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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1996
[ ] 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
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
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.
11,813,062 shares of Registrant's $.001 par value Common Stock, consisting of
2,134,992 shares of nonvoting Class A Common Stock and 9,678,070 shares in
the aggregate of voting Class B Common Stock, Series 1 and 2 combined, were
outstanding at November 4, 1996.
Documents incorporated by reference: None
PORTOLA PACKAGING, INC.
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I PAGE
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . 11
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 13
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . 19
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . 44
PART III
Item 10. Directors and Executive Officers of Registrant . . . . . . . . . 45
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 48
Item 12. Security Ownership of Certain Beneficial Owners and Management. . 52
Item 13. Certain Relationships and Related Transactions . . . . . . . . . 54
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
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- and the Portola
logo are registered trademarks of the Company. All other product names of
the Company are trademarks of the Company.
2
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". Portola's closure products are primarily manufactured
domestically through a technologically advanced, high speed injection molding
process at ten modern manufacturing facilities strategically located
throughout the United States. 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 9.6 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.
During the past decade, the plastic closure market has grown faster than
the overall closure market in the United States. This growth is primarily due
to certain advantages that plastic closures have over metal closures,
including greater performance and design flexibility, the growing demand for
tamper evident packaging and the comparatively lower cost and lighter weight
of plastic closures, an important factor in the packaging industry, where
transportation costs are a significant portion of overall product costs.
Demand for plastic closures has also grown with the increased use of plastic
containers and the conversion of paperboard containers to plastic containers.
HISTORY
Portola Packaging, Inc. (originally Cap Snap Seal, Inc.) was
incorporated in California in 1964, and 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. Portola was reincorporated in
Delaware in April 1994. The Company's executive offices are located at 890
Faulstich Court, San Jose, California 95112, and its telephone number is (408)
453-8840.
On June 30, 1994 Portola acquired Northern Engineering & Plastics Corp.
and Northern Engineering & Plastics Corp.-West (collectively "Nepco", or the
"Nepco Acquisition"), a designer, manufacturer and marketer of tamper evident
plastic closures in markets similar to those served by Portola.
On June 16, 1995, the Company completed the acquisition of Alberta
Plastic Industries Ltd., B.C. Plastic Industries Ltd. the remaining 50%
interest of the Company's joint venture, Canada Cap Snap Corporation, and
certain production equipment of Allwest Industries Incorporated (the "Western
Canadian Acquisition"). The three acquired companies were amalgamated in
connection with the closing of the acquisition. The combined operation now
operates under the name "Portola Packaging Canada Ltd." and is engaged in
manufacturing and distributing plastic bottles and small closures in western
Canada.
On September 1, 1995, the Company acquired the remaining 50% interest it
had not previously owned in its United Kingdom joint venture, Cap Snap
(U.K.) Ltd., now known as Portola Packaging Ltd. (the "U.K. Acquisiton")
On September 1, 1996, the Company completed the acquisition of Rapid
Plast J-P. Inc., and amalgamated it with the company formed to acquire its
capital stock. The combined company now operates under the name "Portola
Packaging Ltd." and is engaged in manufacturing and distributing
plastic bottles, primarily in eastern Canada.
3
BUSINESS STRATEGY
The Company's primary strategy is to increase cash flow by maintaining
and extending its leading position in niche 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 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 and, more recently, an improved recloseable
plastic dispensing fitment for gable-top fruit juice and milk cartons and the
snap-screw cap. The Company also intends to continue its traditional emphasis
on building strong customer loyalty by devoting substantial resources to
product engineering in response to specific customer needs. Portola's staff
of design engineers continually develops and enhances the Company's existing
product lines, offering new features attractive to consumers and improved
designs that enable customers to save costs in the capping process or in
shipping. The Company believes that, by leveraging its design and engineering
expertise and the production techniques it has developed in its traditional
product areas, it will have the opportunity to expand its product lines into
new product applications.
EMPHASIZING CUSTOMER SUPPORT AND TOTAL PRODUCT SOLUTIONS. Portola seeks to
preserve its long-term relationships with customers and attract new customers
by providing superior on-time delivery and technical service and support and
by marketing its products as "total product solutions." The total product
solution approach includes providing 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. Portola's domestic manufacturing facilities are strategically located
throughout the country near major customer concentration areas to minimize
transportation costs and are equipped with high speed injection molding
machinery capable of producing approximately 380 plastic closures per minute
with minimal down time. 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 " below.
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 and distributors,
and by increasing export sales of closures and capping and filling equipment.
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. In 1994, the Company acquired Nepco and
in 1995 the Company consummated the Western Canadian Acquisition and the U.K.
Acquisition. In September 1996, the Company acquired a company in eastern
Canada, primarily engaged in bottle manufacturing. See "Notes to
Consolidated Financial Statements".
4
PRODUCTS
Portola designs, manufactures and markets a wide array of tamper evident
plastic closures for applications in dairy, fruit juice, bottled water,
sports drinks, institutional food products and other non-carbonated beverage
products, as well as plastic bottles. The Company also designs, manufactures
and markets (i) capping equipment for use in high speed bottling, filling and
packaging production lines and (ii) complete turnkey bottling systems which
it markets primarily under the name "PortaPlant".
PLASTIC CLOSURES
The Company's sales of plastic closures represented approximately 89%,
89% and 90% of its total sales for the fiscal years ended August 31, 1994,
1995 and 1996, respectively.
The following table describes the Company's principal plastic closure
product lines:
PRODUCT LINE DESCRIPTION MARKET APPLICATION
- ------------ ----------- ------------------
Small closures Plastic closures for plastic blowmolded Milk, fruit juices,bottled
bottles water and vinegar
Five gallon closures Plastic closures for glass and plastic Water cooler bottles
returnable water cooler bottles
Widemouth closures Plastic closures for widemouth plastic Institutional foods
containers including condiments,
mayonnaise and salad
dressing
Fitments Recloseable plastic dispensing fitments for Orange juice, lemonade and
polyethylene-coated gable-top paperboard other juice products
cartons
Push-pull dispensing Dual tamper evident closures with push- Bottled water, flavored
closures pull feature water, sports drinks
Portola competes in the closure portion 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 and cosmetics, and drugs and pharmaceuticals.
Closure design is a function of the type of container and its contents.
Products which are 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.
Demand for plastic closures has expanded with the increase in demand for
plastic containers. Over the past several years, rigid and flexible plastic
containers have experienced significant growth in market share at the expense
of other materials such as glass and metal. Plastic containers have several
advantages over glass and metal in that they are relatively inexpensive as
well as flexible and light weight - important factors in the
transportation-sensitive packaging industry.
5
The use of plastic closures has also 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
innovated the original snap-on cap design as well as the "tear strip" feature
with breakaway bands for plastic closures, which provided the standard tamper
evidency 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 and bottled water markets, demand is also a function
of seasonal climate variations, warm weather being responsible for increased
consumption. In fiscal 1996, 46% of sales were generated in the first half of
the year (September through February) while 54% of sales were generated in
the second half of the year (March through August). The effect of
seasonality on income from operations is generally more pronounced then on
sales.
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.
PORTAPLANTS
In addition to plastic closures and capping equipment, the Company also
designs, manufactures and markets turnkey 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 150 to 2,000 bottles per hour.
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 1994, 1995 and 1996 were $764,000
$1,682,000 and $2,156,000, respectively.
Traditionally, the Company has built strong customer loyalty by devoting
substantial resources to product engineering, enabling the Company to make
continuing enhancements to the Company's existing product lines that improve
product performance and processing in response to the customers' specific and
changing needs. Portola's design engineers continually develop and enhance
the Company's existing products, offering new features attractive to
customers and improved designs that enable customers to save time and cost in
the capping process or in shipping.
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, such
as the five gallon non-spill closure and the fitment, to design the necessary
tooling for producing such products and to assist with customer presentations
and installations.
6
RAW MATERIALS AND PRODUCTION
The principal raw material for the Company's plastic closures is
injection molding grade low density polyethylene ("LDPE") LDPE resin, which
comprises a significant portion of the Company's cost of sales. The Company
believes that due to its volume purchases it is able to negotiate attractive
pricing with resin suppliers. The Company has not experienced any significant
difficulties over the past ten years in obtaining sufficient quantities of
LDPE resin, although prices for LDPE resin can fluctuate substantially over
relatively short periods of time, resulting from shortages in supply, changes
in prices in petrochemical products, and other factors. In the past, the
Company has been able to pass substantially all resin price increases on to
its customers on a timely basis. 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.
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 has designed and manufactured many of its own
molds. In recent years, the increasing size and complexity of certain molds
for new products have caused the Company to out-source these mold
construction needs. The Company maintains design control over these molds as
well as the molds it still builds.
BACKLOG
Production and delivery cycles for closures is very short and the Company's
backlog for closures is generally cancelable on short notice. Contracts for
equipment purchases generally include cancellation penalties. There is no
assurance that some portion of the backlog may not be canceled or that the
level of backlog at any particular time is an appropriate indicator of the
future operating performance of the Company. As of November 14, 1996, the
backlog for closures was approximately $7.1 million and backlog for equipment
was approximately $3.5 million.
SALES, MARKETING AND CUSTOMER SERVICE
The Company markets its products through its internal sales department
and through an international network 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 35% of the Company's
sales during the fiscal year ended August 31, 1996, and none accounted for
more than 4% 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 the 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 country. Several
of the Company's field service representatives have extensive blowmolding
technical expertise that is especially important in resolving bottle leakage
problems for customers.
7
EXPORT SALES AND JOINT VENTURES
Although the Company's sales are primarily domestic, the Company expects
significant growth in international sales, particularly in the market for
water cooler bottle closures and water bottle capping and filling equipment.
The United States bottled water industry, in general, uses more sophisticated
packaging materials and processes than bottled water companies use in the
rest of the world. The Company believes that bottled water companies and
other non-carbonated beverage companies in Europe, the Far East, Latin
America and elsewhere are beginning to adopt more advanced packaging
materials and techniques, and that, as they do, they will become potential
customers for the Company's plastic closure products and equipment. For the
fiscal years ended August 31, 1994, 1995 and 1996, export sales to
unaffiliated customers were $8,071,000, $18,658,000 and $17,568,000,
respectively.
In the last several years, the Company has utilized joint ventures with
bottle manufacturers 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. Until recently, the
Company had three international joint ventures: (i) a 50% interest in Canada
Cap Snap Corporation, a Canadian corporation formed in 1990 and engaged in
manufacturing and distributing 38mm bottle closures in Canada, (ii) a 50%
interest in Cap Snap (U.K.) Ltd., a corporation formed in the United Kingdom
in 1992 with a local bottle manufacturer to manufacture and sell 38mm caps,
and (iii) a 50% interest in Cap Snap Mexico, a joint venture formed in Mexico
in 1993 with a local producer of plastic bottles and closures. In June 1995,
the Company consummated the Western Canadian Acquisition by acquiring the
remaining 50% interest in Canada Cap Snap Corporation, together with a 100%
interest in two affiliated plastic bottle manufacturing companies. In
September 1995, the Company consummated the U.K. Acquisition by acquiring the
remaining 50% interest in Cap Snap (U.K.) Ltd.
COMPETITION
The Company 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, other non-carbonated
beverage products and institutional foods products. The Company believes that
the most important factors in marketing container closures to the food and
beverage industry are price, design, quality, reliability and customer
service. Among the attributes that distinguish the Company 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 and in-house tool
manufacturing capability.
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.
8
EMPLOYEES
As of October 31, 1996, the Company had 926 full-time employees, 37 of
whom were engaged in product development, 72 in marketing, sales and customer
support, 762 in manufacturing and 55 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 18 of the employees of one of the Company's
Canadian subsidiaries are members of the Teamsters Union), and the Company
has never experienced a work stoppage. The Company believes that its employee
relations are good.
ITEM 2. PROPERTIES
The Company owns or leases ten modern production facilities, located in
the United States, which operate five to seven days a week, 24 hours a day.
In addition, the Company's western Canadian subsidiary leases two production
facilities and the Company's eastern Canadian subsidiary leases two production
facilities. The facilities are highly efficient due to automation and
frequently scheduled maintenance in 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 several years. In addition, the Company is currently in negotiations to
lease a manufacturing facility in the U.K. during fiscal 1997. 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
LOCATION FUNCTIONS SQUARE FEET OWNERSHIP(1)
- -------- --------- ----------- ------------
San Jose, CA Executive Office/Closure Mfg./Warehouse
Engineering/Research and
Development Facility and
Equipment Division 154,000 owned
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 Mfg./Warehouse 46,000 owned
Sumter, SC Closure Mfg./Warehouse 45,000 owned
Chino, CA Closure Mfg./Warehouse 64,000 owned
Gresham, OR Closure Mfg./Warehouse 36,000 owned
Fort Worth, TX Closure Mfg./Warehouse 27,000 owned
Bettendorf, IA Closure Mfg./Warehouse 40,000 owned
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 83,000 leased
Montreal, Quebec, Canada Bottle Mfg./Warehouse 44,000 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 1998, the
leases for the Richmond and Edmonton facilities expire in 2000, and the lease
for the 82,861 square foot facility in Montreal expires in June 1997.
