-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pw8kQDRxRtfO817QJ3Tn+fttOu8shBoNphUECDJndqZaUmtPnNNdhD0EdjXp0Yi2 gEvvWnTuwO0mfJFz4OmJaw== 0001096906-00-000060.txt : 20000417 0001096906-00-000060.hdr.sgml : 20000417 ACCESSION NUMBER: 0001096906-00-000060 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIR PACKAGING TECHNOLOGIES INC CENTRAL INDEX KEY: 0001085117 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 954337254 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26105 FILM NUMBER: 600854 BUSINESS ADDRESS: STREET 1: 25620 RYE CANYON ROAD CITY: VALENCIA STATE: CA ZIP: 91355 BUSINESS PHONE: 6612942222 MAIL ADDRESS: STREET 1: 25620 RYE CANYON ROAD CITY: VALENCIA STATE: CA ZIP: 91355 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 ----------------------- For the fiscal year ended December 31, 1999 AIR PACKAGING TECHNOLOGIES, INC. (Exact name of Registrant as specified in its Charter) Delaware 95-4337254 (State of Incorporation) (IRS Employer ID No.) 25620 Rye Canyon Road, Valencia, California 91355 (Address of principal executive offices) (661) 294-2222 (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: none Securities registered pursuant to section 12(g) of the Act: 7,520,415 common Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 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. X yes no --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _____ The aggregate market value of the voting stock held by non-affiliates of the Registration was $ 2,742,270 as of March 31, 2000. ----------- Shares of Common Stock Outstanding as of March 31, 2000: 7,520,415 Part I Item 1. BUSINESS --------- INTRODUCTION ------------ Air Packaging Technologies, Inc., a Delaware corporation ("APTI") is engaged in the manufacturing, distribution, marketing, and continued development of inflatable, protective packaging for use in shipment of higher end fragile products. It holds worldwide patents on a packaging system which utilizes chambered packing material which provides an Air Box cushion around shipments. Its Air Box system competes favorably against materials like bubble wrap, urethane foam, etc., in terms of protection, ease of use and storage, for shipment of higher value items throughout the world. A. GENERAL DEVELOPMENT -------------------------- The Registrant's predecessor was organized as a Canadian corporation under the British Columbia Company Act in 1985, under the name "MDE Exploration, Inc.". MDE Exploration made an initial public offering in 1988 in Canada under the auspices of the Vancouver Stock Exchange, and raised CDN$175,000 (net of commissions) through the issuance of 500,000 shares of Common Stock at CDN$0.40 per share. In 1989, MDE Exploration, Inc. was reincorporated in Delaware, and reorganized and combined with Puff Pac Hold Co. Inc., P&P Industries, Inc., and Puff Pac Ltd., under the name Puff Pac Industries, Inc. In September of 1992 Puff Pac Industries, Inc. changed its name to Air Packaging Technologies, Inc. The Registrant's stock commenced trading on the NASD Bulletin Board in April of 1994. Puff Pac Ltd., a California Limited Partnership, remains in existence due to ownership by a small minority interest. APTI owns 99.13% of the beneficial interest in Puff Pac Ltd APTI's corporate offices are located at 25620 Rye Canyon Road, Valencia, California 91355; its telephone number is (661) 294-2222; its facsimile number is (661) 294-0947. APTI has one wholly owned subsidiary: Puff Pac Industries Canada Inc. ("Canco"), a British Columbia corporation. B. FINANCIAL INFORMATION BY -------------------------------- INDUSTRY SEGMENT AND CLASSES OF PRODUCTS ---------------------------------------- Registrant is in only one industry segment, "protective packaging".
Year -------------------- 1999 1998 1997 ------------ ------------ ------------ Sales of Air Box Protective Packaging to Unaffiliated Customers: . . . . . . $ 959,712 $ 722,268 $ 340,624 Operating Loss . . . . . . . . . . . . $(1,854,918) $(1,819,872) $(1,827,861) Identifiable Assets, Net . . . . . . . $ 2,970,285 $ 1,810,595 $ 1,137,721
C. BUSINESS ----------- 1. PRODUCTS - -- -------- APTI manufactures and markets a line of industrial packaging products under the name "Air Box" . The Air Box provides reusable protective packaging during shipping and storage for a wide range of high value items. It provides vastly superior protection from ESD (electro static discharge) damage, and moisture. It also provides see-through transparency for visual inspection of the product during shipment and storage. The patented design suspends an item within a double-chambered envelope, which when inflated, surrounds the item with a protective cushion of air, protected by a double wall of transparent material, made out of a combination of polyethylene and nylon. Although not an inexpensive form of packaging, the Air Box provides a cost-effective packaging solution for higher value items and is environmentally superior to conventional packaging. When deflated and disposed of, use of the Air Box reduces the amount of waste by up to 90%, compared with traditional packaging. The packaging is also easily storable in deflated form, greatly reducing warehouse space required to be devoted to package material storage. Air Box is reusable, allowing the package to be deflated and reused. The Air Box is designed for companies that have substantial round-trip packaging and shipping requirements. APTI has also developed and markets a Static Discharge Shielding (SDS) Air Box. This product is designed for electronic products requiring static-discharge protection (i.e., Wafers and Integrated Circuits). The SDS Air Box has two layers of anti-static coated film (inner and outer bags) that dissipate static electricity while the package's air chamber provides full static shielding. This provides one hundred times the protection of traditional static shielding bags, and still provides cushion protection, all in one package. The SDS Air Box also meets MIL B81705C Type II and Type III and EIA 541 specifications. The Electronics Industry Association (EIN) puts out the standard which is titled packaging materials standard for Electro-state discharge sensitive items. Motorola and other electronic semiconductor manufacturers are presently using the SDS Air Box for shipment of their wafer and integrated circuits. During the first quarter of 2000 APTI introduced a new line of products which will substantially reduce the amount of material while preserving the products protective qualities. The new product, to be called Suspend-A-Pak will be suitable for the shipment of laptop computers and similar shaped products. APTI has applied for the patent for this new packaging concept, Suspend-A-Pak. The bag is made similar to an inner tube surrounding the item while allowing the 4 corners to protrude through the tube. This in effect lifts and suspends the item giving it excellent protection against drop and vibration damage. APTI adopted the use of AIR BOX for the promotional market shipping everything from invitations to bottles of Champagne. The see through effect of the Air Box lends itself to this type of packaging. The Company will visit trade shows beginning in January to align us with companies presently selling to this market. Air Box products are offered in 6 standard sizes and SDS Air Box products are offered in 8 standard sizes. Air Box quilting is an additional process developed by the Company which allows the Air Box to take up less space when inflated and to support heavier items for shipping. Air Boxes can accommodate products up to 15 pounds in weight. APTI has created the Air Box Shipping Center as a marketing tool. The Center is designed for the miscellaneous shipping needs of small businesses. It is portable, measuring 17"x22"x4", made of corrugated cardboard, and comes with an assortment of one hundred and twenty (120) Air Boxes in eight different sizes and a portable air pump. It offers packaging protection equivalent to a closet full of Styrofoam. Conventional packaging requires as much as nine times more material volume than the Air Box, which consists of 90 percent air when inflated. Since the Air Boxes are stored flat, storage space requirements are greatly reduced. Designed to be reused as often as five times per Air Box, deflatable Air Box materials going into a landfill after use represent 45 times less waste material compared with existing materials. The see-through film of the Air Box permits instant verification of contents and allows a humidity indicator card to be read without opening the package. In some styles bar codes can also be scanned directly through the Air Box without opening it. During inflation, the two chambers, sealed together at the edges, swell against one another, immobilizing the product trapped between. The product's disadvantage is its high unit cost. Further, in some applications the product's moisture barrier does not meet certain Mil specs, although the Company's research and development department is working to improve such protection. The product is also relatively unknown, and there are limits to size, shapes and weights. At the point of unpacking in the recipient's plant, Air Boxes are deflated by pulling up the valve stem on the valve allowing air to escape through the center of the valve, when the Air Box is ready for reuse the valve stem will be pushed back down after inflation. In summary the Company's Air Box product has the following attributes and advantages - - A unique packaging system - - Patented products - - Superior drop and vibration protection - - Transparency - - ESD protection - - Custom shapes - - Custom printing - - Reusable Cost effective Environmentally friendly - - Suspend-A-Pak is a low cost alternative to traditional packaging MARKETING -------- The Company has identified and has focused upon six key industries which management believes can immediately benefit from its products. These are: - - Promotional product or event announcements - - Static Discharge Shielding (SDS) - - Medical - - Dental - - In store display - - Retail packaging - - Electronic finished product repairs In addition the Company is continually seeking additional commercial opportunities for the of its Air Box Products in all markets. PROMOTIONAL AIR BOX The Company is attempting to take advantage of the unique appearance of its Air Box by increasing its efforts to sell the product in the promotional packaging market. By changing the materials, the price of the Air Box can be significantly reduced which allows the Company to compete with traditional forms of packaging. The Company intends to seek strategic alliances with well-established Companies in the promotion and business premium industries. SDS The SDS market is principally the semiconductor market. Manufacturers are concerned with the shipment of silicon wafers used to manufacture integrated circuits, and IC's packaged in a Tape and Reel for shipment and further manufacture. This is a worldwide market. Management believes its products are the only protective packaging with Both static shielding and cushion protection. The Air Box provides superior - static shielding, is cost effective, requires less storage space, allows use of primary shipment containers (Empak) (reusing the manufacturer's carrier provides additional cost savings), and is more effective in reducing damage from drops and vibrations. The product exceeds all ESD standards, all ISTA and ASTM compression and transportation standards, and has passed all commercial airline altitude tests. The product does not particulate - avoiding wafer contamination. The product is environmentally friendly with 90% less waste going into the landfill after use as compared to other packaging materials. The Company's customers report the Air Box is providing cost savings and freight savings, since there is less shipment weight and the corrugated box is smaller when compared to traditional cushion packaging. In a typical application, the two chambers contain air and are sealed together at the edges, with the exception of an open end in which the product is inserted along with a humidity indicator card. An operator applies pressurized air from an inexpensive regulator, supplied by APTI to the bag's nozzle, inflating the bag. The open end is then vacuum-sealed using existing equipment. The resulting product/package construction, consisting of film/air gap/film/product/film/air gap/film, is what gives the package its strong static shielding protection. The air gaps can range anywhere from to 1 inch thick, depending on the contents. The film is coated to provide the required static dissapative properties, the polyethylene and nylon both provide enhancing properties to resist puncture and a long shelf life. After a variety of tests conducted under several different conditions, independent testing laboratory Fowler Associates confirmed that the combination of the material and the air gaps "provide a very good ESD package for essentially all devices under essentially all conditions. In one test, the package withstood a 20kV discharge while containing integrated circuits that are rated at 150 v maximum. Another part of the SDS market is the Photomask market. The Photomask has no efficient nor cost-effective method of shipment, is extremely fragile, is subject to transit damage, and is particularly sensitive to contamination. SDS Air Box can be sealed to eliminate contamination during transit and storage. Prior to the SDS Air Box entering this market, the Photomask manufacturers had no efficient way to ship their fragile Photomasks. They were getting substantial damage during shipping and storage, causing them to use such extremes as packaging them in a five-gallon ammo can with bubble wrap or a full size suitcase lined with polyurethane foam. If the Photomask was extremely fragile, they had to hand carry it to the customer. In all cases, it was substantially more expensive to insure the safety of the Photomask prior to the introduction of the SDS Air Box. APTI has been selling the Photomask Air Box to Photronics for nine months, and recently began selling the SDS Air Box for Photomasks to two other companies. These three companies control 60% of the Photomask market. Other markets for the SDS Air Box include sensitive parts for wafer making machines, high-end disc drives, quartz glassware used in making semiconductor wafers, and lightweight surface mount boards, among others. MEDICAL The Company recently successfully designed and sold an Air Box to ship living human skin in a Petrie dish, combining a temperature controlled environment with Air Box cushion packaging from the Organogenises laboratory to the hospital. This skin is called Apligraf and is made by Organogenises of New England. If the Apligraf is subjected to substantial vibration or shock during the trip to the hospital, it will form a small bubble under the skin and die very quickly. Many forms of packaging were tested and the Air Box design is the only FDA approved method of shipping the Apligraf. Dental Products ---------------- The Dental market is concerned with the shipment of dental impressions from the dentist's office to the laboratory for the fabrication of dental plates and apparati and the return trip to the Dentist. Deliveries inside of about 75 miles are now hand delivered, and do not need the Air Box. Dentists who are outside the 75-mile radius of the laboratory must ship both ways by air courier. APTI has replaced the corrugated box and foam interior with a simple reusable Air Box that fits into an overnight courier bag. The laboratory is saving $1.00 per shipment on freight (going both ways) and plans to use the Air Box four times, giving them additional savings. They also have their packages delivered up to two hours earlier than if packaged in boxes and foam. The environmental effect is tremendous and important to the industry; the Air Box is 95% less dunnage going into the land fill, and if used four times is 98% less dunnage. IN STORE DISPLAY The Company is also utilizing the unique appearance of the Air Box to increase sales of its product to the in store display market in department stores and service establishments. A leading manufacturer of beauty parlor supplies will introduce a new line of products to its beauty salon customers using a custom-designed Air Box set in a metallic base. RETAIL PACKAGING The Company is presently working with both packaging design firms and manufacturers to develop a line of Air Boxes, which can be used in the retail market. The Air Box will serve two functions: to protect the enclosed product and to attract the attention of potential customers. SUSPEND-A-PAK Suspend-A-Pak, a totally new line of Air Boxes, was introduced in the first quarter of 2000. It is designed to be used as suspension packaging using Air Box technology but utilizing substantially less material. This will allow the Company to compete in high volume, low-end applications and in the transportation of electronic items such as laptop computers. 2. Methods of Sales - ---------------------- The Company has a Vice President of Sales handling national accounts as well as an inside sales person located in Valencia CA. End user sales are mainly handled through a variety of packaging distributors throughout the United States. It is the Company's intention to develop this area of the sales extensively in the coming months. The Company has one outside sales representative located in the San Jose area to sell primarily to the Semiconductor Market. The Company has three International Distributors selling their products; in Europe, Air Packaging Europe, in Japan with Captain Industries and in the Far East with Dou Yee of Singapore. The Company plans to expand its International sales efforts by working with non-exclusive Distributors. The major share of the Company's present sales come from the U.S. market with National accounts and 15% of the sales coming from the International Distributors. 