchange Commission on
November 25, 1996.
(29) Incorporated herein by reference to exhibit 10.37 included in the
Registrant's Annual Report on Form 10-K for the period ended August
31, 1996, as filed with the Securities and Exchange Commission on
November 25, 1996.
(30) Incorporated herein by reference to exhibit 10.38 included in the
Registrant's Annual Report on Form 10-K for the period ended August
31, 1996, as filed with the Securities and Exchange Commission on
November 25, 1996.
(31) Incorporated herein by reference to exhibit 4.05 to the
Registrant's Registration Statement on Form S-8 (Commission File No.
333-17533), as filed with the Securities and Exchange Commission on
December 10, 1996.
(32) Incorporated herein by reference to exhibit 10.41 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1996, as filed with the Securities and Exchange
Commission on January 13, 1997.
(33) Incorporated herein by reference to exhibit 10.42 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1996, as filed with the Securities and Exchange
Commission on January 13, 1997.
Exhibit
Number Exhibit Title
(34) Incorporated herein by reference to exhibit 10.43 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1996, as filed with the Securities and Exchange
Commission on January 13, 1997.
(35) Incorporated herein by reference to exhibit 10.44 with the same
number included in Post-Effective Amendment No. 2 to Registrant's
Registration Statement on Form S-1 (Commission File No. 33-95318),
as filed with the Securities and Exchange Commission on March 11,
1997.
(36) Incorporated herein by reference to exhibit 10.44 included in the
Registrant's Annual Report on Form 10-K for the period ended August
31, 1997, as filed with the Securities and Exchange Commission on
December 1, 1997.
(37) Incorporated herein by reference to exhibit 10.45 included in the
Registrant's Annual Report on Form 10-K for the period ended August
31, 1997, as filed with the Securities and Exchange Commission on
December 1, 1997.
(38) Incorporated herein by reference to exhibit 10.46 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
November 30, 1997, as filed with the Securities and Exchange
Commission on January 14, 1998.
(39) Incorporated herein by reference to exhibit 10.47 included in the
Registrant's Quarterly Report on Form 10-Q for the period ended
February 28, 1998, as filed with the Securities and Exchange
Commission on April 14, 1998.