9
ITEM 3. LEGAL PROCEEDINGS
Until recently, the Company had been engaged in patent infringement
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 five-gallon 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 is engaged in patent litigation with two other parties who
are seeking to have the court declare certain patents owned by the Company
invalid. The Company believes its patents are valid, and intends to
vigorously contest these actions.
The plastic closure industry is characterized by frequent litigation
regarding patent and other intellectual property rights. The Company and its
subsidiaries are party to various claims of this nature. Although the
ultimate outcome of these matters is not presently determinable, 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
Not applicable
10
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, as amended. 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 November 4, 1996, 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 November 4, 1996, there were
approximately 132 holders of record of the 8,506,640 outstanding shares of Class
B Common Stock, Series 1 and 5 holders of record of the 1,171,430
outstanding shares of Class B Common, Series 2.
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.
The following table sets forth information regarding all securities of
the Company (or its predecessors) sold by the Company (or its predecessors)
during the fiscal quarter ended August 31, 1996.
NUMBER AGGREGATE FORM OF
CLASS OF PURCHASERS (1) DATE OF SALE TITLE OF SECURITIES OF SHARES PURCHASE PRICE CONSIDERATION
------------------- ------------ ------------------- --------- -------------- -------------
Jeffrey Pfeffer, Ph.D. June 18, 1996 Class B Common 15,000 $67,500 Cash
Stock, Series 1
Stock options granted under stock August 27, 1996 Stock Options to 333,000 N/A N/A
option plan to 19 optionees (2)(3) Purchase Class B
Common Stock,
Series 1
(1) The sales of securities to the individuals identified in the table above
were made in reliance on Section 4(2) of the Securities Act of 1933, as
amended, and/or Regulation D promulgated thereunder. The securities were
sold to a limited number of people with no general solicitation or
advertising. The purchasers were sophisticated investors with access to
all relevant information necessary to evaluate their investments and
represented to the issuer that the securities were being acquired for
investment.
(2) The options were granted to employees and members of the Board of
Directors of the Company under the Company's 1994 Stock Option Plan.
The options generally expire ten years from the date of grant and
become exercisable for 20% of the shares on the first anniversay of
the date of grant, with the balance generally vesting 5% for each
calendar quarter of each individual's employment or membership on the
Board of Directors thereafter. Vesting of options granted to one
employee and to the members of the Board of Directors accelerate
upon a change of control of the Company. The exercise price on the
date of grant was equal to or greater than 100% of the fair market value
as determined by the Board of Directors on the date of grant.
(3) No optionees exercised stock options granted under the stock option
plans of the Company during the fiscal quarter ended August 31, 1996.
11
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, 1996 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,
------------------------------------------------------
1992 1993 1994(a) 1995 1996
---- ---- ------- ---- ----
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales ............................................. $52,152 $58,286 $70,284 $124,650 $159,462
Cost of sales ..................................... 37,676 42,679 51,670 91,972 117,592
------- ------- ------- -------- --------
Gross profit ................................... 14,476 15,607 18,614 32,678 41,870
Selling, general and administrative ............... 6,046 7,207 8,821 16,649 22,035
Research and development .......................... 915 820 764 1,682 2,156
Amortization of intangibles (b) ................... 1,421 1,400 2,025 3,724 5,207
Write-off of intangibles .......................... _ _ _ _ 7,292
------- ------- ------- -------- --------
Income from operations ......................... 6,094 6,180 7,004 10,623 5,180
Other (income) expense, net (c) ................... 632 (62) 477 259 158
Interest expense, net ............................. 3,147 3,044 3,899 8,483 11,842
Amortization of debt financing costs .............. 365 479 433 447 492
------- ------- ------- -------- --------
Income (loss) before extraordinary item,
cumulative effect of change in accounting
principle and income taxes ................... 1,950 2,719 2,195 1,434 (7,312)
Income taxes (d) .................................. 1,287 1,521 1,095 1,294 865
------- ------- ------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle .................................... 663 1,198 1,100 140 (8,177)
Extraordinary item, net (e) ....................... _ 889 790 _ 1,265
Cumulative effect of change in accounting
principle (d) ................................... _ _ 85 _ _
------- ------- ------- -------- --------
Net income (loss) ................................. $663 $309 $225 $140 $(9,442)
------- ------- ------- -------- --------
Net income (loss) per common share ................ $0.05 $0.02 $(0.02) $(0.04) $(0.88)
------- ------- ------- -------- --------
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital ................................... $2,920 $7,109 $11,049 $13,747 $21,370
Total assets ...................................... 44,031 50,896 110,820 129,315 152,227
Total debt ........................................ 30,611 38,140 77,467 91,912 117,913
Redeemable warrants (f) ........................... 2,483 2,600 3,055 3,665 4,560
Total shareholders' equity (deficit) .............. 2,719 2,597 5,393 6,694 (3,801)
CASH FLOW DATA:
Net cash provided by operating activities ......... 7,699 6,768 9,351 8,422 18,795
Net cash used in investing activities ............. (8,947) (9,119) (38,418) (24,648) (31,271)
Net cash provided by financing activities ......... 229 3,538 30,099 14,785 19,511
OPERATING AND OTHER DATA:
Closure unit volume (in millions) ................. 3,763 3,980 4,893 8,476 9,606
Closure unit volume growth (g) .................... 11.5% 5.8% 22.9% 73.2% 13.3%
EBITDA (h) ........................................ $11,085 $12,883 $14,728 $23,588 $ 27,783
Depreciation and amortization (i) ................. 5,920 6,845 8,357 12,789 15,961
Capital expenditures .............................. 8,089 9,564 6,159 11,302 27,194
Ratio of earnings to fixed charges (j) ............ 1.4x 1.3x 1.2x 1.2x _
(FOOTNOTES ON FOLLOWING PAGE)
12
(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) Other expenses include financing costs and other expenses, net.
(d) The Company adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" in the fiscal year ended August 31, 1994.
(e) Extraordinary item refers to 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 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,
write-off of intangible assets in connection with the adoption of Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", depreciation
of property, plant and equipment, interest expense, net, amortization of
intangible assets and non-recurring legal expenses associated with the Company's
litigation with Scholle Corporation through October 2, 1995. See "Item 3 -
Legal Proceedings." The non-recurring legal expenses associated with the
Scholle Corporation litigation for the fiscal years ended August 31, 1993,
1994 and 1995 were $275,000, $277,000 and $882,000, respectively. EBITDA
is 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 data is
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 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" consist 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 year ended August 31, 1996 resulted in a
deficiency of $9,422,000, primarily as a result of the write-off of intangible
assets of $7.3 million.
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 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 Northern Engineering & Plastics
Corp. ("Nepco") and certain companies in Canada and the United Kingdom.
On June 30, 1994, the Company acquired Nepco for a purchase price of $43.7
million. This acquisition has been accounted for as a purchase, and the results
of Nepco's operations have been consolidated with those of the Company
commencing July 1, 1994. On June 16, 1995, the Company consummated the Western
Canadian Acquisition in which the Company purchased for $13.6 million the 50%
interest it had not previously owned in
13
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.
These three companies were amalgamated in connection with the closing of the
acquisition and the combined entity now operates under the name "Portola
Packaging Canada Ltd." This acquisition has been accounted for as a purchase,
and the results of the western Canadian operations have been consolidated
with those of the Company commencing June 16, 1995. On September 1, 1995, the
Company acquired, for approximately $1.5 million, the remaining 50% interest
it had not previously owned in Cap Snap (U.K.) Ltd., now known as "Portola
Packaging Ltd." The U.K. acquisition has been accounted for as a purchase, and
the results of the U.K. operations have been consolidated with those of the
Company commencing September 1, 1995.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1995
Sales increased $34.8 million, or 27.9%, from $124.7 million for fiscal
1995 to $159.5 million for fiscal 1996. Of the increase, $8.1 million was
attributable to sales from western Canadian operations acquired by the
Company on June 16, 1995 and $5.7 million was attributable to sales from the
U.K. operations acquired by the Company on September 1, 1995. Equipment sales
increased $3.2 million, primarily due to an increase in sales of fitment
applicator equipment, somewhat offset by a decrease in sales of water and
dairy applicator equipment. The majority of the increase in sales, $18.5
million, was due to increases in closures sales volumes, consisting
principally of $10.3 million in increased sales of small closures, $5.7
million in increases in sales of fitments and $2.5 million in increases in
sales of 5-gallon and widemouth closures.
Gross profit increased $9.2 million, or 28.1%, to $41.9 million for
fiscal 1996, as compared to $32.7 million for fiscal 1995. Gross profit as a
percentage of sales remained constant at 26.2% for fiscal 1996 and 1995. The
absolute increase in gross profit was primarily due to increased sales in
closure products and, to a lesser extent, the June 1995 acquisition of the
western Canadian operations, offset by a loss from the U.K. operations
acquired in September 1995.
Selling, general and administrative expense increased $5.4 million, or
32.4%, to $22.0 million for fiscal 1996, as compared to $16.6 million for
fiscal 1995, and increased as a percentage of sales from 13.4% for fiscal
1995 to 13.8% for fiscal 1996. Of the absolute increase, approximately $1.6
million represented increased commissions and approximately $785,000 was due
to increased advertising, public relations and marketing consulting expenses.
The higher level of sales in fiscal 1996 as compared to fiscal 1995 resulted
in an increase in commission expense. The remaining increases were primarily
due to the increased size of the corporation and resulting infrastructure
increases.
Research and development expenses increased $474,000, or 28.2%, to $2.2
million for fiscal 1996, as compared to $1.7 million for fiscal 1995, and
increased as a percentage of sales from 1.3% in fiscal 1995 to 1.4% in fiscal
1996. The absolute increase in research and development expenses was due
primarily to increased expenditures for new product prototypes and patent
expenses.
Amortization of intangibles (consisting of amortization of patents and
technology licenses, goodwill and covenants not to compete) increased $1.5
million, or 39.8%, to $5.2 million for fiscal 1996, as compared to $3.7
million for fiscal 1995. Of the increase, approximately $600,000 was due to
an increase in amortization of patents and acquired technology, primarily
resulting from the U.K. acquisition and approximately $315,000 resulted from
the increase in amortization of goodwill, primarily resulting from the
Western Canadian and U.K. Acquisitions and approximately $550,000 of the
increase related to amortization of the covenant not to compete relating to
the Western Canadian Acquisition.
The write-off of intangibles of $7.3 million in fiscal 1996 related to
the adoption of Financial Accounting Standards Board Statement No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" (SFAS 121) during fiscal 1996, which requires the Company
to review for impairment long-lived assets, certain identifiable intangibles,
and goodwill related to those assets whenever events or changes in
14
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, the Company evaluated portions of its
goodwill recorded in connection with its acquisitions of Nepco and Portola
Packaging Canada Ltd. The Company recorded impairment losses of $421,000 and
$2,332,000 related to goodwill recorded in the acquisition of Nepco and
Portola Packaging Canada Ltd., respectively. The Company also 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
write-down of $4,539,000.
Income from operations decreased $5.4 million, or 51.2%, to $5.2 million
for fiscal 1996, as compared to $10.6 million for fiscal 1995, and decreased as
a percentage of sales from 8.5% for fiscal 1995 to 3.2% for fiscal 1996. These
changes were due to the factors summarized above and primarily reflect the
write-off of intangible assets of $7.3 million.
Net interest expense increased $3.3 million to $11.8 million for fiscal
1996, as compared to $8.5 million for fiscal 1995, primarily as a result of
increased borrowings to fund acquisitions, capital expenditures and higher
working capital requirements associated with increased sales levels.
Amortization of debt financing costs increased $45,000 to $492,000 for
fiscal 1996, as compared to $447,000 for fiscal 1995.
Other expense decreased $101,000 to $158,000 in fiscal 1996 as compared to
$259,000 in fiscal 1995.
Income taxes decreased $429,000 to $865,000 for fiscal 1996, as compared
to $1.3 million for fiscal 1995.
Income (loss) before extraordinary item and cumulative effect of change
in accounting principle decreased to a loss of $8.2 million in fiscal 1996
compared to income of $140,000 in fiscal 1995. Net income (loss) decreased
to a loss of $9.4 million in fiscal 1996 as compared to income of $140,000 in
fiscal 1995. In October 1995, the Company refinanced its debt to provide
additional capacity for growth, resulting in an extraordinary charge of $1.3
million, net of taxes, relating to loan fees and other costs relating to the
early extinguishment of debt.
FISCAL YEAR ENDED AUGUST 31, 1995 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1994
Sales increased $54.4 million, or 77.3%, from $70.3 million for fiscal 1994
to $124.7 million for fiscal 1995. Of the increase, $41.1 million was
attributable to sales from "Nepco" operations acquired by the Company on June
30, 1994. Of the remainder, $5.5 million was attributable to an increase in
equipment sales, primarily due to international sales of PortaPlants and
equipment to attach fitments to gabletop paperboard containers, $3.9 million
resulted from closure price increases primarily driven by higher resin costs and
$2.5 million was due to increased unit sales of 5-gallon and widemouth closures.