3. Manufacturing - --------------------- APTI purchases raw materials in the form of extruded or laminated webs of thin flexible plastic films which have been printed or coated by outside suppliers. These films are produced for the Company to the Company's film design specifications and standards. These films are then formed into the Company's various products on the Company's custom designed and computer controlled modular converting machines, which use heat sealing technology to join the multiple layers of plastic film together. The specific sequence of operations and control parameters is proprietary to the Company, and is covered by process patents. The Company currently has two product fabrication converting machines which are capable of producing a total of five (5) million units per year. The Company fabricates its patented air inflation valve using extruded printed thin plastic films which are heat sealed together to form the valve on a custom designed fabrication machine. In the first half of 1998 APTI designed and developed an industrially acceptable push-pull hard valve. Field tests were completed with some of the Company's largest customers, and they enthusiastically endorsed the change in valves. The new push-pull valve eliminates the threat of air escaping through the valve. APTI is using the push-pull valve in all Semiconductor applications and most custom design applications. The Company utilizes continuous process quality monitoring raw material, production lot testing and other elements of Total Quality Management to produce a high quality of product, which continues to hold air in all usual shipping environments which may be encountered by the Company's customers in shipping their products. The Company packages its products in boxes for shipment to its many customers and distributors throughout the world. Some of the products are "standard" items and are produced to forecast and warehoused for quick response subsequent shipment, while other products are produced only upon specific customer order for immediate shipment. On large special orders the Company can provide products with custom printing to the customer's requirements; all other orders are produced and shipped with the Company's standard logo and patent information printed thereon. 4. Sources and Availability of Raw Material - ---------------------------------------------------- The Company has at least two suppliers fully qualified to produce each of the raw material films required for its products and several companies qualified to provide the printing required. Basic raw materials required by us from our suppliers, such as Jefferson Smurfitt and Huntsman, are produced and readily available to us. All of the film raw materials used are produced in the millions of tons currently in other industries. The Company has adopted industry standard processes to fabricate its raw materials. As a result, supplies of raw materials are available to the Company from many sources, though the lead-time can be several weeks until receipt of raw materials into the Company plant. 5. Patents, Trademarks & Licenses - ---------------------------------------- The Company has a combination of products, process and application patents, backed by proprietary and trade secret manufacturing technology. Management believes the patents and trademarks provide a formidable barrier to competition. They include 13 U.S. patents and 1 pending with 2 trademarks and 1 pending, with 13 foreign patents with 2 pending and 1 trademark pending - and further filings continue to protect and strengthen the technology position. The Company is required to pay minor royalties related to certain patents and trademarks, and in prior years had paid royalties on both patents and the trademark "Puff Pac", which trademark is no longer used. Total expense related to these agreements was $4,324 in 1999, $3,991 in 1998 and $1,726 in 1997. The continuing royalty payment on patents continues for the life of the original patents, and is fixed at 2% of cost of goods sold on an annual basis. 6. Seasonal Factors - ------------------------ The seasonal factors in the Company's Air Box product are limited, and revolve only around industry slow downs. 7. Inventory and Other Working Capital Items - ----------------------------------------------------- The Company carries a continuing inventory of its Air Box products, based on sales forecasts. The book value of this inventory has been significantly reduced due to the slower than expected sales rate and potential obsolescence or rework necessitated by the Company's continuing product development and improvement. The Company had inventory reserves of $33,000 and $63,000 in 1999 and 1998, respectively. 8. Principal Customers - --------------------------- Three larger customers, Motorola (XPEDX), The Air Packaging Company (Europe) Ltd., and C-PAK PTE, LTD (Singapore) accounted for 16%, 17% and 24% of its sales during its fiscal year ended December 31, 1999. These companies are independently owned, and are not affiliates of APTI. 9. Firm Backlog - --------------------- As of December 31, 1999, APTI had $97,000 in backlog orders, which are scheduled to be completed within 90 days. The backlog orders as of December 31, 1998 totaled $35,970. Most orders are non-custom, and are filled and shipped within 14 working days. Custom orders require 6 to 8 weeks to manufacture and ship. 10. Government Contracts - ------------------------------ We recently completed a series of simulated transportation tests for the Military-Navy for several items with excellent results. The U.S. Military advised us they want to purchase the Air Box to ship sensitive items for the U.S. Navy between the ships and repair depots. We are pursuing this at the present time, and although the potential opportunity is substantial, there is no guarantee APTI will have a contract with the U.S. Military in the near future. 11. Competition - -------------------- APTI has two distinct types of competitors, one in the standard Air Box market and one in the SDS Air Box market. The Standard Air Box competes against traditional cushion packaging such as die cut styrofoam, loose fill, bubble wrap, die cut corrugated, convoluted foam and other forms of packaging. The Company's products are competitively priced with most of these competitors. The Company's Air Box product performs better than all other cushion packaging in transportation tests. The second market is the static shielding market. Here, APTI competes against anti-static foam cushion packaging. Most of the Company's competition is multi-step packaging, compared to the one step method offered by SDS Air Box . The Company's SDS Air Box is competitively priced, and management expects to increase its share of this market. 12. Research, Development & Laboratory - --------------------------------------------- The Company maintains an ongoing research and development effort, striving to develop more effective and efficient packaging products based around the Air Box technology and design. The Company maintains three full time researchers, assisted on a part time basis by other employees, and has established an ISTA Certified testing laboratory within its manufacturing premises in order to aid its research and development efforts. The Company also partners with its customers or prospective partners in an effort to develop new and more creative solutions to the customer's unique packaging needs. For the years ended December 1999, 1998, and 1997, research and development expenses were $5,419, $7,371 and $3,322, respectively. 13. Environmental Factors - ------------------------------ The Company's manufacturing processes are environmentally "clean", as they comprise only the use of electrically generated heat at modest temperatures (300 to 400F) to heat seal the layers of plastic films together. There are no by-products created by the Company's manufacturing processes other than scrap plastic films generated when the machines are set up or occasionally require adjustment. There is no toxic or dangerous fumes emitted by the heat seal processes as the materials are kept well below their boiling points. 14. Employees - ----------------- The Company has 19 full-time employees. Eight of these are in management, sales, product development, or administration positions and eleven are in production/warehousing/shipping operations. The production and packaging operations are supplemented by the addition of temporary personnel when scheduling requires. The operation is a non-union shop with staffing drawn from the Valencia and Los Angeles metroplex, California areas. The production workers when hired are typically non-skilled or semi-skilled, and are trained, by the Company, in operation of its converting fabrication equipment. The Company believes that its relationships with its employees are good. 15. Financial Information Relating to Foreign and Domestic Sales - --------------------------------------------------------------------------- Sales to Unaffiliated Customers:
Year -------------------------- 1999 1998 1997 -------- -------- -------- United States $563,971 $366,177 $295,116 Europe. . . . $165,691 $223,619 $ 45,508 Asia. . . . . $230,050 $132,472 -
Operating Loss:
Year -------------------------------- 1999 1998 1997 ------------- ---------- ------------- United States $ (1,094,402) $(928,135) $ (1,590,239) Europe. . . . $ ( 315,336) $(564,160) $( 237,622) Asia. . . . . $( 445,180) $(327,577) -
All Identifiable Assets of the Company are located within the U.S. Item 2. PROPERTIES ---------- The Issuer has corporate offices, manufacturing, research and distribution facilities housed in its 17,280 square foot headquarters in Valencia, California. All products are manufactured at this location. Management believes its facility is adequate for the Company's current level of operation. The facility is leased on a long-term lease which expires May 31, 2000, at a current rental of $10,445.00 per month, plus common area expenses. During January 2000, the Company extended the term of the lease until May 31, 2005 at a monthly rental of $11,000.00 plus common area expenses, beginning June 1, 2000. Item 3. LEGAL PROCEEDINGS ------------------- A former employee of the Company is seeking a severance payment of $101,500 alleging he is entitled to such a payment under terms of an employment agreement, which was voluntarily terminated in November 1998. The parties have agreed to arbitration scheduled to take place during 2000. The Company has established a liability for the entire amount. Aside from the above, there is no litigation outstanding, and management is not aware of any potential claims which might be asserted. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------------- No matters were submitted in the fourth quarter of fiscal 1999. Part II - -------- Item 5. MARKET PRICE AND DIVIDENDS ----------------------------- ON REGISTRANT'S COMMON STOCK ------------------------------- EQUITY AND RELATED STOCKHOLDER MATTERS ------------------------------------------ The Company's Common Stock traded on the Vancouver Stock Exchange in Vancouver, British Columbia, under the symbol "APT" until July 23, 1998. The symbol was changed on September 1, 1992 commensurate with a name change. The closing sales price as of July 22, 1998, the last day traded on the Vancouver Stock Exchange, was $0.14US The Company's Common Stock trades on the NASD Bulletin Board, under the symbol "AIRP". The closing sales price on December 31, 1999 was $0.08 at a pre-reverse stock split price. Set forth below is the high and low bid information in U.S. dollars for the Company's Common Stock for each full quarterly period within the two most recent fiscal years at pre-reverse stock split prices. The information set forth below was obtained from the OTC Bulletin Board and the Vancouver Stock Exchange, the latter which was translated to U.S. dollars using the annual average conversion rate.
High Low Period Bid Bid - ---------------- ----- ----- 4th Quarter 1999 $0.12 $0.10 3rd Quarter 1999 0.17 0.17 2nd Quarter 1999 0.17 0.17 1st Quarter 1999 0.26 0.17 4th Quarter 1998 0.29 0.07 3rd Quarter 1998 0.22 0.10 2nd Quarter 1998 0.24 0.12 1st Quarter 1998 0.26 0.11
At March 31, 2000 the Company had approximately 557 shareholders of record. The Company has not paid a dividend since its incorporation, and management does not anticipate the Company will pay dividends in the near future. RECENT SALES OF UNREGISTERED SECURITIES ---------------------------------------
Class of Nature Amount Amount Persons to of of Exemption Dates Title Sold Whom Sold Consideration Consideration Claimed - --------- ------------------- --------------- ------------------ ------------- --------------- ------------- 8/16/99 - 10/14/99 Debentures(4) 1,500 6 Offshore Cash $ 1,500,000 Sec 4 (2), Reg D Accredited. Sec 4 (6) Investors 6/11/99 Common 335,000 1 Offshore Cash $ 502,500 Reg S Stock (3) Accredited Investor 5/6/99 Common 150,000 1 Offshore Cash $ 225,000 Reg S Stock (3) Accredited Investor 4/26/99 Common 160,000 1 Offshore Cash $ 240,000 Reg S Stock(3) Accredited Investor 1/28/99 Common 246,667 1 Offshore Cash $ 370,000 Rule 504 Stock(3) Accredited Investor 1/28/99 Common 3,333 1 Offshore Cash $ 5,000 Reg S Stock Accredited Investor 1/15/99 Common Stock 150,000 1 Offshore Cash $ 150,000 Reg S & Warrants Accredited (On a 1 for 1 Investors basis) 1/15/99 Common Stock 50,000 1 Accredited Cash $ 68,000 4(2) & Warrants U.S. Investor (On a 1 for 1 basis) 12/21/ Common 420,000 1 Offshore Cash $ 630,000 Rule 504 98 Stock (3) Accredited Investor 9/98 - 12/98 Common Stock 1,043,157 Ten Conversion of $ 1,066,572 Reg S Offshore Debt to Equity Accredited Investors 9/98 Common Stock 20,839 1 Accredited Conversion of $ 25,000 4(2) U.S. Investor Debt to Equity 9/11/98 Common Stock(3) 100,000 1 Offshore Cash $ 125,475 Reg S Accredited Investor 1/98 - Common Stock 811,250 4 Offshore Cash $ 985,657 Reg S 12/98 and Warrants Accredited (On a 1 for 1 Investors basis) 11/4/97 Common Stock & 36,921 1 U.S. Cash $ 99,723 4(2) Warrants(2) Accredited (On a 1 for 1 Investor basis) 5/97 - Common 225,000 3 Offshore Cash $ 365,117 Reg S 11/97 Stock(3) Accredited Investors 1/97 - Common Stock 180,958 Three Conversion of $ 288,907 Reg S 7/97 Offshore Debt to Equity Accredited Investors 1/97 - Options to 5,750 Four Bonus $ 9,539 4(2) 12/97 Acquire Common Sophisticated Consideration Stock Employees, all to Employees Sophisticated 1/97 - Common Stock 1,000,583 4 Offshore Cash $ 834,645 Reg S 11/97 and Warrants(2) Accredited (On a 1 for 1 Investors basis 5/96 Common 747,778 8 Offshore Cash $ 1,235,638 Reg S 12/96 Shares (2) Accredited and Warrants Investors (On a 1 for 1 basis) 7/96 Common Stock 29,375 2 Offshore Conversion of $ 108,555 Reg S Accredited Debt to Equity Investors 5/97 Convertible(1) 230,000 1 Offshore Cash $ 1,250,000 Reg S Debenture Debenture Accredited Investor (1) 1,250,000 of the debt was converted on May 29, 1997, to 230,000 shares of Common Stock plus 230,000 Warrants exercisable at $1.50 per share, and expiring on May 29, 1999. (2) Each Warrant provides the right to acquire one share of Common Stock at $1.50, and has a two-year term. (3) Issued in connection with the exercise of Warrants previously placed with offshore investors. (4) The Company issued $1,500,000 in Senior Convertible Notes during 1999 which are convertible into shares of common stock of the Company at any time before September 30, 2003 at prices ranging from $1.50 to $2.50 per share.
DESCRIPTION OF REGISTRANT'S SECURITIES -------------------------------------- The Company has only one type of equity security, Common Stock with par value equal to U.S. $0.01. There are 50,000,000 authorized shares of Common Stock of which 7,966,408 shares were issued/outstanding as of December 31, 1999. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the holders of Capital Stock. Holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any preferred stock that might be issued in the future. Holders of Common Stock have no preemptive or subscription rights, and there are no redemption or conversion rights with respect to such shares. All outstanding shares of Common Stock are fully paid and nonassessable. The Company issued $1,500,000 in Senior Convertible Notes during 1999. The Senior Convertible Notes are unsecured and due on September 30, 2003. The holder may convert the principal amount of such Note at any time before September 30, 2003, into shares of common stock at a price ranging from $1.50 per share to $2.50 per share, at the holder's option. The annual interest payment of 7% of the principal amount of each debenture may be received in common stock of the Company at a 20% discount, at the holder's option. The Board of Directors proposed to the Company's shareholders and they adopted at its Annual Meeting held on June 4, 1999, resolutions giving the Board of Directors the authority and discretion to reverse split the Company's Common Stock on a 1 for 10 basis, if and at such time over the succeeding 12 months, as the Board of Directors determines such a reverse split would be in the interest of the Company. In such event, the authorized capital stock would change to 50,000,000 shares of common stock authorized and each 10 shares of the outstanding common stock would automatically convert into a single share of new common stock. In January 2000, the Board of Directors declared a one-to-ten reverse stock split and all stock related data for all periods presented has been adjusted. Item 6. FINANCIAL INFORMATION ------------------------ The following table summarizes certain selected financial data for the periods presented for the Company. The data for the year ended December 31 1999, 1998 and 1997 should be read in conjunction with the more detailed audited statements for such years presented elsewhere herein.