Gross profit increased $14.1 million or 75.6%, to $32.7 million for fiscal
1995, as compared to $18.6 million for fiscal 1994. Gross profit as a
percentage of sales decreased slightly from 26.5% for fiscal 1994 to 26.2% for
fiscal 1995. The absolute increase in gross profit was primarily due to the
Nepco acquisition and, to a lesser extent, to increased sales in other product
lines. The margin decline was due to increased sales of low-margin fitment
attachment equipment and to increases in resin costs that, although offset by
price increases in approximately the same amounts, had the effect of decreasing
gross profit margins.
15
Selling, general and administrative expense increased $7.8 million or
88.7%, to $16.6 million for fiscal 1995, as compared to $8.8 million for
fiscal 1994, and increased as a percentage of sales from 12.6% for fiscal
1994 to 13.4% for fiscal 1995. Of the absolute increase, approximately $3.7
million was due to a full year of selling, general and administrative
expenses at Nepco in fiscal 1995, approximately $2.7 million represented
increased general and administrative expenses due primarily to the increased
size of the corporation and resulting infrastructure increases, $835,000
represented increased commissions due to higher sales revenues and $576,000
was due to increased legal expenses primarily associated with the Scholle
patent infringement lawsuit.
Research and development expense increased $918,000, or 120.2%, to $1.7
million for fiscal 1995, as compared to $764,000 for fiscal 1994, and
increased as a percentage of sales from 1.1% in fiscal 1994 to 1.3% in fiscal
1995. Of the absolute increase in research and development expense, $525,000
was due primarily to increased staffing and the balance was the result of
increased expenditures for new product prototypes and patent expenses.
Amortization of intangibles (consisting of amortization of patents,
goodwill and covenants not to compete) increased $1.7 million, or 83.9%, to
$3.7 million for fiscal 1995, as compared to $2.0 million for fiscal 1994.
Of the increase, $938,000 was due to goodwill amortization resulting from the
Nepco acquisition and $729,000 resulted from the amortization of the
covenants not to compete which relate to the acquisition of Nepco.
Income from operations increased $3.6 million, or 51.7%, to $10.6
million for fiscal 1995, as compared to $7.0 million for fiscal 1994, but
decreased as a percentage of sales from 10.0% for fiscal 1994 to 8.5% for
fiscal 1995. These changes were due to the factors summarized above.
Other expense, net declined $218,000 to $259,000 for fiscal 1995, as
compared to $477,000 for fiscal 1994.
Interest expense, net increased $4.6 million to $8.5 million for fiscal
1995, as compared to $3.9 million for fiscal 1994, primarily as a result of
increased borrowings to fund the Nepco acquisition and higher working capital
requirements associated with increased sales levels. Income taxes increased
$199,000 to $1.3 million for fiscal 1995, as compared to $1.1 million for
fiscal 1994.
Amortization of debt financing costs increased $14,000 to $447,000 for
fiscal 1995, as compared to $433,000 for fiscal 1994.
Income before extraordinary item and cumulative effect of change in
accounting principle decreased $960,000 to $140,000 for fiscal 1995, as
compared to $1.1 million for fiscal 1994. Net income decreased $85,000 to
$140,000 for fiscal 1995, as compared to $225,000 for fiscal 1994. An
extraordinary charge of $790,000 net of taxes was recorded for fiscal 1994,
as loan fees and other costs were expensed in connection with an early
extinguishment of debt resulting from the Nepco acquisition. During fiscal
1994, the Company adopted SFAS 109, which resulted in a cumulative charge
against earnings of $85,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily upon cash from operations,
borrowings from financial institutions and sales of 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 ("Notes Offering") that mature on October 1, 2005 and
bear interest at the rate of 10.75% per annum. The net proceeeds 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 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 make a loan to the Company's 50% joint venture in Mexico,
and $2 million was used for working capital needs. At August 31, 1996,
primarily as a result of
16
the Notes Offering and cash generated from operations, the Company had cash
and cash equivalents of $7.8 million, an increase of $7.0 million from
August 31, 1995.
Cash provided by operations totaled $18.8 million in fiscal 1996, a
$10.4 million increase from $8.4 million in fiscal 1995. Working capital
increased $7.6 million in fiscal 1996 to $21.4 million, as compared to $13.7
million in fiscal 1995, primarily as a result of an increase in accounts
receivable and inventories, somewhat offset by an increase in accounts
payable and accrued liabilities. These increases reflect the increased sales
and operating levels achieved in fiscal 1996. In addition, working capital
increased due to increases in cash and cash equivalents, partially offset by
a decrease in the current portion of long-term debt and an increase in
accrued interest expense, primarily due to the refinancing completed in
October 1995.
Capital expenditures have been higher than historic levels following the
Nepco and Western Canadian Acquisitions as the Company operated ten plants in
the United States and two in Canada during fiscal 1996, compared to four
before these acquisitions. Capital expenditures were $27.2 million in fiscal
1996, including $7.2 million related to the purchase of the Company's San
Jose facilities, compared with $11.3 million in fiscal 1995. The Company
anticipates that capital expenditures will continue to be high in fiscal 1997
as a result of capital additions for newer products, principally fitments and
push-pull closures, and to support expanded operations through recently
completed acquisitions. In addition, the Company is subject to certain
future obligations regarding noncompete and bonus arrangements as a result of
certain acquisitions. At August 31, 1996 the present value of the covenants
under the Nepco and Western Canada Acquisitions were $2.4 million and $1.3
million, respectively.
Subsequent to year-end, in September 1996 the Company completed the
acquisition of Rapid Plast J-P. Inc., a Canadian federal company
headquartered in Montreal, Quebec, for a total purchase price of
approximately $2.3 million. Rapid Plast was amalgamated with the wholly-owned
subsidiary formed by the Company to make the acquisition and was renamed
Portola Packaging Ltd. ("Portola Canada Ltd."). Portola Canada Ltd. is
engaged in manufacturing and distributing plastic bottles, primarily in
eastern Canada. This transaction has been accounted for as a purchase and
therefore the results of operations subsequent to the acquisition date will
be consolidated with those of the Company.
Until recently, 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 a royalty 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, 1996, the Company had total indebtedness of $117.9
million. In October 1995 the Company completed an offering of $110 million of
senior notes due in 2005 at a fixed interest rate of 10.75%. In connection
with the offering, the Company repaid all outstanding debt under its senior
term loans, revolving facility and senior subordinated notes. Concurrently
with the offering, the Company entered into a new five-year senior secured
revolving credit facility of up to $35.0 million, subject to a borrowing base
of eligible receivables, inventory and net fixed assets. 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, 1996 the Company had $7.8 million in cash and cash
equivalents as well as borrowing capacity under the revolving credit facility
which was unused as of the date of this report. Management believes
17
that these resources, together with anticipated cash flow from operations,
will be adequate to fund the Company's operations, debt service requirements
and capital expenditures through fiscal 1997.
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. For example, in fiscal
1996, 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, although in fiscal 1996 the Company recorded a loss
from operations in the second half of the year due to the write-down of
intangible assets previously discussed.
Income Taxes
Income tax expense does not bear a normal relationship to income before
income taxes primarily due to nondeductible goodwill arising from the Nepco
acquisition and other acquisitions.
Recent Accounting Pronouncements
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation,"
which establishes a fair value based method of accounting for stock-based
compensation plans. The Company has elected the disclosure provisions in
SFAS 123. This statement will be effective for the Company's fiscal year 1997.
Disclosures Regarding Forward-Looking Statements
This report on Form 10-K 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 this "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. 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.
18
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page in
Form 10-K
---------
Report of Independent Accountants 20
Consolidated Balance Sheets - August 31, 1995 and 1996 21
Consolidated Statements of Operations - Years Ended
August 31, 1994, 1995, and 1996 22
Consolidated Statements of Cash Flows - Years Ended
August 31, 1994, 1995, and 1996 23
Consolidated Statements of Shareholders' Equity -
Years Ended August 31, 1994, 1995, and 1996 24
Notes to Consolidated Financial Statements 25
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts 64
19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Portola Packaging, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Portola
Packaging, Inc. and Subsidiaries as of August 31, 1995 and 1996, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for each of the three years in the period ended August 31,
1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Portola
Packaging, Inc. and Subsidiaries as of August 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements in fiscal
1996 the Company adopted a newly established standard for the impairment of
long-lived assets. As discussed in Note 1 to the consolidated financial
statements, effective September 1, 1993, the Company adopted Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes."
San Jose, California COOPERS & LYBRAND L.L.P.
October 22, 1996
20
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
_____
August 31,
-----------------------------
ASSETS 1995 1996
------------- -------------
Current assets:
Cash and cash equivalents $ 763 $ 7,797
Investments 1,000 710
Accounts receivable, net of
allowance for doubtful accounts
of $813 and $817, respectively 20,323 23,835
Inventories 9,833 11,650
Other current assets 2,300 2,061
Deferred income taxes 1,237 1,307
-------- --------
Total current assets 35,456 47,360
Notes receivable 518 256
Property, plant and equipment, net 53,132 69,773
Goodwill, net of accumulated
amortization of $1,314 and $2,697, respectively 21,580 17,564
Patents, net of accumulated
amortization of $10,413 and $11,923, respectively 7,607 2,235
Covenants not to compete, net of accumulated
amortization of $1,393 and $2,996, respectively 5,295 3,699
Debt financing costs, net of accumulated
amortization of $526 and $413, respectively 1,937 3,853
Other assets 3,790 7,487
-------- --------
Total assets $129,315 $152,227
-------- --------
-------- --------
LIABILITIES, REDEEMABLE WARRANTS, COMMON
STOCK AND OTHER SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 5,668 $ 1,805
Accounts payable 7,796 10,029
Accrued liabilities 4,847 6,046
Accrued compensation 2,602 3,111
Accrued interest 796 4,999
-------- --------
Total current liabilities 21,709 25,990
Long-term debt, less current portion 86,244 116,108
Other long term obligations 3,911 2,303
Deferred income taxes 7,092 7,067
-------- --------
Total liabilities 118,956 151,468
-------- --------
Commitments and contingencies (Note 9)
Redeemable warrants to purchase Class A common stock 3,665 4,560
-------- --------
Common stock and other shareholders' equity (deficit):
Class A convertible common stock of $.001 par value:
Authorized: 2,503 shares in 1995 and 5,203
shares in 1996;
Issued and outstanding: none shares in 1995 and 2,135
shares in 1996 2
Class B, Series 1, common stock of $.001 par value:
Authorized: 17,715 shares;
Issued and outstanding: 9,225 shares in 1995
and 8,507 shares in 1996 9 9
Class B, Series 2, convertible common stock of $.001
par value:
Authorized: 2,571 shares;
Issued and outstanding: 2,571 shares in 1995
and 1,171 shares in 1996 3 1
Additional paid-in capital 9205 9,280
Notes receivable from shareholders (362) (425)
Cumulative foreign currency translation adjustments (8) (8)
Unrealized holding losses on marketable securities (170)
Accumulated deficit (2,153) (12,490)
-------- --------
Total common stock and other shareholders'
equity (deficit) 6,694 (3,801)
-------- --------
Total liabilities, redeemable warrants, common
stock other shareholders' equity (deficit) $129,315 $152,227
-------- --------
-------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
21
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
_____
Year Ended August 31,
----------------------------------
1994 1995 1996
------- -------- --------
Sales $70,284 $124,650 $159,462
Cost of sales 51,670 91,972 117,592
------- -------- --------
Gross profit 18,614 32,678 41,870
------- -------- --------
Selling, general and administrative 8,821 16,649 22,035
Research and development 764 1,682 2,156
Amortization of intangibles 2,025 3,724 5,207
Write-off of intangibles 7,292
------- -------- --------
11,610 22,055 36,690
------- -------- --------
Income from operations 7,004 10,623 5,180
------- -------- --------
Other (income) expense:
Interest income (97) (175) (1,242)
Interest expense 3,996 8,658 13,084
Amortization of financing costs 433 447 492
Financing costs 625
Other (income) expense, net (148) 259 158
------- -------- --------
4,809 9,189 12,492
------- -------- --------
Income (loss) before extraordinary item,
cumulative effect of change in accounting
principle and income taxes 2,195 1,434 (7,312)
Provision for income taxes 1,095 1,294 865
------- -------- --------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle 1,100 140 (8,177)
Extraordinary item-loss on extinguishment of debt,
net of income tax benefit of $539 and $845 (Note 7) 790 1,265
Cumulative effect of change in accounting
principle (Note 13) 85
------- -------- --------
Net income (loss) $ 225 $ 140 $ (9,442)
------- -------- --------
------- -------- --------
Number of shares used in computing per share amounts 11,087 11,393 11,800
Earnings (loss) per common share:
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle $ 0.06 $ (0.04) $ (0.77)
Cumulative effect of change in accounting
principle $ 0.01
Net income (loss) $ (0.02) $ (0.04) $ (0.88)
The accompanying notes are an integral part of these consolidated financial
statements.