1999 1998 1997 1996 1995 ---------------- ------------ ------------ ------------ ------------ Revenues. . . . . . . . . . $ 959,712 $ 722,268 $ 340,624 $ 640,074 $ 453,107 Loss: Continuing Operations (1,853,012) (1,723,647) (1,824,199) (1,172,840) (1,774,801) Net Loss: Loss per Common Share: Loss before extraordinary item. . . . . . . . . . (.25) (.43) (.59) (.61) (1.00) Extraordinary item. . . . - .05 - - - Net loss. . . . . . . . . (.25) (.38) (.59) (.61) (1.00) Dividends Per Share . . . . n/a n/a n/a n/a n/a Weighted Average Shares . . 7,249,585 4,506,608 3,069,362 1,931,376 1,801,986 Outstanding BALANCE SHEET DATA - --------------------------- Total Assets. . . . . . . . $ 2,970,285 $ 1,810,595 $ 1,137,721 $ 643,062 $ 955,722 Long-term Obligations 1,500,000 --- 39,500 39,500 1,352,000 Total Liabilities . . . . . 1,910,826 275,882 1,004,900 2,211,871 2,479,374
Item 7. Management's Discussion and Analysis of -------------------------------------------- Financial Condition and Results of Operation ------------------------------------------------- 1. Results of Operations - --------------------------- General Marketing Efforts - --------------------------- In 1999, the Company achieved sales of $959,712, which was a 33% increase over its 1998 total sales of $722,268. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 - -------------------------------------------------------------------------------- Sales for the year ended December 31, 1999 were $959,712 compared to $722,268 for the fiscal year ended December 31, 1998. This represents an increase of $237,444 or 33% during fiscal 1999. The net increase is due to the increase in sales of the Company's Dental Air Box and the overall increase in sales of the SDS Air Box as a result of repeat orders and further expansion of its customer base. Cost of sales for the year ended December 31, 1999 was $1,012,083 or 105% of sales compared to $566,837 or 78% of sales for the year ended December 31, 1998. The Company has not yet achieved sufficient sales to cover all of its fixed operating costs, with the result that until sales increase substantially, the Company will continue to operated at a deficit. The increase also is due to the related increase in sales of the SDS Air Box product line, which is sold, with a higher standard cost of sales than the Company's Air Box product line. The Company also had an increase in labor and overhead in the manufacturing process which resulted in additional period costs during fiscal 1999 from the comparable period of the preceding year. Selling, general and administrative expenses decreased by $170,804 or 9% during fiscal 1999 as compared to fiscal 1998. The decrease is due to decreases in salaries, consulting fees, travel expenses, legal expenses and a reserve for a potential liability partially offset by increases in sales and marketing, general office expenses, casual labor and accounting fees. The net decrease in salaries of $83,856 is partially due to the decrease in the salary level of the president of the Company as a result of the change in presidents which occurred in June 1999. The decrease is also attributable to a salary adjustment recorded during fiscal 1998 of $81,000 for a former president for which a similar type of adjustment was not recorded during fiscal 1999. The decease in consulting fees of $118,086 during fiscal 1999 is due to the decrease in stock based consulting expense recorded which is partially offset by an increase in consulting fees paid to a former president. The decrease in travel expenses of $35,680 is primarily due to the change in presidents in June 1999. The decrease in legal expenses of $39,956 is due to a reduction in the use of services by two of the Company's attorneys partially offset by an increase in legal fees regarding a claim by a former employee. The decrease in selling, general and administrative expenses includes a reserve recorded during fiscal 1998 for a claim by a former employee of $101,500 for alleged breach of an employment contract. The net decreases in selling, general and administrative expenses during fiscal 1999 are partially offset by increases in four categories. The net increase in sales and marketing expenses of $41,572 is primarily due to increases in trade show fees and related show expenses and travel and is partially offset by a decrease in public relations as the Company did not utilize a public relations company during 1999. The increase in general office expenses is due to a general increase in business. The increase in casual labor of $39,162 is primarily due to the Company's increase in utilizing employees from temporary agencies for staffing needs for the engineering and quality control departments during 1999. The increase in accounting fees of $41,337 is primarily due to the initial Form 10 filing with the Securities and Exchange Commission during fiscal 1999 and the subsequent quarterly filings. Research and development expenses decreased by $1,952 or 26% during fiscal 1999. Interest and other income were $32,350 for fiscal 1999 as compared to $5,676 for fiscal 1998. The increase of 470% in fiscal 1999 is due primarily to the increase in cash placed in an interest earning account. Interest expensed decreased by $123,026 for fiscal 1999 as compared to fiscal 1998 as the Company recorded interest expense of $126,073 due to the revaluation of its warrants in November 1998. This transaction was not repeated during fiscal 1999. The Company did not have an Extraordinary Item during fiscal 1999. The Company recorded an Extraordinary Item during fiscal 1998 that was due to the restructuring of certain outstanding payables and accrued expenses. The Company paid approximately $190,000 in full settlement of accounts payable and other accrued expenses during the fourth quarter of 1998. This resulted in an extraordinary gain of approximately $244,000 during fiscal 1998. This was not repeated during fiscal 1999. The Company is currently in a loss carryforward position. The net operating loss carryforwards balance as of December 31, 1999 was approximately $18,200,000 compared to $16,400,000 as of December 31, 1998. The net operating loss carryforward is available to offset future taxable income through 2019. The Company's net operating loss carryforwards may be limited due to ownership changes as defined under Section 382 of the Internal Revenue Code of 1986. As of December 31, 1999, the Company had a deferred tax asset of approximately $7,400,000 which primarily relates to the net operating losses. A 100% valuation allowance has been established as management cannot determine whether it is more likely than not that the deferred tax assets will be realized. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 - -------------------------------------------------------------------------------- Sales for the year ended December 31, 1998 were $722,268 as compared to $340,624 for the fiscal year ended December 31, 1997. This represents an increase of $381,644 or 112% during fiscal 1998. The Company began pilot programs with prospective customers of the SDS Air Box late in the fourth quarter of 1996. The positive results of these pilot programs resulted in the increase in sales that occurred during 1998. The inventory reserve at December 31, 1998 was approximately $63,000, or 13% of total inventory, compared to a reserve of approximately $154,000 or 50% at December 31, 1997. The net decrease in the reserve from December 31, 1997 to December 31, 1998 of $91,000 is due to the write-off of specific inventory items reserved in prior years. The Company evaluated all inventory items for slow movement and repair, and fully reserved for all items that did not move for at least three months or that had been discontinued. Cost of sales for the year ended December 31, 1998 was $566,837, or 78% of sales, compared to $592,544 for the year ended December 31, 997, or 174% of sales. The decrease in cost of sales as a percentage of sales is partly due to an additional inventory reserve of approximately $97,000 that was recorded during 1997. A similar provision was not recorded in 1998, as by the end o f 1998, the Company had written off those inventory items that had been fully reserved in prior years. Selling, general and administrative expenses increased by $395,313 or 25% during fiscal 1998 as compared to fiscal 1997. The increase in selling, general and administrative expense is attributable primarily to increases in professional fees, consulting fees, travel expenses, public company costs and a reserve for a claim by a former employee. The increase in professional fees is primarily due to an increase in legal expenses of $69,228 during fiscal 1998. The Company de-listed from the Vancouver Stock Exchange during mid-1998. As a result, the Company had several discussions with both Canadian and U.S. attorneys to verify that the related issues were properly handled. The Company also retained an additional attorney during fiscal 1998 specializing in compliance with labor laws. The increase in consulting fees during fiscal 1998 of $48,811 is primarily due to consulting work performed to assist the Company in the restructuring of the Company's debt through the issuance of common shares of stock in settlement of debt. Travel expenses increased during fiscal 1998 by $29,613 as a result of increased travel by an officer of the Company who had previously resided in Canada. Public company costs increased during fiscal 1998 by $68,635 as the Company expenses fees associated with raising capital through the exercise of warrants and fees associated with debt for equity transactions. The increase in selling, general and administrative expense includes a reserve recorded during fiscal 1998 for a claim by a former employee of $101,500 for alleged breach of an employment contract. Based on the current status of this claim, the Company believes that it has fully reserved for the highest potential liability related to this claim. Research and development expenses increased by $4,049 or 122% during fiscal 1998. Interest and other income were $5,676 for fiscal 1998 as compared to $21,596 for fiscal 1997. The decrease of 74% in fiscal 1998 is due to the gain on the disposition of an asset recorded during fiscal 1997. Interest expense increased by $135,536 for fiscal 1998 as compared to fiscal 1997 as the Company recorded interest expense of $126,073 due to the revaluation of its warrants in November 1998. The Company recorded an Extraordinary Item during fiscal 1998 that was due to the restructuring of certain outstanding payables and accrued expenses. The Company paid approximately $190,000 in full settlement of accounts payable and other accrued expenses during the fourth quarter of 1998. This resulted in an extraordinary gain of approximately $244,000. Depreciation and amortization expense increased by $68,664 or 46% during fiscal 1998 as compared to fiscal 1997. The increase in depreciation expense of $63,807 is attributable to the net increase in property and equipment during fiscal 1998 of $818,416 compared to the net increase in property and equipment during fiscal 1997 of $108,224. The increase in additional property and equipment during 1998 is primarily due to the cost of the retrofit of one of the manufacturing machines that approximated $726,500. Depreciation was calculated beginning in June 1998 for approximately 91% of the additions; the balance which was added during the last six months of fiscal 1998. The increase in amortization of $4,857 is due to the increase in additional patent costs from fiscal 1997 to fiscal 1998. The Company is currently in a loss carryforward position. The net operating loss carryforwards balance as of December 31, 1998 was approximately $16,400,000 compared to $15,000,000 as of December 31, 1997. The net operating loss carryforward is available to offset future taxable income through 2018. The Company's net operating loss carryforwards may be limited due to ownership changes as defined under Section 382 of the Internal Revenue Code of 1986. At December 31, 1998, the Company had a deferred tax asset of approximately $6,800,000, which primarily relates to the net operating losses. A 100% valuation allowance has been established as management cannot determine whether it is more likely than not that the deferred tax assets will be realized. 2. Liquidity and Capital Resources - -------------------------------------- The Company's primary need for capital has been to purchase raw materials, upgrade machinery and continue to develop and enhance patents and trademarks. As of December 31, 1999, the Company's working capital was $1,416,212 compared to $430,546 as of December 31, 1998. The increase is primarily do to the cash infusion of $1,328,598 which resulted from the exercise of 895,000 warrants during fiscal 1999 and the cash infusion of $1,500,000 from the Convertible Debenture during the last half of fiscal 1999. The net receivables at December 31, 1999 were $ 57,603 compared to $96,852 at December 31, 1998. Net inventory at December 31, 1999 was $577,389 compared to $408,643 at December 31, 1998. The net increase of $168,746 is due to the increase in raw materials purchased for upcoming orders and anticipation of any Year 2000 issues and an increase in finished goods manufactured for upcoming orders. Advances and prepaids at December 31, 1999 and December 31, 1998 were $41,895 and $75,134, respectively. The decrease is due to a prepayment made in 1998 for materials of $57,892 , which was received in 1999. The prepayment is partially offset by normal recurring advance and prepaid transactions for a net decrease of $31,632. The Company recognized a negative gross profit of 5% during 1999 compared to gross profit of 22% during 1998. The decrease during fiscal 1999 is due to the increase in labor and overhead in the manufacturing process which resulted in additional period costs, and therefore decreased gross margin, during the year ended December 31, 1999 from the comparable period of the preceding year. The decrease during 1999 is also attributable to the increased in sales of the SDS Air Box product line which is sold with a lower gross margin than the Company's Air Box product line. The Company has estimated that sales of $3,500,000 would be required to cover operating costs and to achieve an overall gross margin of 40%. The Company will continue to operate a low margins until sales increases substantially. In addition as sales increase, additional working capital is required to fund inventory and work in process. As a result of these factors the Company has an ongoing and urgent need for an infusion of additional working capital. This need was met in fiscal 1998 by selling additional shares of the Company's Common Stock, primarily offshore to overseas investors and has been met in fiscal 1999 by the exercise of warrants to purchase additional shares of the Company's Common Stock and the placement in the third and fourth quarters of fiscal 1999 of $1,500,000 in Convertible Debentures. The Company may continue to require an infusion of additional working capital in order to develop its business. The source, timing and costs of such infusion is uncertain, and there is no certainty that the Company will be successful in raising additional working capital, either through the sale of debt or equity securities, or through commercial banking lines of credit. The Company currently has no banking lines of credit. The Company had cash outflows of $1,465,588 from operating activities for the 1999 fiscal year compared to cash outflows of $1,635,054 for the 1998 fiscal year. The change in net outflows of $169,466 from operating activities between 1999 and 1998 primarily resulted from the following items. There was a decrease in trade receivables of $84,035, a decrease in inventory of $113,565, a decrease in advances and prepaids of $103,711 and a decrease in other liabilities of $39,500. The total decreases were partially offset by the increase in accounts payable and accrued expenses of $26,221 combined with the increase in the net loss from operations after adjustments for non-cash items of $141,441 during fiscal 1999. Net cash used in investing activities was $189,018 during the fiscal year compared to $447,429 during the 1998 fiscal year. The decrease is due to a reduction in property and equipment expenditures during 1999. Cash flows from financing activities were $2,678,958 during the 1999 fiscal year compared to $2,148,820 during fiscal 1998. The change is primarily due to increased proceeds from the exercise of warrants and notes payable of $1,564,331, which was partially offset by a decrease in proceeds from private placements of $924,593. The Company has suffered recurring losses from operations and has an accumulated deficit of ($19,809,992) at December 31, 1999, which raises substantial doubt about its ability to continue as a going concern. The auditor's report includes an explanatory paragraph on the uncertainty of the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's continued existence is dependent upon its ability to raise substantial capital, to increase sales, to significantly improve operations, and ultimately become profitable. The Company believes that future investments and certain sales-related efforts will provide sufficient cash flow for it to continue as a going concern in its present form. However, there can be no assurance that the Company will achieve such results. On March 24, 2000, the Board of Directors of the Company approved a temporary reduction in the conversion price on the 7% Senior Convertible Debentures into common stock. The conversion price was reduced from $1.50 to the average bid price of the Company's common stock for the twenty-five trading days immediately prior the receipt of a notice of conversions, with minimum conversion price of $0.50. The notice of conversion for the temporary reduction must be received by April 30, 2000 and must include all accrued interest through May 31, 2000. As a result, the Company will record an expense related to reduction in conversion price. On March 24, 2000, the Board of Directors also approved a temporary reduction in the exercise price of all warrants and options outstanding. The exercise price was reduced from $1.50 to the average bid price of the Company's common stock for the twenty-five trading days immediately prior to the receipt of a notice of conversion, with a minimum conversion price of $0.50. The notice of exercises must be received by April 30, 2000. As a result of this temporary reduction, the Company will record compensation expense for the difference between original exercise price and reduced exercise price multiplied by the number of outstanding warrants and options. Subsequent to December 31, 1999, the Company cancelled 100,000 stock options outstanding to officer and issued an additional 335,000 stock options, which expire December 31, 2004 and are subject to certain vesting terms. Any applicable compensation expense will be recorded in 2000. On March 27, 2000, the Company entered into a one-year investment banking agreement with Givigest Fiduciaria SA "Givigest" to raise equity capital. On March 27,2000, the Company and Givigest agreed to raise up to $500,000 on or before April 30, 2000. There are no assurances that the Company will be able to raise any proceeds under this agreement. 3. Seasonality and Inflation - ------------------------------- The Company's sales do not appear to be subject to any seasonal fluctuations. The Company does not believe that inflation has had a material impact on its operations. 4. Year 2000 - -------------- Many existing computer systems and applications use only two digits to identify a year in the date field without considering the impact of the change in the century. As a result, such systems and applications could fail or create erroneous results unless corrected so that they can process data related to the Year 2000. The Company relies on its systems and applications in operating and monitoring all major aspects of its business, including financial systems, such as general ledger, accounts receivable and accounts payable. The Company also relies, directly and indirectly on external systems of business enterprises such as its suppliers, creditors and financial organizations for accurate exchange of data. Following the Year 2000 transition, the Company has not experienced any know disruption to its business as of Year 2000. The cost of the Company's Year 2000 programs was approximately $25,000, which was not material to the Company's financial position or results of operations. Although the Company's business systems were Year 2000 compliant by December 31, 1999, the Company makes no assurances regarding Year 2000 compliance of third party systems. The Company has not incurred any problems with third parties related to Year 2000 but can not guarantee that it will not in the future. Item 7A. MARKET RISK - INTEREST RATE RISK ------------------------------------- The Company's exposure to market risks for changes in interest rates relates primarily to the Company's long term debt obligations. The Company has no cash flow exposure on its long-term debt obligations related to changes in market interest rates. The Company primarily enters into long term debt obligations for general corporate purposes, including the funding of capital expenditures and larger acquisitions. The Company has not entered into any material derivative financial instruments to hedge interest rate risk on these general corporate borrowings. Forward Looking Statement - --------------------------- The above paragraphs and other parts of this Form 10-K Annual Report include "Forward Looking Statements". All statements other than statements of historical fact included herein, including any statements with respect to sales forecast, future product acceptance or other future matters, are Forward Looking Statements. Although the Company believes that there is a reasonable basis for the projections reflected in such Forward Looking Statements, it can give no assurance that such expectations will prove to be correct. Certain of the important factors that could cause actual results to differ materially and negatively from the Company's expectations, among others, include a slow down in the trend in sales and orders during the remainder of the year, an inability to obtain sufficient working capital to meet order demand, and/or a worldwide economic slowdown. Item 8. FINANCIAL STATEMENTS --------------------- AND SUPPLEMENTARY DATA ------------------------ See Index at (Item 14), Financial Statements and Exhibits Item 9. CHANGES IN AND DISAGREEMENTS ------------------------------- WITH ACCOUNTANTS ON --------------------- ACCOUNTING AND FINANCIAL DISCLOSURE -------------------------------------- Not applicable. Part III Item 10. DIRECTORS AND EXECUTIVE OFFICERS ----------------------------------- The names, ages and positions of the directors and executive officers of the Company as of December 31, 1999, are as follows:
Name Age Position Since - ----------------- --- -------------------------- ----- Donald Ochacher . 62 Chairman, CEO & a Director 6/99 Janet Maxey . . . 36 Chief Financial Officer 7/97 Garry Newman. . . 49 Vice President 6/97 Elwood C. Trotter 57 Vice President 4/89 Wayne Case. . . . 59 Director 11/98 Carl Stadelhofer. 46 Director 11/98
The Directors serve until the next annual meeting of shareholders, or until their successors are elected. Donald Ochacher - President and Chief Executive Officer and Chairman of the Board of Directors of the Company since June 1999. Mr. Ochacher has been a member of the New York bar since 1960 and was engaged in the private practice of law specializing in corporate and tax law until 1973 when he became General Counsel and Chief Financial and Administrative Officer of the Newark Group Ltd., a large privately owned paper company. Since 1985, he has been both an attorney and business consultant and at various times, has served as President of privately owned companies engaged in the paper, hazardous waste, real estate and long distance telephone resale industries. From May 1994 to the present, Mr. Ochacher is president of The 800 Network, Inc. From August 1997 to August 1998, he was chief Financial Officer of Electric Entertainment Corp. Mr. Ochacher graduated from the New York University School of Law in 1960, receiving a LL.B degree and received his B.A degree from Cornell University in 1957. Janet Maxey - Ms. Maxey has been an employee of the Company since May 1991, and became Chief Financial Officer in July 1997. Ms. Maxey attended California State University, Northridge, and earned a Bachelor of Science Degree in Business Administration. Garry Newman - Vice President of Manufacturing and Engineering since June 1997. Prior to that, Mr. Newman was Engineering & Quality Assurance Manager for Richmond Technology from October 1994 until he joined the Company. Mr. Newman attended University of California, Davis, and earned a Bachelor of Science Degree in Chemical Engineering. Elwood Trotter - Mr. Trotter has been an employee of the Company since April 1989 and became Vice President, Special Projects in February 1996. Mr. Trotter attended Simon Frazer University in British Columbia, Canada. Wayne Case - President and Chairman of the Board of Schmitt Industries, Inc., since November 1986, when he founded Schmitt Industries, Inc. Mr. Case holds a Bachelor of Arts Degree in Business and an MBA. Carl Stadelhofer - Attorney with Rinderknecht Klein & Stadelhofer in Switzerland since July 1990. Mr. Stadelhofer is a French and Swiss citizen; admitted in Switzerland 1982. Education: Law Schools of Zurich and Berne University (lic.jur1979); Harvard Law School, Massachusetts; Georgetown University, Washington, D.C. Mr. Stadelhofer specializes in banking and financing, mergers and acquisitions, investment funds, international securities transactions and international legal assistance. Section 16(a) Beneficial Ownership Reporting Compliance The following Officers, Directors or Beneficial Owners of more than ten percent of the Company's outstanding common stock failed to timely file reports required under Section 16(a) of the Exchanges Act during 1999.
Transactions Not Name Number of Late Filings Reported Timely - ---------------- ----------------------- ---------------- Donald Ochacher One None* Elwood Trotter One None* Garry Newman One None* Janet Maxey One None* Wayne Case Two One Carl Stadelhofer One None* *Report that was filed late was Form 3, Initial Statement of Beneficial Ownership of Securities. Therefore, no transaction was involved.