22
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
_____
Year Ended August 31,
----------------------------------
1994 1995 1996
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ 225 $ 140 $ (9,442)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation and amortization 8,357 12,789 15,961
Write-off of intangibles7,292
Extraordinary loss on extinguishment of debt 1,329 1,781
Deferred income taxes (320) (707) 19
Loss (gain) on property and equipment
dispositions 147 171
Provision for doubtful accounts 173 892 450
Provision for excess and obsolete inventories 78 26
Changes in working capital:
Accounts receivable (1,683) (4,425) (3,425)
Inventories (908) (862) (1,810)
Other current assets 600 (269) 451
Accounts payable (712) (585) 1,653
Accrued liabilities 1,987 1,137 1,465
Accrued interest 303 87 4,203
-------- -------- --------
Net cash provided by
operating activities 9,351 8,422 18,795
-------- -------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (6,159) (11,302) (27,194)
Proceeds from sale of property, plant
and equipment 47 162 646
Payments for acquisition of Nepco net of
cash acquired of $173 (30,774)
Payments for Canadian acquisition net of
cash acquired of $232 (11,506)
Payment for UK acquisition (1,463)
Proceeds from short term investments 1,000
Payment for short term investments (994)
Issuance of notes receivable (237)
Repayment of notes receivable 31 262
Increase in other assets (1,563) (1,765) (3,528)
-------- -------- --------
Net cash used in investing activities (38,418) (24,648) (31,271)
-------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt arrangements 54,214 29,284 115,212
Repayments of long-term debt arrangements (24,619) (15,208) (89,922)
Payment of loan fees (2,472) (4,189)
Sales of common stock 3,025 1,855 75
Repayment of notes receivable from
shareholders 1 15
Increase in other receivable from
shareholders (91) (63)
Payments on covenants not to compete (50) (1,070) (1,602)
-------- -------- --------
Net cash provided by financing
activities 30,099 14,785 19,511
-------- -------- --------
Effect of exchange rate changes on cash (15) (1)
-------- -------- --------
Increase (decrease) in cash and cash
equivalents 1,032 (1,456) 7,034
Cash and cash equivalents at beginning of period 1,187 2,219 763
-------- -------- --------
Cash and cash equivalents at end of period $ 2,219 $ 763 $ 7,797
-------- -------- --------
-------- -------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
23
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands, except per share data)
----------------
Common Stock
------------------------------------------------------------------
Class A Class B
------------------- -------------------------------------------
Series 1 Series 2
------------------- -------------------
Shares Amount Shares Amount Shares Amount
-------- -------- -------- -------- -------------------
Balances, August 31, 1993 7,869 $ 542 2,571 $ 3,795
Issuances of Class B common stock at $ 3.75 per share 800 3,000
Exercise of Stock options at $2.50 per share 10 25
Reincorporation into a Delaware corporation (3,559) (3,792)
Payment of note receivable from shareholders
Increase in value of stock purchase warrants
Net income
-------- -------- -------- --------
Balance, August 31, 1994 8,679 8 2,571 3
Exercise of stock option at $0.61, $1.00 and $4.00 per share 96 1
Increase in notes and other receivable from shareholders
Issuance of Class B common stock at $4.00 per share, net of
issuance costs of $23 450
Increase in value of stock purchase warrants
Foreign currency translation adjustment
Net income
-------- -------- -------- --------
Balance, August 31, 1995 9,225 9 2,571 3
Conversion of Class B shares to Class A 2,135 $ 2 (735) (1,400) (2)
Issuance of Class B Common Stock at $4.50 per share 15
Exercise of stock options at $4.50 per share 2
Increase in value of stock purchase warrants
Increase in notes and other receivable from shareholders
Net unrealized loss in securities available for sale
Net loss
-------- -------- -------- -------- -------------------
Balance, August 31, 1996 2,135 $ 2 8,507 $ 9 1,171 $ 1
-------- -------- -------- -------- -------------------
-------- -------- -------- -------- -------------------
Total
Notes and Cumulative Unrealized Common
Other Foreign Holding Stock and
Additional Receivable Currency Losses on Other
Paid-in from Translation Marketable Accumulated Shareholders'
Capital Shareholders Adjustments Securities Deficit Equity(Deficit)
------- ------------ ----------- ---------- ------- ---------------
Balances, August 31, 1993 $ (287) $(1,453) $ 2,597
Issuances of Class B common stock at
$3.75 per share 3,000
Exercise of Stock options at $2.50 per share 25
Reincorporation into a Delaware corporation $7,351
Payment of note receivable from shareholders 1 1
Increase in value of stock purchase warrants (455) (455)
Net income 225 225
------- ------------ ----------- ---------- ------- ---------------
Balance, August 31, 1994 7,351 (286) (1,683) 5,393
Exercise of stock option at $0.61, $1.00 and
$4.00 per share 78 79
Increase in notes and other receivable from
shareholders (76) (76)
Issuance of Class B common stock at $4.00 per
share, net of issuance costs of $23 1,776 1,776
Increase in value of stock purchase warrants (610) (610)
Foreign currency translation adjustment $ (8) (8)
Net income 140 140
------- ------------ ----------- ---------- ------- ---------------
Balance, August 31, 1995 9,205 (362) (8) (2,153) 6,694
Conversion of Class B shares to Class A
Issuance of Class B Common Stock at $4.50
per share 67 67
Exercise of stock options at $4.50 per share 8 8
Increase in value of stock purchase warrants (895) (895)
Increase in notes and other receivable from
shareholders (63) (63)
Net unrealized loss in securities available
for sale $ (170) (170)
Net loss (9,442) (9,442)
------- ------------ ----------- ---------- ------- ---------------
Balance, August 31, 1996 $9,280 $ (425) $ (8) $ (170) $(12,490) $(3,801)
------- ------------ ----------- ---------- ------- ---------------
------- ------------ ----------- ---------- ------- ---------------
The accompanying notes are an integral part of these consolidated financial
statements.
24
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
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 food products and other non-carbonated beverage
products. The Company has production facilities throughout the United
States, Canada, 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 as of August 31, 1995 and 1996 consisted of a certificate of
deposit and equity securities in one company, respectively. Investments
are generally considered to be available-for-sale and therefore are
carried at fair market value. Unrealized holding gains and losses on such
securities, when material, are reported net of related taxes as a separate
component of common stock and other shareholders' equity. Realized gains
and losses on sales of all such investments are reported in earnings and
computed using the specific cost identification method.
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. 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.
25
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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.
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 recorded
in connection with acquisitions of Nepco, Portola Packaging Canada Ltd.
and Portola Packaging (UK) (Note 2) is amortized on a straight-line
basis over 15, 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:
Effective September 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "ACCOUNTING FOR INCOME TAXES", which
requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of such assets and liabilities using
enacted tax rates in effect for the year in which 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 and Canada. Ongoing credit
evaluations of customer 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
26
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
CONCENTRATIONS OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES,
CONTINUED:
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 relevant year. Translation gains and losses are
not included in determining net income (loss) but are accumulated as a
separate component of stockholders' equity (deficit). Net gains and
losses arising from foreign currency transactions were not material in
fiscal 1994, 1995 and 1996.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARES:
Earnings (loss) per common share and common equivalent share are computed
by dividing income by the weighted average number of shares of common
stock and common stock equivalents outstanding during the period. Except
as discussed below, the number of common shares is increased by the number
of shares issuable on the exercise of options and warrants when the market
price of the common stock exceeds the exercise price of the options and
warrants. This increase in the number of common shares is reduced by the
number of common shares which are assumed to have been purchased with the
proceeds from the exercise of the options and warrants; these purchases
are assumed to have been made at the average price of the common stock
during that part of the period when the market price of the common stock
exceeds the exercise price of the options and warrants.
Since the Company's warrants include a put provision, Emerging Issues Task
Force (EITF) Consensus 88-9 requires computation of earnings (loss) per
share using the lower of the amount computed assuming conversion, as
described above, or the amount computed assuming exercise of the put
option feature of the warrants. Earnings (loss) per share computed using
the put option feature is the more dilutive of the calculations in fiscal
1994, 1995 and 1996. The accretion of the warrants of $455, $610 and $895
for fiscal 1994, 1995 and 1996 respectively, is deducted from earnings to
derive earnings (loss) per share.
27
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
CARRYING VALUE OF LONG-LIVED ASSETS:
The Company performs an evaluation of the carrying value of long-lived
assets when undiscounted operating cash flows are not sufficient to
recover the carrying value of such assets over their remaining estimated
useful lives.
RECENT ACCOUNTING PRONOUNCEMENTS:
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS 123), "ACCOUNTING FOR STOCK-BASED COMPENSATION",
which establishes a fair value based method of accounting for stock-based
compensation plans. The Company has elected the disclosure provisions in
SFAS 123. This statement will be effective for the Company's fiscal year
1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts payable and other accrued
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 the long term debt approximates fair value.
RECLASSIFICATIONS:
Certain prior year balances have been reclassified to conform with the
current year financial statement presentation.
2. ACQUISITIONS:
On September 1, 1995 the Company completed the acquisition of the 50%
interest it had not previously owed in Cap Snap (UK) Ltd., now known as
Portola Packaging Ltd. ("Portola Packaging (UK)") for a purchase price of
approximately $1.5 million. Portola Packaging (UK) 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 (UK) is being operated as an "unrestricted subsidiary".
Accordingly, amounts that may be invested by the Company in Portola
Packaging (UK) are subject to limitations pursuant to the terms of the
Indenture pertaining to the senior notes issued in October 1995
(see Note 7).
28
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
2. ACQUISITIONS, continued:
Consideration for the acquisition was allocated as follows:
Total consideration paid $ 1,463
Fair value of assets acquired 1,294
--------
Goodwill $ 169
--------
--------
Effective June 16, 1995, the Company completed the acquisition of Alberta
Plastic Industries Ltd., B.C. Plastic Industries Ltd., the remaining 50%
interest of the Company's joint venture, Canada Cap Snap Corporation, and
certain production equipment of Allwest Industries Incorporated. The
acquired companies and assets operate in Canada as Portola Packaging
Canada Ltd.
The Canadian acquisition has been accounted for as a purchase and the
results of operations of Portola Packaging Canada Ltd. have been
consolidated with those of the Company commencing June 16, 1995. The
total purchase price, including cash consideration and a noncompete
agreement, amounted to $13,572. Cash consideration paid by the Company was
$11,738. In addition, the Company entered into a noncompete agreement
under which an intangible asset totaling $2,560 was recorded at the
present value of the payments (using a discount rate of 8.75%). A
liability was recorded of $1,834, which represents the net present value
of the payments less the initial payment made upon the closing of the
Canadian acquisition.
Consideration for the acquisition was allocated as follows:
Total consideration paid $ 11,738
Fair value of net assets acquired 5,464
---------
Goodwill $ 6,274
---------
---------
Pro forma financial statements as if the Canadian acquisition had taken
place at the beginning of each period presented are as follows:
Pro Forma Pro Forma
1994 1995
--------- ---------
(UNAUDITED)
Sales $74,853 $132,165
Gross profit 20,286 35,638
Operating income 7,610 11,597
Net income (loss) (214) 400
Net income (loss) per share $ (0.06) $ (0.02)
Effective June 30, 1994, the Company acquired all of the outstanding stock
of Northern Engineering & Plastics Corp. and Northern Engineering and
Plastics Corp. - West (collectively "Nepco"). Concurrent with the
acquisition of Nepco, the Company also purchased, from parties related to
the owners of Nepco, certain real property located in Sumter, South
Carolina.
The acquisition of Nepco has been accounted for as a purchase and the
results ofoperations of Nepco have been consolidated with those of the
Company commencingJuly 1, 1994. The total purchase price, including
cash consideration, repayment of
29
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
2. ACQUISITIONS, CONTINUED:
existing indebtedness and noncompete agreements, amounted to $43,650.
Cash consideration paid by the Company for the acquisition was $30,947. In
addition, the Company assumed, and subsequently repaid, Nepco indebtedness
of $9,058, and entered into a noncompete agreement under which an
intangible asset and a liability totaling$3,645 were recorded at the
present value of the payments (using a discount rate of11%).
The Company financed its payments for the acquisition and Nepco
indebtedness which aggregated $40,005, through a series of term senior and
revolving notes as described in Note 7.
The cash consideration paid by the Company comprised the following:
Cash paid to the former shareholders of Nepco $28,500
Cash paid for the purchase of real property 1,872
Cash paid for certain closing costs 575
-------
$30,947
-------
-------
Cash consideration for the acquisition was allocated as follows:
Total consideration paid $30,947
Fair value of net assets acquired 14,482
-------
Goodwill $16,465
-------
-------
In connection with the acquisition, the Company entered into noncompete
and bonus agreements with the former owners of Nepco. The noncompete and
bonus agreements have a five-year term with annual payments of $800 and
$200, respectively.
Pro forma financial statements as if the acquisition of Nepco had taken
place at the beginning of fiscal year 1994 are as follows:
Pro Forma
1994
---------
(unaudited)
Sales $101,415
Gross profit 22,246
Operating income 5,175
Net income (loss) (2,908)
Net income (loss) per share $ (0.30)
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 long-lived assets, certain identifiable 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.
30
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
3. WRITE-OFF OF INTANGIBLES, continued:
This statement requires impairment losses to be recognized for assets
that do not haverealizable carrying values, and requires valuation of
impairments at the lowest level ofidentifiable cash flows. Previously,
the Company evaluated long-lived assets on adivisional or group basis
using undiscounted cash flows.
Due to changes in market conditions in certain markets and manufacturing
facilities, the Company evaluated portions of its goodwill recorded in
connection with its acquisitions of Nepco and Portola Packaging Canada
Ltd.
The Company recorded impairment losses of $421 and $2,332, 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 $4,539.
The effect of adopting SFAS 121 on the financial statements was an
increase in expenses of $7,292. Consistent with the provisions of SFAS
121, the additional expense related to adoption is included in results
of operations. This writedown had no effect on cash flows from
operations or cash available for debt service.
SFAS 121 will require on going evaluations of impairments when the
undiscounted cash flows from intangibles are insufficient to recover the
related assets or an impairment is otherwise indicated. Due to the
uncertainties in predicting future cash flows, 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. SUPPLEMENTAL CASH FLOW DISCLOSURES:
The Company paid $835, $1,688 and $1,684 in income taxes during the
years ended August 31, 1994, 1995 and 1996, respectively.
The Company paid $3,694, $8,571 and $8,881 in interest during the years
ended August 31, 1994, 1995 and 1996, respectively.
31
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
4. SUPPLEMENTAL CASH FLOW DISCLOSURES, continued:
During fiscal year 1994, the Company reincorporated into a Delaware
corporation, which resulted in a reclassification of $7,351 Class B
common stock into additional paid-in capital.
During fiscal year 1994 and 1996, the Company acquired $8 and $346,
respectively, of equipment under capital lease.
During fiscal 1994, the Company adopted SFAS No. 109 under which fixed
assets and patents were grossed up $1,322 and $1,906, respectively,
consistent with the gross-up of the deferred tax liability.
During fiscal 1994, 1995 and 1996, the Company wrote off fully
depreciated property, plant and equipment totaling $3,233, $2,561 and
$3,285, respectively.
5. INVENTORIES:
August 31,
-----------------------
1995 1996
---------- ----------
Raw materials $ 4,850 $ 6,023
Work in process 1,455 858
Finished goods 3,528 4,769
---------- ----------
$ 9,833 $ 11,650
---------- ----------
---------- ----------
6. PROPERTY, PLANT AND EQUIPMENT:
August 31,
-----------------------
1995 1996
---------- ----------
Building and land $ 10,655 $ 19,865
Machinery and equipment 66,628 81,126
Leasehold improvements 3,052 3,132
---------- ----------
80,335 104,123
Less accumulated depreciation and amortization (27,203) (34,350)
---------- ----------
$ 53,132 $ 69,773
---------- ----------
---------- ----------
Depreciation charged to operations was $5,903, $8,619 and $10,261 for
the years endedAugust 31, 1994, 1995 and 1996, respectively.
32
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
7. DEBT:
CURRENT PORTION OF LONG-TERM DEBT:
August 31,
-----------------------
1995 1996
---------- ----------
Term Loan Note A $ 4,000
Equipment Note 63
Development Note 17 $ 16
Canadian Term Loan Note 744 1,460
Canadian Revolver Loan Note 844 233
Capital Lease Obligations 96
---------- ----------
$ 5,668 $ 1,805
---------- ----------
---------- ----------
LONG-TERM DEBT:
August 31,
-----------------------
1995 1996
---------- ----------
Senior Notes $ 110,000
Term Loan Note A $ 23,000
Term Loan Note B 30,000
Senior Subordinated Notes 10,000
Revolving Loan Note 15,711
Canadian Term Loan Note 7,442 5,840
Development Note 91 74
Capital Lease Obligations 194
---------- ----------
$ 86,244 $ 116,108
---------- ----------
---------- ----------
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 is payable semi-annually on April 1 and October 1 of each
year, commencing on April 1, 1996.
SENIOR REVOLVING CREDIT FACILITY:
Concurrently with the offering, 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, 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,
33
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
7. DEBT, continued:
SENIOR REVOLVING CREDIT FACILITY, continued:
(vi) engage in certain sales of assets, (viii) engage in certain
transactions with affiliates and (viii) make restricted junior payments.
At August 31, 1996 no amounts were outstanding under this credit facility
and the full amount was available for draw. An availability fee is payable
on the facility based on the total commitment amount and the balance
outstanding at the rate of 0.375% per annum. In addition, interest is
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 9.5% at August 31, 1996.
DEVELOPMENT NOTE:
The Company has a Development Note with the Bi-State Regional
Commission. The Development Note bears interest at 4% with the final
monthly payment due in May 2001.
CANADIAN TERM LOAN NOTE:
Principal payments for the term note are due quarterly beginning on
November 30, 1995 in the amount of $183, then increasing every fifth
quarter to $365, $456, $502 and $502 with the final payment on August
31, 2000. Interest is payable monthly based on the Canadian prime rate
loan and/or Bankers Acceptances. At August 31, 1995 and 1996, the
interest rate was 10.0% and 7.5% respectively. The note agreement also
calls for mandatory prepayments after August 31, 1996, based upon
financial calculations including excess cash flow.
CANADIAN REVOLVING LOAN NOTE:
The revolving credit facility is maintained to finance working capital
requirements. The facility provides for borrowings based on eligible
accounts receivable and inventories up to the commitment amount of
$2,190. The principal is payable upon demand. Interest is payable
monthly based on the Canadian prime rate overdraft and/or Bankers
Acceptances. At August 31, 1995 and 1996, the interest rate was 9.25%
and 8.75%, respectively.
34
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
7. DEBT, continued:
REPAYMENT OF PRIOR OBLIGATIONS:
In connection with the October 2, 1995 Senior Notes offering, the
Company repaid amounts outstanding under the Term Loan Note A, Term Loan
Note B, Senior Subordinated Notes and Revolving Loan Note. The final
installment of the Equipment Note was paid in June 1996.
CAPITAL LEASE OBLIGATIONS:
The Company acquired certain machinery and office equipment under
noncancelable capital leases. The balance sheet includes the following
items held under capital lease obligations:
August 31,
-----------------------
1995 1996
---------- ----------
Building $ 438
Land 65
Equipment 64 $ 346
567 346
---------- ----------
Less accumulated amortization (63) (62)
$ 504 $ 284
EXTRAORDINARY ITEMS:
In connection with the Company's early extinguishment of debt in June
1994, certain costs, consisting primarily of loan fees of approximately
$1,329 were written-off. These transactions have been reported as an
extraordinary item in the statement of operations, net of an income tax
benefit of approximately $539.
In connection with the Company's early extinguishment of debt in October
1995, certain costs, consisting primarily of loan fees of approximately
$2,110 were written-off. These transactions have been reported as an
extraordinary item in the statement of operations, net of an income tax
benefit of approximately $845.
FINANCING COSTS:
In connection with a debt offering which was commenced but not
completed, the Company expensed costs amounting to $625 in fiscal 1994.
35
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
7. DEBT, continued:
AGGREGATE MATURITIES OF LONG-TERM DEBT:
The aggregate maturities of long-term debt as of August 31, 1996 are as
follows:
Fiscal
Years End Total
--------- --------
1997 $ 1,805
1998 1,939
1999 2,089
2000 2,053
2001 27
Thereafter 110,000
--------
$117,913
--------
--------
8. OTHER LONG-TERM OBLIGATIONS:
The Company has incurred certain liabilities in connection with
agreements entered into with former owners, which include provisions for
guaranteed bonuses and covenants not-to-compete, as follows:
August 31,
-----------------------
1995 1996
---------- ----------
Covenants under the acquisition of Nepco $ 3,068 $ 2,358
Covenants under the purchase of Portola Packaging Canada Ltd. 2,125 1,283
Other covenants 50
---------- ----------
Total obligations 5,243 3,641
Current portion (included in accrued liabilities) 1,332 1,338
---------- ----------
$ 3,911 $ 2,303
---------- ----------
---------- ----------
9. COMMITMENTS AND CONTINGENCIES:
The Company leases certain office, production and warehouse facilities
under operating lease agreements expiring on various dates through 2007.
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.
At August 31, 1996 future minimum rental commitments under agreements with
terms in excess of twelve months were as follows:
36
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
9. COMMITMENTS AND CONTINGENCIES, continued:
Fiscal Years Ended August 31,
-----------------------------
1997 $ 1,287
1998 1,091
1999 864
2000 767
2001 450
Thereafter 3,151
--------
$ 7,610
--------
--------
Base rent expense for the years ended August 31, 1994, 1995 and 1996
totaled $1,395, $1,381 and $1,793, respectively, of which $696, $720 and
$291, was paid to Three Sisters (Note 15) for the years ended August 31,
1994, 1995 and 1996, respectively.
The Company has been 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 is engaged in patent litigation with two other parties who
are seeking to have the court declare certain patents owned by the
Company invalid. The Company believes its patents are valid, and
intends to vigorously contest these actions. However, there can be no
assurance that the Company will be successful in its defense.
The Company is also a party to a number of other lawsuits and claims
arising out of the normal course of business. Management does not
believe the final disposition of these matters will have a material
adverse affect on the financial position, results of operations or cash
flows of the Company.
37
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
10. REDEEMABLE WARRANTS:
The Company has outstanding two warrants to purchase an aggregate
of 2,493 shares of its Class A common stock which are held by certain of
the Company's shareholders. A warrant to purchase 2,053 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. The
earnings formula is based on income before interest, taxes and debt
outstanding to calculate an estimated value per share. At August 31,
1994, 1995 and 1996 the accretion was determined using the fair market
value of the common stock.
A second warrant to purchase 440 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
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 a estimated
value per share. At August 31, 1994, 1995 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, 1996, the estimated redemption value of the
warrants exceeded 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 $455, $610 and $895 during the years
ended August 31, 1994, 1995 and 1996, respectively.
11. SHAREHOLDERS' EQUITY:
REINCORPORATION:
In April 1994, the Company was reincorporated from California to
Delaware, at which time the Company's outstanding common stock was
exchanged on a one share of the California corporation common stock for
one share of the Delaware corporation common stock basis.
38
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
11. SHAREHOLDERS' EQUITY, continued:
CLASS A AND B COMMON STOCK:
The Company has authorized 5,203 shares of Class A common stock, of
which 2,493 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 $10,000, the Class A and Class B, Series 2 common stock is
automatically converted into Class B, Series 1 common stock, based on
the appropriate conversion formula. 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 and
amended in January 1990 and August 1991, with certain directors who are
also shareholders of the Company. The agreements provided that the
Company is to pay up to $22 per year to each individual for serving as a
director, and granted each director the right to purchase up to 22
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 provided that the Company pay up to $22 per
year for services as a director. In January 1996, the Company began
paying an additional $4 per year to directors who serve as 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. During the years
ended August 31, 1994, 1995 and 1996, the Company paid $82, $64 and $96,
respectively, in director fees and related expenses.
STOCK OPTION PLAN:
The Company has reserved 2,866 and 1,000 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.
39
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
11. SHAREHOLDERS' EQUITY, continued:
Option Price Available Outstanding
Stock Options Per Share for Grant Shares Amount
------------- ----------- --------- ------ --------
(NOT THOUSANDS)
August 31, 1993 $0.61-$2.50 140 1,212 $ 1,513
Granted $2.50 (70) 70 175
Exercised $2.50 (10) (25)
Canceled $1.75 25 (25) (44)
------- ----- -------
August 31, 1994 $0.61-$2.50 95 1,247 1,619
Reservation of shares 1,000
Granted $3.75-$4.00 (370) 370 1,456
Exercised $0.61-$4.00 (96) (78)
Canceled $4.00 9 (9) (36)
------- ----- -------
August 31, 1995 $0.61-$4.00 734 1,512 2,961
Granted $4.50-$5.00 (622) 622 2,862
Exercised $4.50 (2) (8)
Canceled $4.00- $4.50 48 (48) (207)
------- ----- -------
August 31, 1996 $0.61-$5.00 160 2,084 $ 5,608
------- ----- -------
------- ----- -------
At August 31, 1996, approximately 1,124 options were exercisable at an
average exercise price of $1.43 per share.
12. EMPLOYEE BENEFIT PLANS:
On December 31, 1994, the Company merged its Profit Sharing Plan and its
Retirement and Savings Plan with those of a subsidiary company,
establishing a single defined contribution plan (The "Employee Benefits
Plan"). The Employee Benefits Plan 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 $493 and $596 for the year ended August
31, 1995 and 1996. Administrative expense in connection with the
Plan amounted to $23 and $47 for the years ended August 31, 1995
and 1996. The Company incurred expense related to prior employee
benefit plans of $360 for the year ended August 31, 1994.