Item 11. EXECUTIVE COMPENSATION ----------------------- The following table sets forth the annual compensation paid and accrued by the Company during its last three fiscal years to the executive officers to whom it paid in excess of $100,000, including cash and issuance of securities.
Summary Compensation --------------------- Annual Compensation Awards Payouts -------------------------------------------- --------------------- -------------- Other Secur- Name Annual Restricted ities All Other and Compen- Stock Underlying LTIP Compen- Principal Salary Bonus sation Award(s) Options/ Payouts sation Position Year ($) ($) ($) ($) SARs (#) ($) ($) - ------------------------ -------- --------------- ----------- ----------- ---------- --------- -------- ------- Donald Ochacher . . . . . . . . (1) 1999 42,900 n/a - - 40,000 - - Chairman . . . . . . . . 1998 n/a n/a - - - - - Of the Bd. . . . . . . . 1997 n/a n/a - - - - & CEO Elwood . . . . . . . . . 1999 109,200 n/a - - 75,000(3) - - Trotter. . . . . . . . . 1998 104,260 n/a - - 22,500 - - Vice . . . . . . . . . . 1997 97,200 n/a - - 2,500 - - President Sales &, Marketing, Former Director Garvin McMinn(2) Former . . . . . . . . . 1999 89,808(4) n/a - - 115,000(3) - - Chairman . . . . . . . . 1998 162,154(5) n/a - - 65,000 - - Of the Bd. . . . . . . . 1997 81,346 n/a - - 15,000 - - & CEO - ------------------------ (1)Donald Ochacher has been President and CEO of the Company since June 1999. (2)Garvin McMinn resigned as officer and director effective June 4, 1999 and entered into an amendment to his employment contract shifting has status to that of a consultant over a one year term at a flat agreed fee of $5,000 per month, for its term. (3)Includes stock options which were granted in prior years but were repriced during fiscal 1999. (4)Includes $30,385 of payments in consulting fees. (5)$81,000 was paid in stock through the issuance of 81,000 shares of Common Stock of the Company.
Options/SAR Grants in Last Fiscal Year --------------------------------------
Potential Realized Value At Assumed Rates of Stock Individual Price Appreciation for Grants Option Term(b) ------ --------------- No. Of Sec. % of Total Underlying Options/SARs Options/ Granted to Exercise SARs Employees or Base Granted (a) In Fiscal Price Expiration Name (#) Year ($/Sh) Date 5% ($) 10%($) - ----------------------- ------------- ---------- ----------- ------ ------- ------- Donald Ochacher Chairman of The Board & CEO 40,000 11% $ 1.50 12/31/04 - - Elwood Trotter Vice President Sales & Markeing & Former Director 35,000 10% $ 1.50 12/31/04 - - 20,000 6% $ 1.50 06/22/98 - - 2,500 1% $ 1.50 03/05/03 - - 2,500 1% $ 1.50 06/06/02 - - 15,000 4% $ 1.50 03/05/03 - - Garvin McMinn Former Chairman of the Board & CEO 35,000 10% $ 1.50 12/31/04 - - 40,000 11% $ 1.50 06/22/03 - - 25,000 7% $ 1.50 03/05/03 - - 15,000 4% $ 1.50 08/08/02 - - - ----------------------- (a) Includes options which were repriced during fiscal 1999. (b) These amounts, based on assumed appreciation rates of 5% and 10% rates prescribed by the Securities and Exchange Commission rules are not intended to forecast possible future appreciation, if any, of the Company's stock price. The closing price at December 31, 1999 of the Company's Common Stock was $0.80 per share.
The following table sets forth the number of shares covered by exercisable and unexercisable options held by such executives on December 31, 1999, as adjusted for a blanket reduction in all exercise prices on all outstanding options, to $1.50 per share exercise price per resolutions adopted by the Board of Directors on June 4, 1999, and the aggregate gains that would have been realized had these options been exercised on December 31, 1999, even though these options were not exercised, and the unexercisable options could not have been exercised, on December 31, 1999. The Company did not issue stock appreciation rights.
Number of Value of Unexercised Securities Underlying in-the-Money Shares Unexercised Options/SARs Acquired Value options/SARs at at Fiscal Year End(a) on Exercise Realized FY-End (#) ($) Name $ $ Exercisable Unexercisable Exercisable Unexercisable - --------------- ------ --------- -------------------------- ---------------------------- Donald Ochacher - - 40,000 - - - Elwood Trotter. - - 75,000 - - - Garvin McMinn . - - 115,000 - - - (a) Market value of shares covered by in-the-money options on December 31, 1999, less option exercise price. Options are in-the-money if the market value of the shares covered thereby is greater than the option exercise price based on the last trading day in 1999 of $0.80 per share at a $1.50 per share exercise price. The Company has no Long-Term Incentive Plans and no Awards were made in its Last Fiscal Year
Item 12. SECURITY OWNERSHIP OF ----------------------- CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------- The following table sets forth information regarding beneficial ownership as of December 31, 1999, of the Company's Common Stock, by any person who is known to the Company to be the beneficial owner of more than 5% of the Company's voting securities and by each director and by officers and directors of the Company as a group.
Beneficial(1) Percentage Officers and Directors Ownership of Class 1 - ---------------------------------------------- ---------- ---------- Donald Ochacher, Chairman, CEO and a Director(2) 42,500 0.5% Janet Maxey, Chief Financial Officer(3) . . . 25,000 0.3% Garry Newman, Vice President(4) . . . . . . . . 30,100 0.4% Elwood C. Trotter, Vice President(5). . . . . . 104,986 1.2% Wayne Case, Director (6). . . . . . . . . . . . 67,992 0.8% Carl Stadelhofer, Director(7) . . . . . . . . . 223,333 2.6% ---------- All current directors and officers as a group (6 persons). . . . . . . . 493,911 5.8% ========= ===== 5% Holders - ---------------------------------------------- Schmitt Industries, Inc.(8). . . . . . . . . 1,375,716 16.1% 2765 N.W Nicolai Street Portland OR 97210 Finter Bank Zurich.(9) . . . . . . . . . . . . 485,000 5.7% Claridenstrasse 3S CH-8022 Zurich Switzerland 1 Assumes all outstanding stock options and all outstanding warrants have been exercised and the subject shares have been issued and are outstanding. 2 Includes 40,000 stock options outstanding and exercisable at 12/31/99 3 Includes 25,000 stock options outstanding and exercisable at 12/31/99 4 Includes 30,000 stock options outstanding and exercisable at 12/31/99 5 Includes 75,000 stock options outstanding and exercisable at 12/31/99 6 Includes 40,000 stock options outstanding and exercisable at 12/31/99 7 Includes 40,000 stock options outstanding and exercisable at 12/31/99 8 Wayne Case, a Director of the Company, is a principal shareholder, President, and Chairman of the Board of Schmitt Industries, Inc. 9 Finter Bank Zurich holds these shares on behalf of various clients, none of which is an officer, director, or affiliate of the Company. Under the laws of the country of Switzerland, Finter Bank may not divulge the names of its individual clients and, therefore, may be deemed the beneficial owner of these shares, although Finter Bank Zurich disclaims any individual interest in these shares.
On March 24, 2000, 100,000 stock options outstanding to officers were cancelled. An additional 335,000 stock options were issued to officers which expire December 31, 2004 and are subject to certain vesting terms. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -------------------------------------------------- 1. Wayne Case, a Director of the Company, also serves as the President and Chairman of the Board of Schmitt Industries, Inc. Schmitt acquired during fiscal 1998, and the first quarter of 1999, an aggregate of 1,375,716 Shares of the Company's Common Stock, from another principal shareholder. As of December 31, 1999, Schmitt held 1,375,716 shares of the Company's Common Stock and on a fully diluted basis, represent 16.1% of the Company's outstanding Common Stock. 2. In December 1998, the Company issued 81,000 shares of its common stock in settlement of $81,000 of debt owned to Garvin McMinn. 3. The Company issued 131,250 shares of common stock, through a private placement, to Variety Investments, Ltd., a company owned by Don Farrell (a former principal shareholder) during 1998. In December of 1998, 256,671 shares of common stock were issued in exchange for debt owed to Farrell Financial in the amount of $282,887, a company owned by Don Farrell. 4. On June 4, 1999, the Board of Directors adopted a 1999 Non Qualified Key Man Stock Option Plan. This Plan authorized the issuance of up to 500,000 options to acquire shares of the Company's common stock at an exercise price of not less than 100% of the fair market value at the date of grant, and with the addition of such additional terms at the date of grant as the Board of Directors determines. 5. The Company has written employment agreements with two individuals: Elwood Trotter and Janet Maxey, and a consulting agreement with Garvin McMinn. Summaries of the provisions under the agreements follow. Garvin McMinn resigned as officer and director effective June 4, 1999 and entered into a one year consulting agreement to provide consulting services as needed at a flat agreed fee of $5,000 per month, for its term which expires May 31, 2000. Elwood Trotter has a one-year employment contract that was amended June 1999 and expires May 31, 2000. He receives $8,000 per month as Vice-President Special Projects. In the event of his termination, he will receive only the compensation earned up to the date of termination. Janet Maxey has a one-year employment contract that was amended June 1999 and expires May 31, 2000. She receives $3,574 per month as Chief Financial Officer. In the event of her termination, she will receive only the compensation earned up to the date of termination. 6. Donald Ochacher was retained as President and Chief Executive Officer of the Company on June 4, 1999 at a salary of $6,500 per month. In addition, the Board of Directors authorized the issuance of 40,000 options to acquire shares of the Company's common stock at an exercise price of $1.50 per share and with other terms and conditions as provided in the Company's 1999 Non Qualified Key Stock Option Plan. No formal written agreement has been entered into between the Company and Donald Ochacher. 7. Escrowed Shares. In 1991, 29 stockholders of the Company entered into an escrow agreement under which a total of approximately 4.50,000 shares of the Company's common stock were placed in escrow, in exchange for an assignment by the 29 stockholders of certain fractional rights they held in the original Air Box patents to the Company. None of these 29 stockholders currently hold significant shares, nor are they officers or directors. The shares are entitled to be released from escrow based on the performance of the Company as measured by cash flow (as defined by the agreement) and certain other conditions. The agreement specifies that the shares are to be released from escrow on a pro rata basis of the Company as measured by the Cumulative Cash Flow of the Company since January 1, 1990 not previously applied towards a release, divided by the earn-out price of $4.60 CDN. Cash flow is defined as net income or loss before tax adjusted to add back expenses including depreciation, amortization of goodwill, expensed research and development costs and any other amounts permitted or required by the Vancouver Stock Exchange. The Cumulative Cash Flow I, at any time, the aggregate cash flow up to that time from a date no earlier than the Company; financial year-end immediately preceding, and no later than the Company's financial year-end immediately following the date the issuance of the performance shares is finally accepted by the Vancouver Stock Exchange, net of any negative cash flow. At the time that this agreement was entered into, the Company's common stock was traded on the Vancouver Stock Exchange, the Company de-listed itself form the Vancouver Stock Exchange and the last day it traded on the Vancouver Stock Exchange was July 22, 1998. While the shares re in escrow, the stockholders have waived their rights to receive dividends or participate in the distribution of assets upon a winding up of the Company. Any shares while the shares are in escrow, the stockholders have waived their rights to receive dividends or participate in the distribution of assets upon a winding up of the Company. Any shares remaining in escrow at December 31, 1999 are to be canceled by the Company. As of December 31, 1999 as the shares were not actually cancelled by the Company's Transfer Agent until January 2000, all such shares remain in escrow. These shares are included in the number of shares outstanding in each of the three years ended 1999. However, these shares have been excluded from the computation of basic and diluted loss per shares for each of the three years ended 1999. 8. The Board of Directors proposed to the Company's shareholders and they adopted at its Annual Meeting held on June 4, 1999, resolutions giving the Board of Directors the authority and discretion to reverse split the Company's outstanding common Stock on a 1 for 10 basis, if and at such time over the succeeding 12 months, as the Board of Directors determines such a reverse split would be in the interest of the Company. In such event, the authorized capital stock would change to 50,000,000 shares of common stock authorized and each 10 shares of the outstanding commons tock would automatically convert into a single share of new common stock. In January 2000, the Board of Directors declared the one-to-ten reverse stock split. 9. The Value of Warrant Exercise Price. During 1998 and 1997 the Company issued 1,011,250 and 1,037,504 shares of Common Stock through private placements. Each share issued had attached a share purchase warrant to purchase one additional share of Common Stock for a period of two years. During 1999, 1998 and 1997, the Company issued a total of 134,250, 520,000 and 225,000 shares at various per share prices upon the exercise of warrants by various shareholders. In November 1998, the Company's Board of Directors revalued 2,248,754 outstanding warrants based on the fair value of the stock, and amended the exercise price to $1.50 per share up to the expiration date. From November 1998 to the present, 1,315,000 warrants have been exercised. 10. Conversion of Related Party Debt to Equity. The Company in 1997 converted a debt owed to Donald Farrell, an offshore former Director and through his offshore company, formerly a principal shareholder of the Company, in the amount of $126,000, 86,310 shares of the Company's Common Stock. In 1998, additional fees of $31,500 were incurred, and all remaining outstanding debt was settled in exchange for 256,671 shares of the Company's Common Stock issued in an offshore transaction, at $1.00 per share. In January 1997, the Company entered into an agreement with Variety Investments, Ltd., an offshore affiliate of Donald Farrell, by which the Company could borrow up to $150,000. Interest payments at 8.5% per annum were due monthly, and any borrowings are secured by the Company's assets. The outstanding loan payable became due and payable on June 1, 1998. In December 1998, the Company issued a total of 43,529 shares of its Common Stock at a value of $1.00 per share, in full settlement of the outstanding debt plus accrued interest, in an offshore transaction. Other than discussed above, the Company has no knowledge of any transaction or series of transactions, since January 1, 1998, or any currently proposed transaction, or series of transactions, to which the Company was or is to be party, in which the amount involved exceeds $60,000, involving management, any person owning 10% or more of the common stock, or any member of the immediate family of any of the foregoing persons. Management believes that the transactions with related parties were on terms as favorable as the Company would have obtained from unaffiliated parties. Item 14. FINANCIAL STATEMENTS AND EXHIBITS --------------------------------- (a) Financial Statements Reports of Independent Certified Public Accountants Consolidated Financial Statements Balance Sheets as of December 31, 1999 and 1998; Statement of Operations for the years ended December 31, 1999, 1998 and 1997; Statement of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997; Statement of Cash Flows for the years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements (b) Exhibits Required by Item 601 of Regulation SK. 3(i) Articles of Incorporation, Incorporated by reference to exhibits attached to Amended Form 10 filed July 23, 1999 3(ii) Bylaws, Incorporated by reference to exhibits attached to Amended Form 10 filed July 23, 1999 4 Instruments defining rights of security holders, including indentures None. ----- 9 Voting Trust Agreement None ---- 10 Material Contracts Lease Agreement for plant facilities, Incorporated by reference to exhibits attached to Amended Form 10 filed July 23, 1999 (b)1. Employment Agreement with Garvin McMinn, Incorporated by reference to exhibits attached to Amended Form 10 filed July 23, 1999 (b)2. Amendment to Employment with Garvin McMinn, Incorporated by reference to exhibits to Amended Form 10 filed July 23, 1999 (c)1. Employment Contract with CFO Janet Maxey, Incorporated by reference to exhibits attached to Amended Form 10 filed July 23, 1999 (c)2. Amendment to Employment Contract with CFO Janet Maxey, Incorporated by reference to exhibits attached to Amended Form 10 filed July 23, 1999 (d)1. Employment Contract with Vice President Elwood Trotter, Incorporated by reference to exhibits attached to Amended Form 10 filed July 23, 1999 (d)2. Amendment to Employment Contract with Vice President Elwood Trotter, Incorporated by reference to exhibits attached to Amended Form 10 filed July 23, 1999 (e) Form of Option Certificate delivered to certain Key Employees in connection with the Grant of Individual Options to said Employees, Incorporated by reference to exhibits attached to Amended Form 10 filed July 23, 1999 (f) Patent Royalty Agreement between Puff Pac, Ltd. (the Company's predecessor), and Puff Pac People, Incorporated by reference to exhibits attached to Amended Form 10 filed July 23, 1999 (g) Escrow Agreement, Incorporated by reference to exhibits attached to Amended Form 10 filed July 23, 1999 (h) 1999 Non-Qualified Key Man Stock Option Plan, Incorporated by reference to exhibits attached to Amended Form 10 filed July 23, 1999 (i) 1999 Investment Banking Agreement (j) 2000 Investment Banking Agreement 21 Subsidiaries of the Registrant Name Domicile ---- -------- Puff Pac Industries (Canada) Inc. (inactive) Canada 27 Financial Data Schedule SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AIR PACKAGING TECHNOLOGIES, INC. /s/ Donald Ochacher --------------------------------- Donald Ochacher Date: 4/11/00 Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- Chairman of the Board, Director, and /s/ Donald Ochacher Chief Executive Officer 4/11/00 - ---------------------- Donald Ochacher /s/ Janet Maxey Chief Financial Officer 4/11/00 - ---------------------- Janet Maxey /s/ Wayne Case Director 4/11/00 - ---------------------- Wayne Case AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY CONTENTS REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1 CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets as of December 31, 1999 and 1998 F-3 Statements of Operations for the years ended December 31, 1999, 1998 and 1997 F-5 Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1999, 1998 and 1997 F-6 Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES F-21 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors Air Packaging Technologies, Inc. Valencia, California We have audited the accompanying consolidated balance sheets of Air Packaging Technologies, Inc. and Subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1999. We have also audited the schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement and schedule presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Air Packaging Technologies, Inc. and Subsidiary at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein. The accompanying consolidated financial statements and schedule have been Prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements and schedule do not include any adjustments that might result from the outcome of this uncertainty. /s/ BDO Seidman, LLP Los Angeles, California March 3, 2000, except for Note 17 as to which the date is March 27, 2000 F-1 INDEPENDENT AUDITOR'S REPORT The Stockholders and Board of Directors Air Packaging Technologies, Inc. Valencia, CA We have audited the consolidated balance sheet of Air Packaging Technologies, Inc. and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Air Packaging Tehnologies, Inc. and subsidiaries as of December 31, 1997, and results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations that raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments relating to the recoverability and classification of reported asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. /s/Hein + Associates LLP Hein + Associates LLP Certified Public Accountants Orange, California March 30, 1998 F-2 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31, --------------- 1999 1998 ---------- --------- ASSETS CURRENT ASSETS Cash and cash equivalents . . . . . . . . . . . . . . . . . . $1,150,151 $ 125,799 Trade receivables, net of allowance for doubtful accounts of $22,630 and $5,130 (Note 15). . . . . . . . . . . . . . . . . 57,603 96,852 Inventories, net (Note 4) . . . . . . . . . . . . . . . . . . 577,389 408,643 Advances and prepaids . . . . . . . . . . . . . . . . . . . . 41,895 75,134 ---------- --------- Total current assets . . . . . . . . . . . . . . . . . . . . . . 1,827,038 706,428 PROPERTY AND EQUIPMENT, net (Note 5) . . . . . . . . . . . . . . 714,186 810,458 INTANGIBLE ASSETS, net (Note 6). . . . . . . . . . . . . . . . . 229,378 233,609 DEFERRED FINANCING COSTS, net of accumulated amortization of $ 10,416 139,583 - DEPOSITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,100 60,100 ---------- --------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $2,970,285 $1,810,595 ========== ==========