The Board of Directors has approved, subject to stockholder approval, an
Employee Stock Purchase Plan (the ESPP) under which 750,000 shares of
Class B 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, as determined by the Board
of Directors. The Plan, once approved by the shareholders, shall continue
until terminated by the Board, until all of the shares reserved for
issuance under the Plan have been issued or until January 1, 2007,
whichever shall first occur.
40
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
13. INCOME TAXES:
The provision for income taxes, excluding extraordinary items, for the
three years ended August 31, 1996 consists of the following:
August 31,
--------------------------
1994 1995 1996
------ ------ ------
Current:
Federal $1,013 $1,677 $ 747
State 344 300 187
Foreign (29) 26
------ ------ ------
1,357 1,948 960
------ ------ ------
Deferred:
Federal (176) (605) (392)
State (86) (86) 260
Foreign 37 37
------ ------ ------
(262) (654) (95)
------ ------ ------
$1,095 $1,294 $ 865
------ ------ ------
------ ------ ------
As discussed in Note 1, Summary of Significant Accounting Policies, the
Company adopted SFAS No. 109 effective September 1, 1993. Prior years'
financial statements have not been restated to apply the provisions of
SFAS No. 109; however, prior year business combinations have been
restated as of September 1, 1993 under SFAS No. 109.
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:
Year Ended August 31,
--------------------------
1994 1995 1996
------ ------ ------
Federal statutory rate (benefit) 34.0% 34.0% (34.0)%
State taxes 6.6 14.9 (5.1)
Nondeductible amortization and depreciation 7.4 26.0 46.2
Nondeductible permanent items 7.0 0.7
Other 1.9 8.3 4.0
------ ------ ------
Effective income tax rate 49.9% 90.2% 11.8%
------ ------ ------
------ ------ ------
41
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
13. INCOME TAXES, continued:
The components of the net deferred tax liabilities:
August 31,
----------------
1995 1996
------ ------
Deferred tax assets:
Federal credits $ 651 $ 404
State tax credits 360 7
Accounts receivable 313 317
Other liabilities 924 990
------ ------
Total assets 2,248 1,718
------ ------
Deferred tax liabilities:
Property, plant and equipment 7,354 7,977
Intangible assets 712 (574)
Foreign taxes, net 37 75
------ ------
Total liabilities 8,103 7,478
------ ------
Net deferred tax liabilities $5,855 $5,760
------ ------
------ ------
14. EXPORT SALES AND GEOGRAPHICAL INFORMATION:
Export sales to unaffiliated customers were $8,071, $18,658 and $17,568
for the years ended August 31, 1994, 1995 and 1996, respectively. Export
sales are predominantly to North America, Europe, the Middle East and the
Pacific Rim. During fiscal 1996, export sales to North America, Europe,
the Middle East and the Pacific Rim accounted for 24%, 33%, 12%, and 6%
of total export sales, respectively.
Summarized data by geographic area for fiscal 1996 is as follows:
United States Canada Europe Eliminations Total
------------- ------- ------- ------------ --------
Sales $145,614 $10,303 $ 5,695 $(2,150) $159,462
Income (loss)
from
operations 8,301 (1,476) (1,645) 5,180
Identifiable
assets $142,084 $11,040 $ 4,648 $(5,545) $152,227
42
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
15. RELATED PARTY TRANSACTIONS:
In fiscal 1996, the Company deposited $3,000 in a U.S. Bank to secure a
loan to its 50% joint venture in Mexico.
The Company paid $162 and $5 for the years ended August 31, 1994 and
1995, respectively, to a company for prototype mold development and mold
engineering work. A director and officer of the aforementioned company is
also a director of the Company.
The Company paid $420, $333 and $618 for the years ended August 31, 1994,
1995 and 1996, respectively, to a law firm for legal services rendered. A
general partner of the aforementioned firm is also a director of the
Company.
The Company paid $42 for the years ended August 31, 1994, 1995 and 1996
to a corporation for management fees. A shareholder of the aforementioned
corporation is also a director and significant shareholder of the Company.
The Company had debt outstanding with a financial institution of $10,000
at August 31, 1994 and 1995, which was repaid by the Company in October
1995 along with a debt prepayment penalty of approximately $149. The
Company paid interest of approximately $1,350, $1,350 and $113 for each
of the three years, respectively. The Company also paid $258 for the year
ended August 31, 1994 to the same financial institution for ongoing
corporate advice and in connection with the refinancing in fiscal year
1994. An officer of the financial institution is a director of the
Company.
The Company has amounts receivable from non-consolidated affiliated
companies which amounted to $421, $736 and $358 as of August 31, 1994,
1995 and 1996, respectively.
The Company leased certain office, production and warehouse facilities
from Three Sisters Ranch Enterprises (Three Sisters). Certain general
partners in Three Sisters are also minority shareholders in the Company
(less than 5%). The Company owed $15 at August 31, 1994 in the form of
unsecured notes due to Three Sisters. The notes were repaid in fiscal
1995. The Company purchased these facilities for $7.2 million in fiscal
1996.
16. SUBSEQUENT EVENT:
On September 1, 1996 the Company completed the acquisition of Rapid Plast
J-P. Inc., a Canadian federal corporation, for a purchase price of
approximately $2.3 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. This transaction has been accounted for as a purchase and
therefore the results of operations subsequent to the acquisition will be
consolidated with the Company.
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The current directors and executive officers of the Company are as
follows:
YEARS WITH
NAME AGE COMPANY POSITION
- ---- --- ---------- --------
Jack L. Watts 48 10 Chairman of the Board and Chief Executive Officer
Laurie D. Bassin 47 10 Vice President - Corporate Development
Douglas L. Cullum 42 10 President - Packaging Division
Dannie K. Martz 44 1 President - Closures Division and Portola Sales and Service Division
E. Scott Merritt 41 1 Vice President - Manufacturing Technology
Rodger A. Moody 43 21 Vice President, Managing Director - International Division
Robert Plummer 37 2 President - Dispensing Closure Products Division and U.S. Closure Manufacturing
Division
Robert R. Strickland 52 5 Vice President - Finance, CFO and Assistant Secretary
Patricia A. Voll 38 0 Vice President - Finance and Accounting
Christopher C. Behrens 35 2 Director
Martin R. Imbler (2) 48 7 Director
Jeffrey Pfeffer, Ph.D. (1) 50 0 Director
Timothy Tomlinson (1)(2) 46 10 Secretary and Director
Larry C. Williams (1)(2) 47 7 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 - Packaging Division since April
1996. 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. Martz has been President - Closures Division and Portola Sales and
Service Division since August 29, 1996. From September 1995, when he joined
the Company, through August 29, 1996, he was President - Cap Snap Division.
From March 1995 to September 1995, he was Senior Vice President of Cymer
Laser Technologies, a laser manufacturer. From January 1992 to March 1995, he
was Vice President and General Manager of the Varian - TEL Products Division
of Varian Associates, Inc., a manufacturer of semiconductor equipment,
electrical devices, instruments and other electronics products, and from
October 1986 to January 1992, he was employed by KLA Instruments Corporation,
a company involved in the factory automation, manufacturing, photonics, and
test and measurement industries, most recently as Vice President and General
Manager, Automated Test Systems Division.
45
Mr. Merritt has been Vice President - Manufacturing Technology since
April 1996. 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. Moody has been Vice President - Managing Director - International
Division of the Company since October 1994. 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 - Dispensing Closure Products and U.S.
Closure Manufacturing Division since August 29, 1996. 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; as an
Assembly Advisor for New United Motor Manufacturing, Inc., an automobile
manufacturing joint venture between General Motors and Toyota from February
1993 to May 1994 and as Product Manager of the Harrison Division of General
Motors Corporation, which produces automotive engine cooling and heating,
ventilating, and air conditioning systems, from May 1989 to February 1993.
Mr. Strickland has been Vice President - Finance and Chief Financial
Officer of the Company since July 1991. From September 1990 to July 1991, he
served as Senior Vice President and Chief Financial Officer at Personics
Corporation, a company that manufactured a system of producing audio cassette
tapes in retail record stores. From February 1988 to June 1990, he was
employed by Lucky Stores, Inc., a supermarket chain, most recently as Vice
President Finance and Administration.
Ms. Voll joined the Company in April 1996 as Vice President, Finance and
Accounting. From February 1993 to September 1995, she was employed by Trinzic
Corporation, a software company, most recently as Vice President, Finance,
Chief Financial Officer, Treasurer and Secretary. From June 1991 to January
1993, she was employed by Pyramid Technology, Inc., a computer hardware
manufacturer, as Director of Accounting. From 1986 to 1991, she was employed
by Ingres Corporation, a software company, where she held various management
positions, most recently as Corporate Controller.
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 since 1990. Mr. Behrens is a director of The
Pantry, Inc. and numerous private companies.
Mr. Imbler has been a director of the Company since March 1989. He has
been President, Chief Executive Officer and a director of Berry Plastics
Corporation ("Berry"), a manufacturer of plastic packaging, since January
1991. He has also served as a director of BPC Holding Corporation, an entity
affiliated with Berry, since 1991.
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.
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
as 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.
46
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, except Dr. Pfeffer, was elected at the
Company's Annual Meeting of Shareholders held in January 1996 and will serve
until his successor has been elected and qualified or until his earlier
resignation or removal. Dr. Pfeffer was elected by Unanimous Written Consent
of the Board of Directors of the Company effective May 19, 1996 and will
serve until his successor has been elected or qualified or until his earlier
resignation or removal. Executive officers are chosen by, and serve at the
discretion of, the Board.
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, as amended
(the "Exchange Act"). Accordingly, no persons are presently required to file
reports with the Commission pursuant to Section 16(a) of the Exchange Act.
47
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, 1996, 1995 and 1994 by the Company's Chief Executive
Officer and the Company's five other most highly compensated executive
officers during fiscal 1996 (together, the "Named Officers"). The table
includes one executive officer who has resigned.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
--------------------------
ANNUAL COMPENSATION OTHER ANNUAL SECURITIES ALL OTHER
------------------- COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) (2) OPTIONS (3)
- --------------------------- ---- -------- --------- ------------ ---------- ------------
Jack L. Watts 1996 $269,348 $ 37,500 $50,493 100,000 $3,600
Chairman of the Board and 1995 232,280 62,502 50,251 -- 3,015
Chief Executive Officer 1994 201,093 150,000 50,373 -- 6,999
Douglas L. Cullum 1996 149,093 7,500 -- 20,000 3,600
President- 1995 143,042 9,940 -- -- 3,015
Packaging Division 1994 136,839 16,300 -- -- 2,404
Howard R. Girbach (4) 1996 162,323 11,250 7,200 -- 3,600
Corporate Vice-President 1995 162,011 2,040 7,200 -- 3,015
1994 149,261 29,300 7,200 -- 2,404
Dannie K. Martz (5) 1996 155,481 11,250 6,600 72,000 --
President - Closures 1995 -- -- -- -- --
Division and Portola Sales
and Service Division 1994 -- -- -- -- --
Robert Plummer (6) 1996 152,137 8,750 -- 10,500 3,600
President-Dispensing 1995 133,850 13,900 28,721 54,000 2,260
Closure Products Division 1994 36,346 5,700 -- 50,000 --
and U.S. Closure
Manufacturing Division
Robert R. Strickland 1996 156,770 10,000 3,600
Vice President-Finance and 1995 150,974 2,040 3,015
Chief Financial Officer 1994 133,443 57,500 2,404
___________
(1) With respect to fiscal 1996, includes bonuses paid during fiscal 1996 for
services rendered during fiscal 1996, but not bonuses paid during fiscal
1997 for services rendered during fiscal 1996. With respect to fiscal
1995, includes bonuses paid during fiscal 1996 for services rendered
during fiscal 1995, but not bonuses paid during fiscal 1995 for services
rendered during fiscal 1994. With respect to fiscal 1994, includes
bonuses paid during fiscal 1995 for services rendered during fiscal 1994,
but not bonuses paid during fiscal 1994 for services rendered during
fiscal 1993.
(2) Includes automobile and gas allowances with respect to Mr. Watts,
Mr. Girbach and Mr. Martz. In
48
addition, 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. Also includes relocation payments with respect
to Mr. Plummer for fiscal 1995.
(3) Represents insurance premiums on term life insurance of $4,595 for
Mr. Watts for fiscal 1994. In addition, represents a Company
profit-sharing contribution of $2,304, $2,100 and $2,100 for fiscal 1994,
1995 and 1996, respectively, and a Company 401(k) matching contribution
of $100 in fiscal 1994, a Company 401(k) matching contribution of up to
1% of salary, depending on the employee's contribution to the plan for
fiscal 1995, and a Company 401(k) matching contribution of $1,500 for
fiscal 1996, for the officers who participate in the plan.
(4) Mr. Girbach resigned as President of the Packaging Division in April 1996
and resigned all other officer positions in late October 1996.