F-3 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31, ------------ 1999 1998 ------------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable (Note 11) . . . . . . . . . . . . . . . . . $ 316,861 $ 191,025 Accrued expenses (Note 11) . . . . . . . . . . . . . . . . . 93,965 84,857 -------------- ------------- Total current liabilities . . . . . . . . . . . . . . . . . . 410,826 275,882 -------------- ------------- LONG TERM LIABILITIES Senior convertible notes (Note 10) . . . . . . . . . . . . . 1,500,000 - -------------- ------------- Total long term liabilities . . . . . . . . . . . . . . . . . 1,500,000 - -------------- ------------- Total liabilities . . . . . . . . . . . . . . . . . . . . . . 1,910,826 275,882 -------------- ------------- COMMITMENTS AND CONTINGENCIES (Note 14) STOCKHOLDERS' EQUITY (Notes 7, 8, 9, 12, 14 and 16) Common stock, $.01 par value, 50,000,000 shares authorized; 7,966,408 and 7,071,408 shares issued and outstanding. . . . 79,664 70,714 Additional paid-in capital . . . . . . . . . . . . . . . . . 20,789,787 19,420,979 Accumulated deficit. . . . . . . . . . . . . . . . . . . . . (19,809,992) (17,956,980) -------------- ------------- Total stockholders' equity. . . . . . . . . . . . . . . . . . 1,059,459 1,534,713 -------------- ------------- Total liabilities and stockholders' equity. . . . . . . . . . $ 2,970,285 $ 1,810,595 ============== ============
See accompanying notes to consolidated financial statements. F-4 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, ------------------------ 1999 1998 1997 ------------ ------------ ------------ NET SALES (Note 15). . . . . . . . . . . . $ 959,712 $ 722,268 $ 340,624 COST OF SALES. . . . . . . . . . . . . . . 1,012,083 566,837 592,544 ------------ ------------ ------------ GROSS PROFIT (LOSS). . . . . . . . . . . . (52,371) 155,431 (251,920) ------------ ------------ ------------ OPERATING EXPENSES: Sales, general and administrative . . . . 1,797,128 1,967,932 1,572,619 Research and development. . . . . . . . . 5,419 7,371 3,322 ------------ ------------ ------------ Total operating expenses . . . . . . . . . 1,802,547 1,975,303 1,575,941 ------------ ------------ ------------ LOSS FROM OPERATIONS . . . . . . . . . . . (1,854,918) (1,819,872) (1,827,861) ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense. . . . . . . . . . . . . (30,444) (153,470) (17,934) Interest income . . . . . . . . . . . . . 20,900 3,433 2,010 Other income. . . . . . . . . . . . . . . 11,450 2,243 19,586 ------------ ------------ ------------ TOTAL OTHER INCOME (EXPENSE) . . . . . . . 1,906 (147,794) 3,662 ------------ ------------ ------------ LOSS BEFORE EXTRAORDINARY ITEM . . . . . . - (1,967,666) (1,824,199) EXTRAORDINARY ITEM - GAIN ON RESTRUCTURING OF PAYABLES (Note 11). . . - 244,019 - ------------ ------------ ------------ NET LOSS . . . . . . . . . . . . . . . . . $(1,853,012) $ (1,723,647) $ (1,824,199) ============ ============ ============ LOSS PER COMMON SHARE - BASIC AND DILUTED Loss before extraordinary item. . . . . . $ (.25) $ (.43) $ (.59) Extraordinary item. . . . . . . . . . . . $ - $ .05 $ - Net loss. . . . . . . . . . . . . . . . . $ (.25) $ (.38) $ (.59) WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND DILUTED . . . . . 7,249,585 4,506,608 3,069,362 ============ ============ ============
See accompanying notes to consolidated financial statements. F-5 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional --------------------- Paid-In Accumulated Shares Amount Capital Deficit Total ----------- --------- ----------- ----------- ----------- BALANCE, January 1, 1997. . . . . . . . . . . . 2,796,952 $ 27,970 $ 12,812,355 $ (14,409,134)$ (1,568,809) Net cash proceeds from private placements (Note 12) . . . . . . . . . . . . . 1,037,504 10,376 1,580,343 - 1,590,719 Debt for equity exchange (Notes 7 and 12) . . . 180,958 1,809 285,477 - 287,286 Conversion of debenture (Note 9). . . . . . . . 230,000 2,300 1,247,700 - 1,250,000 Exercise of options (Note 12) . . . . . . . . . 5,750 58 8,089 - 8,147 Exercise of warrants (Note 12). . . . . . . . . 225,000 2,249 343,978 - 346,227 Stock-based compensation (Note 12). . . . . . . - - 43,450 - 43,450 Net loss. . . . . . . . . . . . . . . . . . . . - - - (1,824,199) (1,824,199) ----------- --------- ----------- ------------ ------------- BALANCE, December 31, 1997. . . . . . . . . . . 4,476,164 44,762 16,321,392 (16,233,333) 132,821 Net cash proceeds from private placements (Note 12) . . . . . . . . . . . . . 1,011,250 10,113 914,480 - 924,593 Debt for equity exchange (Notes 7, 8, 9 and 12) . . . . . . . . . . . . 1,063,994 10,639 1,073,534 - 1,084,173 Exercise of warrants (Notes 9 and 12) . . . . . 520,000 5,200 738,427 - 743,627 Stock-based compensation (Note 12). . . . . . . - - 247,073 - 247,073 Revaluation of warrants (Note 12) . . . . . . . - - 126,073 - 126,073 Net loss. . . . . . . . . . . . . . . . . . . . - - - (1,723,647) (1,723,647) ----------- --------- ----------- ------------ ------------ BALANCE, December 31, 1998. . . . . . . . . . . 7,071,408 70,714 19,420,979 (17,956,980) 1,534,713 Exercise of warrants (Notes 9 and 12) . . . . . 895,000 8,950 1,320,008 - 1,328,958 Stock-based compensation (Note 12). . . . . . . - - 48,800 - 48,800 Net loss. . . . . . . . . . . . . . . . . . . . - - - (1,853,012) (1,853,012) ----------- --------- ----------- ------------ ------------ BALANCE, December 31, 1999. . . . . . . . . . . 7,966,408 $ 79,664 $ 20,789,787 $ (19,809,992) $ 1,059,459 =========== ========== ============ =============== ============== See accompanying notes to consolidated financial statements.
F-6 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Years ended December 31, ----------------------------- 1999 1998 1997 ------------- -------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (1,853,012) $ (1,723,647) $ (1,824,199) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization . . . . . . . . . . . 299,938 219,064 150,400 Provision for doubtful accounts . . . . . . . . . . 17,500 - 2,037 Inventory reserve . . . . . . . . . . . . . . . . . (30,123) - 97,202 Stock-based compensation. . . . . . . . . . . . . . 48,800 247,073 43,450 Expense on revaluation of warrants. . . . . . . . . - 126,073 - Extraordinary gain on restructuring of payables . . - (244,019) - Gain on sale of property and equipment. . . . . . . - - (6,742) Increase (decrease) from changes in: Trade receivables . . . . . . . . . . . . . . . . . 21,749 (62,286) 3,730 Inventories . . . . . . . . . . . . . . . . . . . . (138,623) (252,188) (123,211) Advances and prepaids . . . . . . . . . . . . . . . 33,239 (70,472) 356 Deposits. . . . . . . . . . . . . . . . . . . . . . - 6,774 (51,594) Accounts payable and accrued liabilities. . . . . . 133,085 159,306 171,981 Accrued officers' salaries. . . . . . . . . . . . . 1,859 (1,232) (24,794) Due to related party. . . . . . . . . . . . . . . . - - 126,000 Other liabilities . . . . . . . . . . . . . . . . . - (39,500) - ------------- -------------- ------------- Net cash used in operating activities. . . . . . . . . (1,465,588) (1,635,054) (1,435,384) ------------- -------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment. . . . . - - 7,000 Purchases of property and equipment . . . . . . . . . (129,126) (413,765) (528,193) Patent expenditures . . . . . . . . . . . . . . . . . (59,892) (33,664) (37,788) ------------- -------------- ------------- Net cash used in investing activities. . . . . . . . . (189,018) (447,429) (558,981) ------------- -------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from private placements. . . . . . . . . - 924,593 1,590,719 Net proceeds from exercise of warrants. . . . . . . . 1,328,958 743,627 346,227 Net proceeds from exercise of options . . . . . . . . - - 8,147 Deferred costs. . . . . . . . . . . . . . . . . . . . (150,000) - - Proceeds from loan payable - related party. . . . . . - - 38,128 Proceeds from senior convertible notes. . . . . . . . 1,500,000 521,000 50,000 Payment on note payable . . . . . . . . . . . . . . . - (33,000) (31,000) Costs associated with debt conversion . . . . . . . . - (7,400) - ------------- -------------- ------------- Net cash provided by financing activities. . . . . . . 2,678,958 2,148,820 2,002,221 ------------- -------------- ------------- NET INCREASE IN CASH . . . . . . . . . . . . . . . . . 1,024,352 66,337 7,856 CASH, at beginning of year . . . . . . . . . . . . . . 125,799 59,462 51,606 ------------- -------------- ------------- CASH, at end of year . . . . . . . . . . . . . . . . . $ 1,150,151 $ 125,799 $ 59,462 ============= ============== =============
F-7 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The Company paid interest in the amount of $237, $0 and $43,205 during 1999, 1998 and 1997, respectively. The Company paid income taxes in the amount of $800, $800 and $800 during 1999, 1998 and 1997, respectively. During 1997, $3,528 of interest was capitalized for construction of property and equipment. During 1998 and 1997, the Company exchanged $1,084,173 and $287,286, respectively, of debt for 1,063,995 and 180,958 shares of common stock (see Notes 7, 8, 10 and 12). During 1997, the convertible debenture with a balance of $1,250,000 was converted into 230,000 shares of common stock of the Company at the exercise price of $5.40 per share and 230,000 detachable nontransferable warrants (see Note 9). During the years ended December 31, 1999, 1998 and 1997, the Company recorded $22,750, $187,073 and $43,450, respectively, representing stock-based compensation in conjunction with stock options granted to nonemployees (see Note 12). During 1998, the Company issued 81,000 shares to an employee in satisfaction of accrued compensation in the amount of $81,000 (Note 12). During 1999, the Company's board of directors revalued 435,000 outstanding options to their fair value. As a result, stock-based compensation of $16,050 was recorded in the current year for options held by non employees (see Note 12). During 1998, the Company's Board of Directors changed the exercise price of 2,248,754 outstanding warrants to their fair value. As a result, an expense of $126,073 was recorded in the 1998 year (see Note 12). During the years ended December 31, 1999 and 1998, the Company recorded stock-based compensation of $10,000 and $60,000 related to employee options. These amounts represent the excess fair market price of the Company' stock at the date of grant over the exercise price. See accompanying notes to consolidated financial statements. F-8 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1-NATURE OF OPERATIONS Air Packaging Technologies, Inc. (the "Company") and Subsidiary develops, manufactures and distributes inflatable commercial packaging systems. The Company's sales are primarily to companies producing Silicon wafers and computer chips in California, Arizona, Oregon, Colorado and Texas in the United States, Denmark and the U.K. in Europe, and Singapore in Asia. The Company was incorporated in the State of Delaware on November 9, 1989. NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Air Packaging Technologies, Inc. and its wholly-owned foreign subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. The foreign subsidiary currently has no operations, therefore has no foreign translation adjustment. REVENUE RECOGNITION Revenue is recognized upon shipment of products. CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. INVENTORY Inventory, which consists of raw material, work in progress, and finished goods, is valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives (ranging from 3 to 5 years) of the respective assets. The cost of normal maintenance and repairs is charged to operating expenses as incurred. Material expenditures which increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of property and equipment sold, or otherwise disposed of, and the related accumulated depreciation or amortization are removed from the accounts, and any gains or losses are reflected in current operations. INTANGIBLE ASSETS Patents, trademarks, and rights to patent and trademark royalties are carried at cost less accumulated amortization which is calculated on a straight-line basis over ten years, the estimated useful lives of the assets. The Company periodically evaluates and assesses the overall recoverability of its intangible assets by determining if the unamortized balance can be recovered through undiscounted future operating cash flows. F-9 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IMPAIRMENT OF LONG-LIVED ASSETS Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," established guidelines regarding when impairment losses on long-lived assets, which include plant and equipment and certain identifiable intangible assets, should be recognized and how impairment losses should be measured. The Company periodically reviews such assets for possible impairments and expected losses, if any, are recorded currently. INCOME TAXES The Company provides for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". SFAS 109 requires a company to use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. A valuation allowance is provided when management cannot determine whether it is more likely than not that the deferred tax asset will be realized. Under SFAS 109, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), establishes a fair value method of accounting for stock-based compensation plans. In accordance with SFAS 123, the Company has chosen to continue to account for stock-based compensation utilizing the intrinsic value method prescribed in APB 25. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Also, in accordance with SFAS 123, the Company has provided footnote disclosure with respect to stock-based employee compensation. The cost of stock-based employee compensation is measured at the grant date based on the value of the award and is recognized over the service period. The value of the stock-based award is determined using a pricing model whereby compensation cost is the excess of the fair value of the stock as determined by the model at grant date or other measurement date over the amount an employee must pay to acquire the stock. F-10 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONCENTRATIONS OF CREDIT RISK Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or groups of counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly effected by changes in economic or other conditions described below. In accordance with FASB Statement No. 105, "Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk," the credit risk amounts shown in Note 15 do not take into account the value of any collateral or security. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values for financial instruments under Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair values of the Company's financial instruments, which includes all cash, accounts receivables, accounts payable, long-term debt, and other debt, approximates the carrying value in the consolidated financial statements at December 31, 1999 and 1998 as a result of their short term nature, or due to the interest rates approximating the Company's effective borrowing rates. At December 31, 1999, the fair value of the Senior Convertible Notes, is estimated to be $978,807 based on the quoted market prices using an interest rate of 10.5%. EARNINGS (LOSS) PER SHARE Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share," requires presentation of basic and diluted earnings per share. Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts, such as stock options, to issue common stock were exercised or converted into common stock, but does not include the impact of these dilutive securities that would be antidilutive. During the three years ended December 31, 1999, these dilutive securities were antidilutive. All prior period weighted average and per share information had no effect on the amounts presented in accordance with SFAS 128. Options and warrants to purchase 575,000, 2,215,754 and 2,170,032 shares were outstanding during the years ended 1999, 1998 and 1997, respectively, but were not included in the computation of diluted loss per common share because the effect would be antidilutive. The Company has 446,042 shares in escrow included in the number of shares outstanding in each of the three years ended 1999. However, these shares have been excluded from the computation of basic and diluted loss per share for each of the three years ended 1999 as the necessary conditions have not been satisfied (see Note 14). F-11 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS 130") establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is comprised of net income and all changes to stockholders' equity except those due to investments by owners and distribution to owners. The Company does not have any components of comprehensive income for each of the years ended December 31, 1999, 1998 and 1997. SEGMENTS OF AN ENTERPRISE During the year ended December 31, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS 131") issued by the FASB and is effective for financial statements with fiscal years beginning after December 15, 1997. SFAS 131 requires that public companies report certain information about operating segments, products, services and geographical areas in which they operate. At December 31, 1999 and 1998, the Company did not report any segment information as operations and business activity are considered one unit. Adoption of SFAS 131 did not have an impact on the Company's financial position, results of operations and cash flows. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires the Company's 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. RECLASSIFICATIONS Certain reclassifications have been made to the prior year statements to conform to the 1999 presentation. Such reclassifications had no effect on the previously reported net loss. NOTE 3-LIQUIDITY AND GOING CONCERN The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, there is substantial doubt about the Company's ability to continue as a going concern because of the magnitude of its losses during the past three years, ($1,853,012), ($1,723,647) and ($1,824,199) in 1999, 1998 and 1997 and an accumulated deficit of ($19,809,992) at December 31, 1999. The Company's continued existence is dependent upon its ability to raise substantial capital, to increase sales, to significantly improve operations, and ultimately become profitable. Management believes that future investments and certain sales-related efforts will provide sufficient cash flow for it to continue as a going concern in its present form. However, there can be no assurance that the Company will achieve such results. Accordingly, the consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern. F-12 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4-INVENTORIES Inventories consist of the following at:
December 31, ---------------- 1999 1998 -------- -------- Raw materials $ 450,583 $ 350,147 Work-in-process 21,385 23,703 Finished goods 105,421 34,793 ---------- ---------- $ 577,389 $ 408,643 ========== ==========
The above balances are presented net of total inventory reserves of approximately $33,000 and $63,000 in 1999 and 1998, respectively. During the year ended December 31, 1997, the Company wrote down inventory by approximately $97,000, respectively, to reflect lower of cost or market pricing. NOTE 5-PROPERTY AND EQUIPMENT Property and equipment consist of the following:
December 31, ------------------ 1999 1998 ---------- ---------- Manufacturing equipment . . . $ 1,710,269 $ 1,639,469 Dies and molds. . . . . . . . 187,375 166,866 Computer equipment. . . . . . 92,494 62,673 Quality control lab . . . . . 102,035 102,035 Office equipment. . . . . . . 108,232 100,237 Vehicles. . . . . . . . . . . 12,730 12,730 ---------- ---------- 2,213,135 2,084,010 Less accumulated depreciation 1,498,949 1,273,552 ---------- ---------- $ 714,186 $ 810,458 ========== ==========
Depreciation and amortization expense for property and equipment charged to operations for the years ended December 31, 1999, 1998 and 1997 was $225,397, $143,967 and $80,160, respectively. F-13 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6-INTANGIBLE ASSETS Intangible assets consist of the following at:
December 31, ------------ 1999 1998 --------- --------- Patents. . . . . . . . . . . . . . . . . . $ 711,543 $ 657,142 Trademarks . . . . . . . . . . . . . . . . 3,649 3,157 Rights to patent and trademark royalties . 90,146 85,146 --------- --------- 805,338 745,445 Less accumulated amortization. . . . . . . 575,960 511,836 --------- --------- $ 229,378 $ 233,609 ========== ==========
Amortization expense for intangible assets charged to operations for the years ended December 31, 1999, 1998 and 1997 was $64,124, $75,097 and $70,240, respectively. NOTE 7-RELATED PARTY TRANSACTIONS A former employee of the Company, who resigned effective June 4, 1999 entered into a one year consulting agreement that expires May 31, 2000 to provide consulting services at a fee of $5,000 per month. The amount due to related party consists of fees payable to, and non-interest bearing advances from, a former director. During 1997, $126,000 of the outstanding balance was converted to 86,310 shares of common stock. In 1998, additional fees of $31,500 were incurred, and all remaining outstanding debt was settled in exchange for 256,671 shares at $1.00 per share. NOTE 8-LOAN PAYABLE - RELATED PARTY In January 1997, the Company entered into an agreement with an affiliate of a related party by which the Company can borrow up to $150,000. Interest payments at 8.5% per annum are due monthly, and any borrowings are secured by the Company's assets. The outstanding loan payable became due and payable on June 1, 1998. In December 1998, the Company issued 43,529 shares at a value of $1.00 per share in full settlement of the outstanding debt plus accrued interest. NOTE 9-CONVERTIBLE SUBORDINATED DEBENTURE AND NOTES PAYABLE In 1991, the Company issued a $1,500,000 convertible subordinated debenture due October 31, 1996. In February 1994, a principal payment of $250,000 was made. On May 15, 1996 this debenture was modified and extended to October 31, 1997. On May 29, 1997, the debenture was converted into 230,000 shares of common stock of the Company and 230,000 detachable nontransferable warrants. Two warrants entitle the lender to purchase one additional common share of the Company. The exercise price of each warrant is $5.40 for the first year ended May 29, 1998 and $6.20 for the second year ended May 29, 1999. F-14 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9-CONVERTIBLE SUBORDINATED DEBENTURE AND NOTES PAYABLE (CONTINUED) In November 1998, the Company's board of directors amended the warrants to be convertible on a one for one basis at a price of $1.50 per share up to the expiration date (see Note 12). In December 1998, the lender exercised the entire 230,000 warrants at the amended price of $1.50 per share. During 1998, the Company paid $23,000 in full settlement of the outstanding installment note payable and recognized a gain of $8,500, which is included in "Extraordinary Item" in the consolidated statements of operations (see Note 11). In December 1998, the Company issued 56,800 shares at a value of $1.00 per share in full settlement of the interest-bearing note payable, plus accrued interest (see Note 12). NOTE 10-SENIOR CONVERTIBLE NOTES During the year ended December 31, 1999, the Company issued $1,500,000 in Senior Convertible Notes with interest payable annually on June 30 at 7% per annum. The Senior Convertible Notes are unsecured and due on September 30, 2003. At the option of the holder, the holder may convert the principal amount of such Note at any time before September 30, 2003, into shares of common stock. The conversion price is equal to or greater than the fair value of the stock on the date the Senior Convertible Notes were issued. At the holder's option, the holder may elect to receive any annual interest payment in common stock of the Company at a 20% discount. The difference between the fair market value of the stock on date of conversion and the conversion price, will be recorded as additional interest expense. In conjunction with these Notes, the Company paid a finder's fee of $150,000 and other financing costs, which is being amortized over the life of the Notes. NOTE 11-EXTRAORDINARY ITEM During the fourth quarter of 1998, the Company paid approximately $190,000 in full settlement of various accounts payables and other accrued expenses totaling approximately $434,000 and recognized an extraordinary gain of $244,000, or $.05 per share. There was no income tax effect due to the Company's current year net loss and related valuation allowance. The Company did not recognize any gains or losses on the issuance of stock in full settlement of debts as described in Notes 7, 8, 10 and 12 as the fair value of the equity interest granted was equivalent to the carrying amount of the settled debts. NOTE 12-STOCKHOLDERS' EQUITY COMMON STOCK During the year ended December 31, 1999, 895,000 warrants were exercised resulting in proceeds of $1,328,958. F-15 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12-STOCKHOLDERS' EQUITY (CONTINUED) In connection with the reverse stock split discussed below, the Company amended its Articles of Incorporation to reduce the authorized common shares from 100,000,000 at $0.001 par value to 50,000,000 at $0.01 par value. During 1998, the Company completed six private placements for a total of 1,011,250 shares and received total net proceeds of approximately $925,000, net expense of $81,423. During 1997, the Company issued 1,037,504 shares of common stock through private placements, receiving net proceeds of approximately $1,600,000 after expenses. In 1998 and 1997, the Company issued a total of 1,063,994 and 180,958 common shares, which includes shares also disclosed in Notes 7, 8 and 10, in full settlement of various debts amounting to approximately $1,084,000 and $287,000. The Company did not recognize any gains or losses on the conversion as the fair value of the equity interest granted was equivalent to the carrying amount of the settled debts. STOCK SPLIT In January 2000, the Board of Directors declared a one-to-ten reverse stock split. All stock related data in the consolidated financial statements reflect the stock split for all periods presented. STOCK OPTIONS The Company has issued options to purchase common stock to certain officers, employees and others under various stock option plans for services performed and to be performed. Some options require continued employment. NOTE 12-STOCKHOLDERS' EQUITY (CONTINUED) Option activity is as follows:
Number of Weighted Average Shares Exercise Price ------------ --------------- Outstanding at January 1, 1997 . 96,750 $ 2.30 Granted . . . . . . . . . . . . 297,750 1.70 Exercised . . . . . . . . . . . (5,750) 1.40 Expired/canceled. . . . . . . . (9,000) 2.70 ------------ --------------- Outstanding at December 31, 1997 379,750 1.80 Granted . . . . . . . . . . . . 283,000 1.80 Exercised . . . . . . . . . . . - - Expired/canceled. . . . . . . . (275,750) 1.60 ------------ --------------- Outstanding at December 31, 1998 387,000 1.90 Granted . . . . . . . . . . . . 570,000 1.50 Exercised . . . . . . . . . . . - - Expired/canceled. . . . . . . . 522,000 2.00 ------------ --------------- Outstanding at December 31, 1999 435,000 $ 1.50 ------------ --------------- Exercisable at December 31, 1999 435,000 $ 1.50 ============ ===============
F-16 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12-STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTIONS (Continued) Information relating to stock options at December 31, 1999 summarized by exercise price are as follows:
Outstanding Exercisable ----------- ----------- Weighted Average Weighted Average ---------------- Exercise Price Remaining Life Exercise Exercise Per Share Shares (Months) Price Shares Price ---------- --------- --------- -------- -------- 1.50 . . . . . 435,000 39 $ 1.50 435,000 $ 1.50 ========== ========= ========= ======== ========
In June 1999, the Company's board of directors revalued 435,000 common stock shares, based on the fair value of the stock, and amended the exercise price to $1.50 per share. During the years ended December 31, 1999, 1998 and 1997, the Company recorded $22,750, $187,073 and $43,450, respectively, related to stock-based compensation in conjunction with stock options granted to non-employees. During 1999, the Company's Board of Directors revalued 435,000 outstanding options to their fair value. As a result, stock-based compensation of $16,050 was recorded in the current year for options held by non-employees. During the years ended December 31, 1999 and 1998, the Company recorded stock-based compensation of $10,000 and $60,000 related to employee options. These amounts represent the excess fair market price of the Company' stock at the date of grant over the exercise price. PRO FORMA INFORMATION In accordance with SFAS 123 and described in Note 2, the Company continues to account for stock-based compensation utilizing the intrinsic value method prescribed by APB 25. Had compensation cost for stock options issued to employees been determined based on the fair value at grant dates consistent with the method of SFAS 123, the Company's net loss and net loss per share would have increased to the pro forma amounts presented below:
December 31, --------------------------------- 1999 1998 1997 ------------ ------------ ----------- Net loss, as reported. . . . . . . . . . . . . . . . . $ (1,843,012) $ (1,723,647) $ (1,824,199) Net loss, pro forma. . . . . . . . . . . . . . . . . . (1,935,285) (1,900,179) (2,265,081) Loss per common share - basic and diluted, as reported $ (.25) $ (.38) $ (.59) Loss per common share - basic and diluted, pro forma . $ (.27) $ (.42) $ (.74)
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions: expected volatility of 27%, 106% and 130% in 1999, 1998 and 1997, respectively, an expected life of five and a half years in 1999, five years in 1998, and two years in 1997, no dividends would be declared during the expected term of the options, risk-free interest rate of 5.81%, 5.01% and 6.1% for 1999, 1998 and 1997, respectively. The weighted average fair value of stock options granted to employees during 1999, 1998 and 1997 was $1.50, $1.60 and $1.60, respectively. F-17 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12-STOCKHOLDERS' EQUITY (CONTINUED) WARRANTS During 1998 and 1997, the Company issued 1,011,250 and 1,037,504 shares of common stock through private placements. Each share issued had attached a share purchase warrant to purchase one additional share of common stock for a period of two years. During 1999, 1998 and 1997, the Company issued a total of 895,000, 520,000 and 225,000 shares in connection with the exercise of warrants by various shareholders, amounting to approximately $1,329,000, $744,000 and $346,000, respectively. In November 1998, the Company's Board of Directors revalued 2,248,754 outstanding warrants based on the fair value of the stock, and amended the exercise price to $1.50 per share. As a result, interest expense of $126,073 was recognized in the 1998 year. Outstanding and exercisable warrants at December 31, 1999 to acquire the Company's stock, held primarily by existing stockholders, are as follows: Warrants Exercise Price Expiration Date - ----------- -------------- --------------- 140,000 $ 1.50 October 3, 2000 NOTE 13-INCOME TAXES Income taxes are accounted for in accordance with SFAS No. 109. At December 31, 1999, the Company has a net operating loss carryforward (NOL) of approximately $18,200,000 for federal tax purposes. At December 31, 1999, the Company has a deferred tax asset of approximately $7,400,000, which primarily relates to net operating losses. A 100% valuation allowance has been established as management cannot determine whether it is more likely than not that the deferred tax asset will be realized. The NOLs expire as follows:
Year ending December 31, Amount --------------- -------------- 2007 $ 5,400,000 2008 2,000,000 2009 2,300,000 2010 1,400,000 2011 1,700,000 2012 2,200,000 2018 1,400,000 2019 1,800,000 ------------- Total $ 18,200,000 =============
The Company's net operating loss carryforwards may be limited due to ownership changes as defined under Section 382 of the Internal Revenue Code of 1986. F-18 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14-COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS Minimum lease commitments under noncancelable operating lease agreements are as follows:
Year ending December 31, Amount - ------------- ---------- 2000 $ 130,354 2001 134,625 2002 134,625 2003 134,625 2004 132,656 Thereafter 55,000 ---------- Total $ 721,885 ==========
Rent expense was $151,131, $142,987 and $140,788 for the years ended December 31, 1999, 1998 and 1997, respectively. ROYALTY AGREEMENTS The Company is required to pay royalties related to certain patents and trademarks. Total expense related to these agreements was $4,324 in 1999, $3,991 in 1998 and $1,726 in 1997. ESCROW AGREEMENT In 1991, certain stockholders of the Company entered into an escrow agreement under which a total of approximately 4.5 million shares of the Company's common stock were placed in escrow. The shares were entitled to be released from escrow based on the performance of the Company as measured by cash flow (as defined by the agreement) and certain other conditions. While the shares were in escrow, the stockholders waived their rights to receive dividends or participate in the distribution of assets upon a winding up of the Company. Per the agreement, any shares remaining in escrow at December 31, 1999 would be canceled by the Company. As of December 31, 1999 as the shares were not actually cancelled by the Company's Transfer Agent until January 2000, all such shares remain in escrow. These shares are included in the number of shares outstanding in each of the three years ended 1999. However, these shares have been excluded from the computation of basic and diluted loss per share for each of the three years ended 1999. EMPLOYMENT AGREEMENTS The Company entered into an employment agreement with one employee in August 1994 and two five-year employment agreements with employees of the Company in July 1998. In June 1999, two of the contracts were amended and expired May 31, 2000. The current salaries under these agreements are $96,000 and $43,000 per annum for each employee. Upon termination, the employees will receive the salaries earned to the date of termination. The employee related to the third contract, resigned effective June 4, 1999 and entered into a one year consulting agreement to provide consulting services at a fee of $5,000 per month, for its term that expires May 31, 2000. POTENTIAL LIABILITY A former employee of the Company is seeking a severance payment of $101,500 per terms of his employment agreement, which was voluntarily terminated in November 1998. The parties have agreed to arbitration scheduled to take place during 2000. The Company has established a liability for the entire amount. F-19 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15-SIGNIFICANT CONCENTRATIONS OF CREDIT RISK, MAJOR CUSTOMERS AND OTHER RISKS AND UNCERTAINTIES The Company operates primarily in one industry segment: developing, manufacturing and distributing of inflatable commercial packaging systems. The Company's sales are primarily to companies producing Silicon wafers and computer chips in California, Arizona, Oregon, Colorado and Texas in the United States, Denmark and the U.K. in Europe, and Singapore in Asia. Sales to unaffiliated customers which represent more than 10% of the Company's net sales for 1999, 1998 and 1997 were as follows:
December 31, ------------------------------- Customer 1999 1998 1997 - ----------- ----------- ---------- ----------- A 16% 15% 22 B - -% 13 C 17% 31% -% D 24% 18 -
Financial instruments that subject the Company to credit risk consist primarily of accounts receivable. The Company frequently makes large credit sales to customers. At December 31, 1999 and 1998, approximately $41,162 or 84%, and $69,400 or 72% of the Company's accounts receivable were due from three customers, respectively. NOTE 16-RELATED PARTY TRANSACTIONS The Company issued 475,833 shares of common stock to a related party through a private placement for net proceeds of $635,769 during 1997 (See also Note 7). During 1997, the Company issued 350,000 shares of common stock to an affiliate of a related party through a private placement for net proceeds of $548,742 (See also Note 8). During 1997, the Company was billed $126,000 for fees due to a related party related to private placements (See Note 7). During 1998, the Company issued 81,000 shares of its common stock to the Chief Executive Officer in exchange for salary expenses of $81,000. The transaction was based on the fair value of the stock on the date the services were rendered. The President and Chairman of the Board of Schmitt Industries, Inc., who is also a director of the company, acquired an aggregate of 1,208,000 shares of common stock in 1998 from another principal shareholder. NOTE 17-SUBSEQUENT EVENTS On March 24, 2000, the Board of Directors of the Company approved a temporary reduction in the conversion price on the 7% Senior Convertible Debenture into common stock. The conversion price was reduced from $1.50 to the average bid price of the Company's common stock for the twenty-five trading days immediately prior to the receipt of a notice of conversion, with a minimum conversion price of $.50. The notice of conversion for the temporary reduction must be received by April 30, 2000 and must include all accrued interest through May 31, 2000. As a result, the Company will record an expense related to the reduction in conversion price. On March 24, 2000, the Board of Directors also approved a temporary reduction in the exercise price of all warrants and options outstanding. The exercise price was reduced from $1.50 to the average bid price of the Company's common stock for the twenty-five trading days immediately prior to the receipt of a notice of conversion with a minimum conversion price of $.50. The notice of exercises must be received by April 30, 2000. As a result of this temporary reduction, the Company will record compensation expense for the difference between original exercise price and reduced exercise price multiplied by the number of outstanding warrants and options. Subsequent to December 31, 1999, the Company cancelled 100,000 stock options outstanding to officers and issued an additional 335,000 stock options, which expire December 31, 2004 and are subject to certain vesting terms. Any applicable compensation expense will be recorded in 2000. On March 27, 2000, the Company entered into a one year investment banking agreement with Givigest Fiduciaria SA "Givigest" to raise equity capital. On March 27, 2000, the Company and Givigest agreed to raise up to $500,000 on or before April 30, 2000. There are no assurances that the Company will be able to raise any proceeds under this agreement. F-20 AIR PACKAGING TECHNOLOGIES, INC. AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN A Column B Column C Column D Column E --------------------------------------------------------------- Additions Balance at Charged to Balance Beginning Costs and at End of Description of year Expenses Deductions Year --------------------------------------------------------------- Allowance for possible losses on receivables Year ended December 31, 1999. . . . . . . . . . . . . . $ 5,130 $ 17,500 $ - $ 22,630 1998. . . . . . . . . . . . . . 3,878 1,252 - 5,130 1997. . . . . . . . . . . . . . 1,842 2,576 (540) 3,878 Allowance for inventory reserve Year ended December 31, 1999. . . . . . . . . . . . . . $ 63,066 $ - $ (30,123)(a) $ 32,943 1998. . . . . . . . . . . . . . 153,637 - (90,571)(a) 63,066 1997. . . . . . . . . . . . . . 361,393 97,202 (304,958)(a) 153,637 (a) Write-off of obsolete inventory.