(5) Mr. Martz joined the Company in September 1995.
(6) Mr. Plummer joined the Company in May 1994.
The following table sets forth information concerning individual grants
of stock options made during fiscal year 1996 to the Named Officers.
OPTION GRANTS IN FISCAL 1996
POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES
SECURITIES OPTIONS EXERCISE OF STOCK PRICE
UNDERLYING GRANTED TO OR BASE APPRECIATION FOR OPTION
OPTIONS EMPLOYEES IN PRICE EXPIRATION TERM
NAME GRANTED (1) FISCAL YEAR (2) ($/SH) (3) DATE 5%($) 10%($) (4)
- ---- ----------- --------------- ---------- ---------- -------- ----------
Jack L. Watts 100,000 17.2% $4.95 08/27/2006 $238,005 $672,165
Douglas L. Cullum 20,000 3.4% $4.50 08/27/2006 $ 56,601 $143,433
Dannie K. Martz 72,000 12.4% $4.50 11/08/2005 $203,764 $516,359
Robert Plummer 10,500 1.8% $4.50 08/27/2006 $ 29,715 $ 75,303
___________
(1) All 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 each individual's employment thereafter. Vesting of Mr. Watts' options
accelerates upon a change in control. See "Employment and Change in
Control Arrangements" below. All individuals identified in the table
received incentive stock options.
(2) Calculated by excluding as part of total options granted in fiscal 1996
any options granted to non-employee directors during fiscal 1996 under
the Company's 1994 Stock Option Plan.
49
(3) 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, except with respect to the exercise price of the options granted
to Mr. Watts on the date of grant which was equal to $0.45 above the fair
market value determined by the Board of Directors.
(4) 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 1996 and the number of shares covered by both
exercisable and unexercisable stock options as of August 31, 1996 for each
of the Named Officers.
AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT AUGUST 31, 1996 AUGUST 31, 1996 (1)
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
Jack L. Watts -- -- -- 100,000 $ -- $ --
Douglas L. Cullum -- -- 55,000 20,000 213,950 --
Howard R. Girbach (2) -- -- 64,000 76,000 128,000 152,000
Dannie K. Martz -- -- -- 72,000 -- --
Robert Plummer -- -- 28,800 75,700 41,400 65,600
Robert R. Strickland -- -- 80,000 -- 220,000 --
___________
(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, 1996 of $4.50 per share, as determined by the Company's Board
of Directors, minus the exercise price of the option.
(2) Mr. Girbach resigned as President of the Packaging Division in April 1996
and resigned all otherofficer positions in late October 1996.
DIRECTOR COMPENSATION
Each of Dr. Pfeffer and Messrs. Imbler, 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. None of the other Board members is
compensated as such. Each of Messrs. Imbler and Williams receives an annual
retainer for his services as a member of the Audit Committee of the Board in
the amount of $4,000 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.
50
On August 27, 1996, the Compensation Committee of the Board of Directors
approved the grant to certain Directors of the Company of non-qualified stock
options pursuant to the terms of the 1994 Stock Option Plan (the "1994
Plan"). Options may be granted under the 1994 Plan to officers, key
employees, directors and independent contractors of the Company, or any
subsidiary of the Company. Each of Dr. Pfeffer and Messrs. Imbler, Williams
and Tomlinson received options to purchase 10,000 shares of Class B Common
Stock, Series 1 of the Company, with an exercise price of Five Dollars
($5.00) per share. The non-qualified stock options granted to such directors
will expire ten (10) years from the date of grant and will vest twenty
percent (20%) one year after the vesting start date of August 27, 1996 and
five percent (5%) for each calendar quarter that such individual continues to
serve as a member of the Board of Directors or is employed by the Company.
Mr. Tomlinson has assigned his options to TZM Investment Fund, of which
Mr. Tomlinson is a general partner.
EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
In April 1996, Mr. Girbach resigned from his position as
President-Packaging Division of the Company and assumed the title of
Corporate Vice President working on special projects for Mr. Watts.
Effective as of October 28, 1996, Mr. Girbach resigned his position as an
officer of the Company and entered into a Resignation Agreement providing for
severance payments in connection with such resignation. Under the terms of
such arrangement, Mr. Girbach will remain as an employee of the Company until
August 31, 1997. The Company will continue to pay to Mr. Girbach an amount
generally equal to his current monthly salary through the period ending
August 31, 1997. Mr. Girbach generally will remain eligible to receive
various employee benefits and, until expiration of his period of employment,
will retain his rights under the stock option agreements relating to the
stock options previously granted to him.
Certain of the stock option agreements entered into pursuant to the 1994
Plan provide for acceleration of vesting of options governed thereby in the
event of a "change of control," as defined in such stock option agreements.
In this regard, the options granted to Dr. Pfeffer and each of Messrs. Watts,
Imbler, Williams and Tomlinson on August 27, 1996 provide for acceleration of
vesting upon a change of control of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company's Board of
Directors are Timothy Tomlinson, Larry C. Williams and Jeffrey Pfeffer, Ph.D.
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. For a description of the options recently granted to Dr.
Pfeffer and Messrs. Williams and Tomlinson, please see the heading above
entitled "Director Compensation."
51
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
November 4, 1996 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, as amended.
TITLE OF CLASS (1) NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE PERCENT OF
------------------ ------------------------------
OWNER OF BENEFICIAL CLASS (2)
----- ---------
OWNERSHIP (2)
-------------
Class B Common Stock, Series 1 Jack L. Watts (3) 3,898,021 40.3%
Class B Common Stock, Series 1 Christopher C. Behrens (4) 1,552,333 16.0%
Class B Common Stock, Series 1 Chase Manhattan Capital 1,552,333 16.0%
Corporation (5)
Class B Common Stock, Series 2 Christopher C. Behrens (4) 815,715 8.4%
Class B Common Stock, Series 2 Chase Manhattan Capital 815,715 8.4%
Corporation (5)
Class B Common Stock, Series 1 Gary L. Barry (6) 607,965 6.3%
Class B Common Stock, Series 1 Timothy Tomlinson (7) 245,984 2.5%
Class B Common Stock, Series 1 Howard Girbach (8) 128,000 1.3%
Class B Common Stock, Series 1 Robert R. Strickland (9) 100,000 1.0%
Class B Common Stock, Series 1 Douglas L. Cullum (10) 70,000 *
Class B Common Stock, Series 1 Larry C. Williams (11) 66,371 *
Class B Common Stock, Series 1 Robert Plummer (12) 46,200 *
Class B Common Stock, Series 1 Martin R. Imbler (13) 20,000 *
Class B Common Stock, Series 1 Jeffrey Pfeffer, Ph.D. (14) 15,000 *
Class B Common Stock, Series 1 Dannie K. Martz (15) 14,400 *
Class B Common Stock, Series 1 All executive officers and 7,168,586 71.0%
and Series 2 directors as a group (14
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 $10,000,000 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 stockholders shall be not less than
$1.75 per share. As of November 4, 1996, there were 9,678,070 shares of
Class B Common Stock issued and outstanding, consisting of 8,506,640
shares of Class B Common Stock, Series 1 and 1,171,430 shares of Class B
Common Stock, Series 2. As of November 4, 1996, 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 Capital holds 2,052,526 of
52
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 $10,000,000 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 November 4, 1996 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 529,712 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. 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. Barry's address is 640 Menlo Avenue, Suite 5, Menlo Park, California
95025.
(7) Includes 36,000 shares held by First TZMM Investment Partnership, of
which Mr. Tomlinson is a general partner, 66,000 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 and 119,984 shares
subject to options held by TZM Investment Fund that are exercisable within 60
days of November 4, 1996. Mr. Tomlinson's address is 200 Page Mill Road,
Second Floor, Palo Alto, California 94306.
(8) Includes 68,000 shares subject to options exercisable within 60 days of
November 4, 1996. Mr. Girbach's address is 18115 Mountfield Drive, Houston,
Texas 77084.
(9) Includes 80,000 shares subject to options exercisable within 60 days of
November 4, 1996. Mr. Strickland's address is 890 Faulstich Court, San Jose,
California 95112.
(10) Includes 55,000 shares subject to options exercisable within 60 days of
November 4, 1996. Mr. Cullum's address is 890 Faulstich Court, San Jose,
California 95112.
(11) Includes 16,050 shares subject to options exercisable within 60 days of
November 4, 1996. Does not include (i) 123,756 shares and (ii) 41,976 shares
subject to options exercisable within 60 days of November 4,
53
1996, held in the individual names of four other principals of The Breckenridge
Group, Inc. Mr. Williams' address is Resurgens Plaza, Suite 2100, 945 E. Paces
Ferry Road, Atlanta, Georgia 30326.
(12) Includes 36,200 shares subject to options exercisable within 60 days of
November 4, 1996. Mr. Plummer's address is 890 Faulstich Court, San Jose,
California 95112.
(13) Mr. Imbler's address is 101 Oakley Street, Evansville, Indiana 47706.
(14) Dr. Pfeffer's address is Graduate School of Business, Stanford
University, Stanford, California 94305.
(15) Includes 14,400 shares subject to options exercisable within 60 days of
November 4, 1996. Mr. Martz's address is 890 Faulstich Court, San Jose,
California 95112.
(16) Includes all of the shares shown as included in footnotes (3), (4), and
(7) through (15).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
LOANS TO EMPLOYEES
During fiscal 1996, the Board of Directors of the Company agreed to
extend until January 1997 the due date of all principal and accrued interest
owing to the Company by Jack L. Watts, Chairman of the Board and Chief
Executive Officer, under the terms of that certain loan made by the Company
to Mr. Watts in January 1992 in the original principal amount of $250,000.
The loan is secured by a pledge of certain shares of Class B Common Stock,
Series 1 owned by Mr. Watts. Interest accrues at a rate equal to 2% above
the Company's borrowing rate on its revolving credit facility. Principal
plus accrued interest outstanding at August 31, 1996 was approximately
$404,000. The note plus accrued interest was originally due in January 1993.
In September 1992, the Company loaned Howard R. Girbach, formerly
President - Packaging Division, $75,000 towards the purchase of a home. The
loan was represented by a nonrecourse promissory note secured by a deed of
trust. The note provided for prepayment in full in one or more installments
on or before the sixth anniversary of the date of the note. Prepayment was
to have included accrued interest at the rate of 6.0%. If the note was not
prepaid, satisfaction of the note was limited to proceeds from the sale of
the home in accordance with a formula outlined in the loan agreement. In
July 1996, Mr. Girbach sold his home and prepaid the note, to the extent of
the proceeds received from the sale. The Company received a payment of
principal in the amount of $75,000, and agreed to discharge Mr. Girbach's
remaining obligations under the note.
TRANSACTIONS WITH DIRECTORS
Jeffrey Pfeffer, Ph.D., a director of the Company, purchased 15,000
shares of Class B Common Stock, Series 1 on June 18, 1996, at a price per
share of $4.50. For a description of the options granted to directors during
fiscal 1996, please see "Director Compensation" under Item 11 of this report
on Form 10-K.
TRANSACTIONS WITH ENTITIES AFFILIATED WITH DIRECTORS
Since June, 1988, Chase Manhattan Bank, N.A. ("Chase Bank") had held
certain Senior Subordinated Notes payable by the Company in the principal
amount of $10,000,000 that were due June 30, 2002. On October 2, 1995, the
Company completed an offering of $110,000,000 of unsecured Senior Notes due
2005 (the "Notes"), at which time the Senior Subordinated Notes held by Chase
Bank were repaid in full with the net proceeds of the offering of the Notes.
Such payment included $10,000,000 of
54
principal, $7,500 of interest, a pre-payment premium of $147,008 and $1,500
of other fees and expenses. Chase Bank is an affiliate of Chase
Securities Inc., Chase Capital Partners and Chase Manhattan Capital
Corporation ("Chase Capital"), which together with other related parties,
owns approximately 24.5% of the Company's outstanding voting Stock. Chase
Securities Inc. was one of the underwriters in the offering of the Notes, and
currently makes a market in the Notes. Chase Securities Inc. received
underwriting discounts and commissions in connection with the offering of the
Notes. It is not compensated by the Company for making a market in the
Notes. Christopher C. Behrens, a Director of the Company, is also a Vice
President of Chase Bank and Chase Capital Partners.
In June 1994, Chase Capital 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.
In fiscal 1996, Breckenridge Securities Corporation ("Breckenridge") an
affiliate of The Breckenridge Group, Inc. an investment banking firm of which
Larry C. Williams is a principal, acted as finder in connection with the sale
of Common Stock of the Company held by certain insiders of the Company.
Breckenridge received $495,865 from the proceeds of the sale. Mr. Williams
is a director of the Company and a member of the Compensation Committee.
The Company retains as its general counsel the law firm of Tomlinson
Zisko Morosoli & Maser LLP, of which Timothy Tomlinson is a general
partner. For legal services rendered during fiscal 1996, the Company paid
Mr. Tomlinson's law firm fees and expenses in the amount of approximately
$618,000. Mr. Tomlinson is a director of the Company and a member of the
Compensation Committee.