F-21 EX-10.I 2 EXHIBIT 10(i) GIVIGEST FIDUCIARIA SA ONE TIME PROGRAM INVESTMENT BANKING AGREEMENT THIS INVESTMENT BANKING AGREEMENT made this 13th day of August, 1999 by and between: GIVIGEST FIDUCIARIA SA Corso Elvezia 4, CH-6901 Lugano, Switzerland a Swiss Corporation (hereinafter referred to as "GIVIGEST"), and; AIR PACKAGING TECHNOLOGIES, INC. 25260 Rye Canyon Road, Valencia, California, USA (hereinafter referred to as "COMPANY"); collectively GIVIGEST and COMPANY hereinafter referred to as "the parties". WITNESSETH: WHEREAS, GIVIGEST is an investment banking, financial, management consulting and strategic planning firm, with expertise in the dissemination of information about publicly traded companies, and WHEREAS, COMPANY is publicly held with its common stock trading Over the Counter (OTC) under the ticker symbol "AIRP", WHEREAS, COMPANY desires to place a private placement of 7% Convertible Debentures to institutional and accredited investors as more particularly described in Addendum "B", attached hereto, and WHEREAS, GIVIGEST is willing to accept COMPANY as a client; and assist COMPANY to place the above mentioned private placement, WHEREAS, GIVIGEST is a company under the laws of the State of Ticino, Country of Switzerland and, through its financial and investment banking functions, makes venture capital investments on behalf of itself and clients; and THEREFORE, in consideration of the mutual covenants contained herein, it is agreed as follow: DEFINITIONS AND INTERPRETATIONS 1. CAPTIONS AND SECTION NUMBERS The headings and section references in this Investment Banking Agreement are for convenience or reference only and do not form a part of this agreement and are not intended to interpret, define or limit the scope, extent or intent of this Investment Banking Agreement or any provisions thereof. 2. EXTENDED MEANINGS The words "hereof", "herein", "hereunder" and similar expressions used in any clause, paragraph or section of this agreement will relate to the whole of this Investment Banking Agreement and not to that clause, paragraph or section only, unless otherwise expressly provided. 3. NUMBER AND GENDER In this Investment Banking Agreement, words importing the masculine gender include the feminine or neuter gender and words in the singular include the plural, and vice-versa. 4. SECTION REFERENCES AND SCHEDULES Any reference to a particular "article", "section", "paragraph" or other subdivision of this Investment Banking Agreement and any reference to a schedule, exhibit or addendum by name, number and/or letter will mean the appropriate schedule, exhibit or addendum attached to this Investment Banking Agreement. AGREEMENT 5. APPOINTMENT COMPANY hereby appoints and engages GIVIGEST, on a non-exclusive basis, as its investment banking and financial planning counsel for Switzerland and Italy, and hereby retains and employs GIVIGEST upon terms and conditions of this Investment Banking Agreement. GIVIGEST accepts such appointment and agrees to perform the services upon the terms and conditions of said Investment Banking Agreement. 6. FIRST ENGAGEMENT COMPANY engages GIVIGEST to place the private placement, as described on Addendum "B", to prospective investors as further described below and subject to the further provisions of this Investment Banking Agreement. GIVIGEST hereby accepts said engagement and COMPANY as a client and agrees to provide the services as further described below and subject to the further provisions of this Investment Banking Agreement. 7. AUTHORITY AND DESCRIPTION OF SERVICES During the term of this Agreement, GIVIGEST shall furnish various professional services. Said professional services and advice shall relate to those services, items and/or subjects described in Addendum "A", which is attached hereto and made a part hereof by this reference, and/or as follows: 8. TERM OF AGREEMENT This agreement shall become effective upon execution hereof and shall continue thereafter through and including October 15, 1999 or in case of paragraphs 10,11,12(d),12(e),17,18,23,24,26, and 30 so long as any of the debentures that are to be offered to the private placement are outstanding. 9. WHERE SERVICES SHALL BE PERFORMED GIVIGEST services shall be performed at the main office location of GIVIGEST in Lugano (Switzerland), or other such designated location(s) as GIVIGEST and COMPANY agree are the most advantageous for the work to be performed. 10. LIMITATIONS ON RELEASE OF INFORMATION The parties hereto recognize that certain responsibilities and obligations are imposed by federal and state securities laws and by the applicable rules and regulations of stock exchanges, the National Association of Securities Dealers, in house "due diligence" or "compliance departments of brokerage houses, etc. Accordingly, GIVIGEST agrees as follows: (a) GIVIGEST will NOT release any financial or other information or data about COMPANY that has not previously been publicly disseminated, without the consent and approval of COMPANY. (b) GIVIGEST will NOT conduct any meetings with financial analysts without informing COMPANY in advance of any proposed meeting, the format or agenda of such meeting and allowing COMPANY to elect to have a representative of COMPANY attend such meeting. 11. DUTIES OF COMPANY (a) COMPANY shall supply GIVIGEST, on a regular and timely basis, with all approved data and information about COMPANY, its management, its product and its operations; and COMPANY shall promptly advise GIVIGEST of any facts which would affect the accuracy of any prior data and information previously supplied to GIVIGEST so that GIVIGEST may take corrective action. (b) COMPANY shall promptly supply GIVIGEST with full and complete copies of all filings with all federal and state securities agencies; with full and complete copies of all shareholder reports and communications; with all data and information supplied to any analyst, broker-dealer, market maker, or other member of the financial community; and with all product/services brochures, sales material, etc (3) COMPANY will immediately notify GIVIGEST if it intends to make any additional private or public offering of securities, including an S-8 or other registered offering, a Regulation S placement, or any other public or private placement or distribution of its securities and, if reasonably possible, give GIVIGEST a first right of refusal to make such offering or placement upon the same terms and conditions. (4) COMPANY will immediately notify GIVIGEST at least 30 days prior to any insider selling of COMPANY'S stock, an insider being defined as any officer, director, or holder of five (5) per cent or more of COMPANY'S outstanding securities. (e) In that GIVIGEST shareholders, officers, employees, and/or members of their families may hold a position in and engage in transactions with respect to COMPANY securities and, in light of the fact that GIVIGEST imposes restrictions on such transactions to guard against trading on the basis of material non public information, COMPANY shall contemporaneously notify GIVIGEST if any information or data being supplied to GIVIGEST has not been generally released or promulgated. (f) COMPANY will cause the outstanding common shares to be reverse split on a 1 new share for 10 old share basis no sooner than October 15, 1999 and no later than December 31, 1999. (g) COMPANY will cause DTC sheets to be provided to GIVIGEST on a weekly basis and will pay all costs thereof. (h) COMPANY will provide GIVIGEST, at no cost, a quarterly shareholder list and, in addition will provide a list anytime the shareholdings of any shareholder holding 5% or more of COMPANY'S shares is transferred. (i) COMPANY will notify GIVIGEST, in advance, of its intention to issue to COMPANY officers, directors, employees, or consultants any new options or warrants on its common stock. 12. REPRESENTATIONS AND INDEMNIFICATION (A) In that GIVIGEST relies on information provided by COMPANY for a substantial part of its efforts, COMPANY represents that said information provided by COMPANY will be neither false nor misleading nor will COMPANY fail to disclose information necessary to make the other information provided not misleading. (b) COMPANY shall be deemed to make a continuing representation of the accuracy of any and all material facts, materials, information, and data which it supplies to GIVIGEST and COMPANY acknowledges its awareness that GIVIGEST will rely on such continuing representation in disseminating such information and otherwise performing its investment banking functions. (c) GIVIGEST, in the absence of notice in writing from COMPANY, will rely on the continuing accuracy of materials, information, and data supplied by COMPANY. (d) COMPANY hereby agrees to hold harmless and indemnify GIVIGEST against any claims, demands, suits, loss, damages, liabilities and expenses arising out of GIVIGEST's reliance upon the instant accuracy and continuing accuracy of such facts, materials, information, and data, unless GIVIGEST has been negligent in performing its duties and obligations hereunder. (e) GIVIGEST hereby agrees to hold harmless and indemnify COMPANY and its officers and directors against any claims, demands, suits, loss, damage, liabilities and expenses incurred which arise out of the services to be provided by GIVIGEST to COMPANY, but only to the extent that such claims, demands, suits, loss, damage, liabilities and expenses shall arise out of or be based upon any untrue statement or alleged untrue statement of a material fact made by GIVIGEST in the offer and sale of COMPANY'S debentures. (f) COMPANY shall cooperate fully and timely with GIVIGEST to enable GIVIGEST to perform its duties and obligations under this agreement. (g) The execution and performance of this Investment Banking Agreement by COMPANY has been duly authorized by the Board of Directors of COMPANY in accordance with applicable law, and, to the extent required, by the requisite number of shareholders of COMPANY. (h) The performance by COMPANY of this Agreement will not violate any applicable court decree or order, law or regulation, nor will it violate any provision of the organizational documents and/or bylaws of COMPANY or any contractual obligation to which COMPANY may be bound. 13. COMPENSATION (a) For its Investment Banking services, COMPANY shall make payment to GIVIGEST according to the terms and conditions set forth in Addendum "A". (2) All moneys payable hereunder shall be in U.S. funds and drawn on U.S. banks. (c) For all services not within the scope of this agreement, COMPANY shall pay to GIVIGEST such fee(s) as, and when, the parties determine in advance of performance of said special services, provided COMPANY has agreed to said special services in advance. 14. BILLING AND PAYMENT Finder's Fees will by paid by wire within three days after COMPANY has received the funds from any sale of its securities under this agreement. Billing and payments for any special services shall be agreed on a case by case basis. 15. GIVIGEST AS AN INDEPENDENT CONTRACTOR GIVIGEST shall provide said services as an independent contractor and not as an employee of COMPANY nor of any company affiliated with COMPANY. GIVIGEST has no authority to bind COMPANY or any affiliate of COMPANY to any legal action, contract, agreement, or purchase and such action can not be construed to be made in good faith or with the acceptance of COMPANY, thereby becoming the sole responsibility of GIVIGEST. GIVIGEST is not entitled to any medical coverage, life insurance, savings plans, health insurance, or any and all other benefits of afforded COMPANY employees. GIVIGEST shall be solely responsible for any Federal State or Local Taxes; and should COMPANY for any reason be required to pay taxes at a later date, GIVIGEST shall insure such payment is made by GIVIGEST and not COMPANY. GIVIGEST shall be responsible for all workers compensation payments and herein holds COMPANY harmless for any and all such payments and responsibilities related hereto. 16. GIVIGEST NOT TO ENGAGE IN CONFLICTING ACTIVITIES During the term of this agreement, GIVIGEST shall not engage in any activities that directly conflicts with the interests of COMPANY. COMPANY hereby acknowledges notification by GIVIGEST and understands that GIVIGEST does and shall represent and service other multiple clients in the same manner as it does COMPANY, and that COMPANY is not an exclusive client of GIVIGEST. 17. PROPRIETARY INFORMATION GIVIGEST shall treat as proprietary any and all information, not previously publicly disclosed, belonging to COMPANY, its affiliates, or any third parties and disclosed to GIVIGEST in the course of the performance of GIVIGEST Services. 18. INSIDE INFORMATION - SECURITIES VIOLATIONS In the course of the performance of this agreement it is expected that specific sensitive information concerning the operations of COMPANY business and/or affiliate companies shall be divulged to GIVIGEST. In such event GIVIGEST will not divulge, discuss, or otherwise reveal such information to any third parties. 19. DISCLOSURE GIVIGEST shall disclose any outside activities or interests, including ownership or participation in the development of prior inventions, that conflict or may conflict with the best interests of COMPANY. It is mutually understood that prompt disclosure is required under this paragraph if the activity or interest is related directly or indirectly, to any activity that GIVIGEST may be involved with on behalf of COMPANY. 20. WARRANTY AGAINST CONTEMPLATION OF AGREEMENT FOR RELATED CORRUPT PRACTICES GIVIGEST represents and warrants that all payments and other valuable consideration paid or to be paid under this agreement constitutes compensation for services rendered that this agreement; all payments and other valuable considerations and the use of those payments and valuable considerations are non-political in nature; and that said payments and valuable considerations will not be used to influence, sway or bribe any government or municipal party, either domestic or foreign, in any way. 21. SEVERABILITY If any provision of this agreement shall be held to be contrary to law, invalid or unenforceable for any reason, the remaining provisions shall continue to be valid and enforceable. If a court finds that any provision of this agreement is contrary to law, invalid or unenforceable and that by limiting such provision it would become valid and enforceable, then such provision shall be deemed to be written, construed, and enforceable as so limited. 22. TERMINATION OF AGREEMENT This Investment Banking Agreement may not be terminated by either party prior to the expiration of the term provided in Paragraph 8 above except as follows: (a) Upon the bankruptcy or liquidation of the other party, whether voluntary or involuntary, (b) Upon the other party taking the benefit of any insolvency law, and/or (c) Upon the other party having or applying for a receiver appointment for either party. (d Upon the discovery of false, misleading, or fraudulent misrepresentations by either party or the breach of any warranty, representation of covenant contained herein by either party. (e) In the event COMPANY fails or refuses to cooperate with GIVIGEST or fails or refuses to make timely payment of the compensation set forth above and/or in Addendum "A". In such a case, GIVIGEST shall have the right to terminate any further performance under this agreement and upon, notification thereof, all earned compensation shall become immediately due and payable. 23. ATTORNEY FEES In the event either party is in default of the terms and conditions of this Investment Banking Agreement and legal action is initiated or suit be entered as a result of such a default, the prevailing party shall be entitled to recover all costs incurred as a result of such default including all costs, reasonable attorney fees, expenses, court costs through trial, appeal and to final disposition (if applicable), and all costs of arbitration provided for herein. 24. RETURN OF RECORDS Upon termination of this agreement, GIVIGEST shall deliver all of Company's records, notes, data, memorandum, models and equipment of any nature that are in the control of GIVIGEST. 25. Miscellaneous (1) Effective date of representations shall be no later than the date of the signing of this agreement by both parties. (2) Currency: in all instances, references to dollars shall be deemed to be United States Dollars 26. NOTICES All notices hereunder shall be in writing and addressed to the party at the address herein set forth, or at such other address which notice pursuant to this section may be given and shall be given by either personal delivery, certified mail, express mail or other national overnight courier services. Notices shall be deemed given upon the earlier or actual receipt or three (3) business days after being mailed or delivered to such courier service. Any notices to be given hereunder shall be effective if executed by and sent by the attorneys for the parties giving such notice; and in connection therewith, the parties and their respective counsel agree that in giving such notice, such counsel may communicate directly in writing with such parties to the extent necessary to give such notice. Any notice required or permitted by this agreement to be given shall be given to the respective parties at the following addresses: GIVIGEST: GIVIGEST FIDUCIARIA SA Corso Elvezia 4, CH-6901 Lugano, Switzerland Telephone: +4191-921-1821 Fax: +4191-921-1823 COMPANY: AIR PACKAGING TECHNOLOGIES, INC. 25260 Rye Canyon Road, Valencia, California, USA Telephone 1-661-294-2222 Fax: 1-661-294-0947 27. TIME IS OF THE ESSENCE Time is hereby expressly made of the essence of this Investment Banking Agreement with respect to the performance by the parties of their respective obligations hereunder. 28. INUREMENT This Investment Banking Agreement shall enure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, personal representatives, successors, assigns and any addenda attached hereto. 