SHAREHOLDERS AGREEMENTS
A majority of the Company's shares, including shares held by Jack L.
Watts, 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.
55
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:
PAGE IN
FORM 10-K
---------
Report of Independent Accountants 20
Consolidated Balance Sheets - August 31, 1996 and 1995 21
Consolidated Statements of Operations - Years Ended
August 31, 1996, 1995 and 1994 22
Consolidated Statements of Cash Flows - Years Ended
August 31, 1996, 1995 and 1994 23
Consolidated Statements of Shareholders' Equity -
Years Ended August 31, 1996, 1995 and 1994 24
Notes to Consolidated Financial Statements 25
(a)(2) FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedules are filed herewith and should be read in conjunction with the
consolidated financial statements:
PAGE IN
FORM 10-K
---------
Schedule II - Valuation and Qualifying Accounts 64
Report of Independent Accountants on Financial Statement
Schedule 65
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)
10.01 Underwriting Agreement(3)
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,
56
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 warrantholders(2)
10.04 Stock Purchase Agreement, dated as of March 19, 1994, by and
among the Registrant, Nepco, Robert Crisci and Harry Crisci(4)
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(5)
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(6)
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 $75,000 Non-Recourse Promissory Note, dated September 28, 1992,
made by Howard R. Girbach and Beverly Girbach in favor of the
Registrant(2)
10.10 $250,000 Secured Promissory Note, dated January 17, 1992 made by
Jack L. Watts in favor of the Registrant(2)
10.11 $100,000 Non-Recourse Promissory Note, dated May 28, 1996, made
by Joseph F. Jahn and Nancy L. Jahn in favor of the Registrant
10.12 Director's Agreement, dated October 5, 1990, by and between the
Registrant and Martin Imbler(2)
10.13 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(2)
10.14 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(2)
10.15 Stock Purchase Agreement, dated October 17, 1990, by and among
the Registrant Robert Fleming Nominees, Ltd., Jack Watts, John
Lemons and LJL Cordovan Partners(2)
10.16 Stock Purchase Agreement, dated as of June 16, 1995, by and among
the Registrant, Jack L. Watts, LJL Cordovan Partners, Robert
Fleming Nominess, Ltd., Chase
57
Manhattan Capital Corporation, and certain other selling
shareholders (2)
10.17 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(2)
10.18 Limited Recourse Guarantee, dated as of June 16, 1995, between
the Registrant as guarantor and Canadian Imperial Bank of
Commerce(2)
10.19 Master Supply Agreement, dated March 29, 1995, by and between the
Registrant and Tetra Rex Packaging Systems, Inc.(2)
10.20 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)(2)
10.21 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)(2)
10.22 Stock Purchase Agreement, dated as of June 9, 1995, by and among
the Registrant, Oakley T. Hayden, Chase Manhattan Capital
Corporation and Heller Financial, Inc.(7)
10.23 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 Limited(7)
10.24 Second Amended and Restated Credit and Security Agreement, dated
as of October 2, 1995, by and between the Registrant and Heller
Financial, Inc.(1)
10.25 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 Limited,
Suez Equity Investors, L.P. and SEI Associates.(1)
10.26 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 Limited, Suez Equity Investors, L.P.
SEI Associates and Chase Manhattan Capital Corporation.(1)
10.27 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 Nomimees Limited, Suez Equity Investors, L.P. and SEI
Associates.(1)
10.28 1988 Stock Option Plan and related documents(1)
10.29 1994 Stock Option Plan and related documents(1)
10.30 1996 Special Management Bonus Plan(1)
10.31 1996 Management Bonus Plan(1)
10.32 Description of provisions of 1996 Senior Executive Bonus Plans(1)
10.33 Faulstich Court Property Agreement of Purchase and Sale, dated as
of January 17, 1996 by and between the Registrant and Three
Sisters Ranch Enterprises(8)
58
10.34 Settlement Agreement, dated June 1996, by and between the
Registrant and Scholle Corporation(9)
10.35 Resignation Agreement, dated October 28, 1996, by and between
the Registrant and Howard R. Girbach.
10.36 Director's Agreement, dated as of May 20, 1996, by and between
the Registrant and Jeffrey Pfeffer.
10.37 Form of Indemnification Agreement by and between the Registrant
and the related director or officer.
10.38 Form of Amendment to Indemnification Agreement by and between
the Registrant and certain directors and officers of the
Registrant.
10.39 Forms of Stock Option Agreements available for use in
connection with the Registrant's 1994 Stock Option Plan (1994
Stock Option Plan and certain related documents filed as
Exhibit 10.29 to this report on Form 10-K).
11.01 Computation of Net Income (Loss) Per Share
12.01 Computation of Ratio of Earnings to Fixed Charges
21.01 Subsidiaries of the Registrant
23.01 Consent of Coopers & Lybrand L.L.P.
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 Company'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 Registration Statement on Form S-1, as
filed with the Securities and Exchange Commission on August 1,
1995.
(3) Incorporated herein by reference to exhibit 1.01 included in pre-
effective Amendment No. 2 to the Registration Statement on
Form S-1, as filed with the Securities and Exchange Commission on
September 25, 1995.
(4) Incorporated herein by reference to exhibit 2.01 included in the
Registration Statement on Form S-1, as filed with the Securities
and Exchange Commission on August 1, 1995.
(5) Incorporated herein by reference to exhibit 2.02 included in the
Registration Statement on Form S-1, as filed with the Securities
and Exchange Commission on August 1, 1995.
(6) Incorporated herein by reference to exhibit 2.03 included in the
Registration Statement on Form S-1, as filed with the Securities
and Exchange Commission on August 1, 1995.
(7) Incorporated herein by reference to the exhibit with the same
number included in pre-effective Amendment No. 2 to the
Registration Statement on Form S-1, as filed with the Securities
and Exchange Commission on September 25, 1995.
(8) 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 February 29, 1996, as filed with
the Securities and Exchange Commission on April 15, 1996.
(9) 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 May 31, 1996, as filed with the
Securities and Exchange Commission on July 11, 1996.
59
(b) REPORTS ON FORM 8-K. No report on Form 8-K was filed during the
last quarter of the period covered by this report.
(c) EXHIBITS - See (a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES - See (a)(2) above.
60
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
November 20, 1996 By: /s/ Jack L. Watts
----------------------------
Jack L. Watts
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, Robert R. Strickland,
Patricia Voll 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, 1996
- ----------------------------
Jack L. Watts
Chief Executive Officer,
Chairman of the Board and
a Director
PRINCIPAL FINANCIAL OFFICER:
/s/ Robert R. Strickland November 20, 1996
- ----------------------------
Robert R. Strickland
Vice President - Finance and
Chief Financial Officer
PRINCIPAL ACCOUNTING OFFICER:
/s/ Patricia Voll November 20, 1996
- ----------------------------
Patricia Voll
Vice President - Finance and Accounting
61
DIRECTORS:
/s/ Christopher C. Behrens November 20, 1996
- ----------------------------
Christopher C. Behrens
/s/ Martin R. Imbler November 20, 1996
- ----------------------------
Martin R. Imbler
November __ 1996
- ----------------------------
Jeffrey Pfeffer, Ph.D.
/s/ Timothy Tomlinson November 20, 1996
- ----------------------------
Timothy Tomlinson
/s/ Larry C. Williams November 20, 1996
- ----------------------------
Larry C. Williams
62
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.
63
PORTOLA PACKAGING, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BEGINNING ADDITIONS/ ENDING
BALANCE EXPENSE OTHER DEDUCTIONS(2) BALANCE
------- ------- ----- ------------- -------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
August 31, 1994 $ 206 $ 173 $(167)(1) $ 157 $ 389
August 31, 1995 389 892 468 813
August 31, 1996 813 450 446 817
(1) Amount of valuation allowance established as part of the acquisition of
NEPCO
(2) Write-off of Bad Debts
64
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 20 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.
COOPERS & LYBRAND L.L.P.
San Jose, California
October 22, 1996
65
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)
10.01 Underwriting Agreement(3)
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 warrantholders(2)
10.04 Stock Purchase Agreement, dated as of March 19, 1994, by and among
the Registrant, Nepco, Robert Crisci and Harry Crisci(4)
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(5)
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(6)
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 $75,000 Non-Recourse Promissory Note, dated September 28, 1992, made
by Howard R. Girbach and Beverly Girbach in favor of the Registrant(2)
10.10 $250,000 Secured Promissory Note, dated January 17, 1992 made by
Jack L. Watts in favor of the Registrant(2)
10.11 $100,000 Non-Recourse Promissory Note, dated May 28, 1996, made by
Joseph F. Jahn and Nancy L. Jahn in favor of the Registrant
10.12 Director's Agreement, dated October 5, 1990, by and between the
Registrant and Martin Imbler(2)
66
10.13 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(2)
10.14 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(2)
10.15 Stock Purchase Agreement, dated October 17, 1990, by and among
the Registrant Robert Fleming Nominees, Ltd., Jack Watts, John
Lemons and LJL Cordovan Partners(2)
10.16 Stock Purchase Agreement, dated as of June 16, 1995, by and among
the Registrant, Jack L. Watts, LJL Cordovan Partners, Robert
Fleming Nominess, Ltd., Chase Manhattan Capital Corporation, and
certain other selling shareholders(2)
10.17 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(2)
10.18 Limited Recourse Guarantee, dated as of June 16, 1995, between
the Registrant as guarantor and Canadian Imperial Bank of Commerce(2)
10.19 Master Supply Agreement, dated March 29, 1995, by and between the
Registrant and Tetra Rex Packaging Systems, Inc.(2)
10.20 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)(2)
10.21 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)(2)
10.22 Stock Purchase Agreement, dated as of June 9, 1995, by and among the
Registrant, Oakley T. Hayden, Chase Manhattan Capital Corporation and
Heller Financial, Inc.(7)
10.23 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
Limited(7)
10.24 Second Amended and Restated Credit and Security Agreement, dated as of
October 2, 1995, by and between the Registrant and Heller
Financial, Inc.(1)
10.25 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 Limited,
Suez Equity Investors, L.P. and SEI Associates.(1)
10.26 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
Limited, Suez Equity Investors, L.P. SEI Associates and
Chase Manhattan Capital Corporation.(1)
67
10.27 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 Nomimees
Limited, Suez Equity Investors, L.P. and SEI Associates.(1)
10.28 1988 Stock Option Plan and related documents(1)
10.29 1994 Stock Option Plan and related documents(1)
10.30 1996 Special Management Bonus Plan(1)
10.31 1996 Management Bonus Plan(1)
10.32 Description of provisions of 1996 Senior Executive Bonus Plans(1)
10.33 Faulstich Court Property Agreement of Purchase and Sale, dated as of
January 17, 1996 by and between the Registrant and Three Sisters
Ranch Enterprises(8)
10.34 Settlement Agreement, dated June 1996, by and between the Registrant
and Scholle Corporation(9)
10.35 Resignation Agreement, dated October 28, 1996, by and between the
Registrant and Howard R. Girbach
10.36 Director's Agreement, dated as of May 20, 1996, by and between the
Registrant and Jeffrey Pfeffer
10.37 Form of Indemnification Agreement by and between the Registrant and
the related director or officer.
10.38 Form of Amendment to Indemnification Agreement by and between the
Registrant and certain directors and officers of the Registrant.
10.39 Forms of Stock Option Agreements available for use in connection
with the Registrant's 1994 Stock Option Plan (1994 Stock Option Plan
and certain related documents filed as Exhibit 10.29 to this report
on Form 10-K.
11.01 Computation of Net Income Per Share
12.01 Computation of Ratio of Earnings to Fixed Charges
21.01 Subsidiaries of the Registrant
23.01 Consent of Coopers & Lybrand L.L.P.
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 Company'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 Registration Statement on Form S-1, as filed with the
Securities and Exchange Commission on August 1, 1995.
(3) Incorporated herein by reference to exhibit 1.01 included in
pre-effective Amendment No. 2 to the Registration Statement on
Form S-1, as filed with the Securities and Exchange Commission on
September 25, 1995.
(4) Incorporated herein by reference to exhibit 2.01 included in the
Registration Statement on Form S-1, as filed with the Securities and
Exchange Commission on August 1, 1995.
(5) Incorporated herein by reference to exhibit 2.02 included in the
Registration Statement on Form S-1, as filed with the Securities and
Exchange Commission on August 1, 1995.
(6) Incorporated herein by reference to exhibit 2.03 included in the
Registration Statement on Form S-1, as filed with the Securities and
Exchange Commission on August 1, 1995.
(7) Incorporated herein by reference to the exhibit with the same number
included in the pre-effective Amendment No. 2 to the Registration
Statement on Form S-1, as filed with the Securities and Exchange
Commission on September 25, 1995.
(8) 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 February 29, 1996, as filed with the Securities and
Exchange Commission on April 15, 1996.
(9) 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 May 31, 1996, as filed with the Securities and Exchange
Commission on July 11, 1996.
68