29. ENTIRE AGREEMENT This Investment Banking Agreement contains the entire agreement of the parties and may be modified or amended only by agreement, in writing, signed by the party against whom enforcement of any waiver, change, amendment, modification, extension or discharge is sought. It is declared by both parties that there are no oral or other agreements or understanding between them affecting this Investment Banking Agreement or relating to the business of GIVIGEST. This agreement supersedes all previous agreements between GIVIGEST and COMPANY. 30. APPLICABLE LAW This Agreement is executed pursuant to and shall be interpreted and governed for all purposes by the laws of the State of Ticino. If any provision of this Investment Banking Agreement is declared void, such provisions shall be deemed severed from this agreement, which shall otherwise remain in full force and effect. Any controversy or claim arising out of, relating to this agreement, or the breach thereof, shall be settled by arbitration in the Lugano District, Ticino in accordance with the rules then promulgated by said Courts, the Court shall appoint an arbitrator, and judgment upon award rendered may be entered in the courts of the Lugano District, Ticino or any other court having jurisdiction, which award and/or judgment shall include reasonable attorney's fees. 31. ACCEPTANCE BY GIVIGEST This Investment Banking Agreement is not valid or binding upon GIVIGEST unless and until executed by the President or other duly authorized executive officer of GIVIGEST at its home office in Lugano, Switzerland. 32. NON-WAIVER The failure of either party at any time to require any such performance by any other part shall not be construed as a waiver of such right to require such performance and shall in no way affect such party's right to require such performance and shall in no way affect such party's right subsequently to require full performance hereunder. 33. EXECUTION IN COUNTERPARTS This agreement may be executed in counterparts, not withstanding the date or dates upon which this agreement is executed and delivered by any of the parties, and each shall be deemed to be an original and all of which will constitute one and the same agreement. 34. Costs All costs and expenses incurred in the preparation of this agreement shall be borne solely by COMPANY. IN WITNESS WHEREOF, the parties hereto have set their hands in execution of this agreement. For and in behalf of: For and in behalf of: COMPANY GIVIGEST AIR PACKAGING TECHNOLOGIES, INC. GIVIGEST FIDUCIARIA SA a US Company a Swiss Company By /s/ Donald M. Ochacher By /s/ Claudio Gianascio ------------------------ ---------------------- Donald M. Ochacher Claudio Gianascio President President GIVIGEST FIDUCIARIA SA ONE TIME PROGRAM INVESTMENT BANKING AGREEMENT ADDENDUM "A" SPECIFIC SERVICES 1. GIVIGEST agrees to use its efforts to place COMPANY's $2,000,000 7% Convertible Debentures (hereinafter "Debentures"), as described on Addendum "B". 2. GIVIGEST commits to place $1,500,000 of COMPANY's Debentures on a firm basis, as that term is commonly used. 3. GIVIGEST will use its best efforts to place the remaining $500,000 of COMPANY's Debentures. 4. GIVIGEST commits to place the first $500,000 of COMPANY's Debentures no later than August 13, 1999. 5. GIVIGEST commits to place the next $1,000,000 of COMPANY's Debentures no later than September 15, 1999. 6. GIVIGEST will use its best efforts to place the remaining $500,000 of COMPANY's debentures no later than October 15, 1999. COMPENSATION 10% commission on all funds received by COMPANY through the sale of the Debentures subject to this agreement, including but not limited to the sale of the aforementioned debentures by GIVIGEST directly, received from investors or subscribers presented by GIVIGEST, or received from persons related to or referred by any such investor or subscriber. For and in behalf of: For and in behalf of: COMPANY GIVIGEST AIR PACKAGING TECHNOLOGIES, INC. GIVIGEST FIDUCIARIA SA a US Company a Swiss Company By /s/ Donald M. Ochacher By /s/ Claudio Gianascio ------------------------ ---------------------- Donald M. Ochacher Claudio Gianascio President President GIVIGEST FIDUCIARIA SA ONE TIME PROGRAM INVESTMENT BANKING AGREEMENT ADDENDUM "B" DESCRIPTION OF DEBENTURES 1. 4 year 7% Convertible Debentures of Air Packaging Technologies, Inc. 2. Conversion Price a. Convertible into common stock of COMPANY at anytime within two years of issue date at $0.15 per share. b. Convertible into common stock of COMPANY at anytime between the first day of the third year and the last day of the fourth year after issue date at $0.25 c. Conversion feature expires at 12:00 midnight Los Angeles, California time on the last day of the fourth year after the issue date. 3. Payable in full, if not converted, upon surrender of debenture to COMPANY no sooner than the first day of the fifth year after issue date. 4. Interest a. Payable annually in arrears. b. Payable, at the option of holder, in unregistered common stock of COMPANY at a 20% discount to the average bid price of COMPANY's common stock during the 30 business days immediately prior to payment date, if COMPANY is notified of the election a minimum of 15 days prior to the payment date. For the purpose of this paragraph the "payment date" is defined as the 365th day from the issue date or the last payment date, as applicable. c. At COMPANY's option, COMPANY may choose to register said dividend shares. In such event, the dividend shall be payable at the average bid price of COMPANY's common stock for the 30 business days immediately prior to payment date. If COMPANY chooses this option, it will use its best efforts to register the dividend shares as soon as practicable after payment date. D. Notwithstanding anything to the contrary, the minimum price to be used to compute the number of shares to be issued as a dividend shall be $0.15. 5. Issuance of Debentures a. The Debentures will be issued in the names and denominations as directed by GIVIGEST, provided, that COMPANY shall be entitled to request information from GIVIGEST concerning any purchaser and approve any purchaser of the Debentures, which approval shall not be unreasonably withheld or delayed. REGISTRATION RIGHTS AND OTHER FEATURES 1. Registration Rights a. Company will use its best efforts to file a registration with the US Securities and Exchange Commission within 30 days of this agreement to register the debentures and the underlying common shares upon conversion. b. Company will use its best efforts to cause said registration statement to become effective by December 31, 1999 and will use its best efforts to maintain said registration until 6 months after the conversion of all of the debentures or the expiration of the conversion rights, whichever comes first. 2. Other Features a. The minimum amount of debentures that can be converted at any time by any debenture holder shall be $100,000. b. Debentures shall be senior in preference to all other debentures whether presently outstanding or issued in the future unless unanimously agreed to by the debenture holders in the particular case. SUBSCRIBERS & EXEMPT PLACEMENT a. The aforementioned debentures shall be offered by GIVIGEST only to accredited institutions and individuals as that term is defined under the Securities Act of 1933 and the rules promulgated thereunder (hereinafter "The Act")and only to institutions and individuals which acknowledge that they are acquiring the Debentures with an investment intent and not with a view to resale unless registered. b. The Debentures will be offered and sold pursuant to an exemption from registration under The Act and, as such, both the Debentures and the common shares issued upon conversion will be issued with a restrictive legend and may not be resold, hypothecated, or transferred within the US or to a US person, as that term is defined under The Act, unless and until a registration statement covering the debentures and underlying shares is in effect or an exemption from registration for said sale, hypothecation, or transfer is applicable to said action. For and in behalf of: For and in behalf of: COMPANY GIVIGEST AIR PACKAGING TECHNOLOGIES, INC. GIVIGEST FIDUCIARIA SA a US Company a Swiss Company By /s/ Donald M. Ochacher By /s/ Claudio Gianascio ------------------------ ---------------------- Donald M. Ochacher Claudio Gianascio President President EX-10.J 3 EXHIBIT 10(j) GIVIGEST FIDUCIARIA SA One Time Program INVESTMENT BANKING AGREEMENT THIS INVESTMENT BANKING AGREEMENT made this 27th day of March, 2000 by and ---- ----- between: GIVIGEST FIDUCIARIA SA Corso Elvezia 4, CH-6901 Lugano, Switzerland a Swiss Corporation (hereinafter referred to as "GIVIGEST"), and; AIR PACKAGING TECHNOLOGIES, INC. 25260 Rye Canyon Road, Valencia, California, USA (hereinafter referred to as "COMPANY"); collectively GIVIGEST and COMPANY hereinafter referred to as "the parties". WITNESSETH: WHEREAS, GIVIGEST is an investment banking, financial, management consulting and strategic planning firm, with expertise in the dissemination of information about publicly traded companies, and is in the business of providing investor relations services and other related program services and products; and, WHEREAS, COMPANY is publicly held with its common stock trading Over the Counter (OTC) under the ticker symbol "AIRP", and WHEREAS, COMPANY desires the advise and services of GIVIGEST in providing investor relations, preparation of research reports, being introduced to institutional investors, and assist in a private placement, and WHEREAS, GIVIGEST is willing to accept COMPANY as a client and to assist COMPANY in the aforementioned matters, THEREFORE, in consideration of the mutual covenants contained herein, it is agreed as follow: DEFINITIONS AND INTERPRETATIONS 1. Captions and Section Numbers The headings and section references in this Investment Banking Agreement are for convenience or reference only and do not form a part of this agreement and are not intended to interpret, define or limit the scope, extent or intent of this Investment Banking Agreement or any provisions thereof. 2. Extended Meanings The words "hereof", "herein", "hereunder" and similar expressions used in any clause, paragraph or section of this agreement will relate to the whole of this Investment Banking Agreement and not to that clause, paragraph or section only, unless otherwise expressly provided. 3. Number and Gender In this Investment Banking Agreement, words importing the masculine gender include the feminine or neuter gender and words in the singular include the plural, and vice-versa. 4. Section References and Schedules Any reference to a particular "article", "section", "paragraph" or other subdivision of this Investment Banking Agreement and any reference to a schedule, exhibit or addendum by name, number and/or letter will mean the appropriate schedule, exhibit or addendum attached to this Investment Banking Agreement. AGREEMENT 5. Appointment COMPANY hereby appoints and engages GIVIGEST, on exclusive basis, as its investment banking and financial planning counsel for Europe, and hereby retains and employs GIVIGEST upon terms and conditions of this Investment Banking Agreement. GIVIGEST accepts such appointment and agrees to perform the services upon the terms and conditions of said Investment Banking Agreement. 6. Authority and Description of Services During the term of this Agreement, CONSULTANT shall furnish various professional services and advice as needed and as specifically requested by Mr. Donald Ochacher, President of COMPANY and/or a representative appointed by the Board of Directors of COMPANY. Said professional services and advice shall relate to those services, items and/or subjects described in Addendum "A", which is attached hereto and made a part hereof by this reference. 7. Term of Agreement This agreement shall become effective on April 1, 2000 shall continue for a period of one year. 8. Where Services Shall Be Performed GIVIGEST services shall be performed at the main office location of GIVIGEST in Lugano (Switzerland), or other such designated location(s) as GIVIGEST and COMPANY agree are the most advantageous for the work to be performed. 9. Limitations On Release Of Information The parties hereto recognize that certain responsibilities and obligations are imposed by federal and state securities laws and by the applicable rules and regulations of stock exchanges, the National Association of Securities Dealers, in house "due diligence" or "compliance" departments of brokerage houses, etc. Accordingly, GIVIGEST agrees as follows: (a) GIVIGEST will NOT release any financial or other information or data about COMPANY that has not previously been publicly disseminated, without the consent and approval of COMPANY. (b) GIVIGEST will NOT conduct any meetings with financial analysts without informing COMPANY in advance of any proposed meeting, the format or agenda of such meeting and allowing COMPANY to elect to have a representative of COMPANY attend such meeting. 10. Duties Of COMPANY (a) COMPANY shall supply GIVIGEST, on a regular and timely basis, with all approved data and information about COMPANY, its management, its product and its operations; and COMPANY shall promptly advise GIVIGEST of any facts which would affect the accuracy of any prior data and information previously supplied to GIVIGEST so that GIVIGEST may take corrective action. (b) COMPANY shall promptly supply GIVIGEST with full and complete copies of all filings with all federal and state securities agencies; with full and complete copies of all shareholder reports and communications; with all data and information supplied to any analyst, broker-dealer, market maker, or other member of the financial community; and with all product/services brochures, sales material, etc. (c) COMPANY will immediately notify GIVIGEST if it intends to make any additional private or public offering of securities, including an S-8 or other registered offering, a Regulation S placement, or any other public or private placement or distribution of its securities and give GIVIGEST a first right of refusal to make such offering or placement upon the same terms and conditions. (d) COMPANY will immediately notify GIVIGEST at least 15 days prior to any insider selling of COMPANY'S stock, an insider being defined as any officer, director, or holder of five (5) per cent or more of COMPANY'S outstanding securities. (e) In that GIVIGEST shareholders, officers, employees, and/or members of their families may hold a position in and engage in transactions with respect to COMPANY securities and, in light of the fact that GIVIGEST imposes restrictions on such transactions to guard against trading on the basis of material non public information, COMPANY shall contemporaneously notify GIVIGEST if any information or data being supplied to GIVIGEST has not been generally released or promulgated. (f) COMPANY will consult with GIVIGEST, in advance, of its intention to issue to COMPANY officers, directors, employees, or consultants any new options or warrants on its common stock In the event that GIVIGEST disagrees with such issuance and COMPANY carries through with the issuance, GIVIGEST shall have the unilateral right to terminate this agreement. (g) Prior to this agreement becoming effective, COMPANY will provide to GIVIGEST a year 2000 budget and warrants that it will not materially deviate from such budget without first consulting with GIVIGEST as to the propriety of any such deviation. In the event Company materially deviates from such budget without the permission of GIVIGEST, which shall not be unreasonably withheld, GIVIGEST shall have the right to terminate this agreement and any unearned portion of Compensation provided for in Addendum A shall immediately become fully earned as liquidated damages for this breach. The aforementioned Budget shall be attached hereto as Addendum B. (h) COMPANY will not negotiate with or enter into any agreement with a US investor relations group or US investment banking group without prior consultation with GIVIGEST, will allow GIVIGEST to assist in any such negotiations, and will give to GIVIGEST a first right of refusal to perform the same services on terms equal to any proposed US investor relations group or US investment banking group. 11. Representations And Indemnification (a) In that GIVIGEST relies on information provided by COMPANY for a substantial part of its efforts, COMPANY represents that said information provided by COMPANY will be neither false nor misleading nor will COMPANY fail to disclose information necessary to make the other information provided not misleading. (b) COMPANY shall be deemed to make a continuing representation of the accuracy of any and all material facts, materials, information, and data which it supplies to GIVIGEST and COMPANY acknowledges its awareness that GIVIGEST will rely on such continuing representation in disseminating such information and otherwise performing its investment banking functions. (c) GIVIGEST, in the absence of notice in writing from COMPANY, will rely on the continuing accuracy of materials, information, and data supplied by COMPANY. (d) COMPANY hereby agrees to hold harmless and indemnify GIVIGEST against any claims, demands, suits, loss, damages, liabilities and expenses arising out of GIVIGEST's reliance upon the instant accuracy and continuing accuracy of such facts, materials, information, and data, unless GIVIGEST has been negligent in performing its duties and obligations hereunder. (e) GIVIGEST hereby agrees to hold harmless and indemnify COMPANY and its officers and directors against any claims, demands, suits, loss, damage, liabilities and expenses incurred which arise out of the services to be provided by GIVIGEST to COMPANY, but only to the extent that such claims, demands, suits, loss, damage, liabilities and expenses shall arise out of or be based upon any untrue statement or alleged untrue statement of a material fact made or absence to disclose a material fact by GIVIGEST in the offer and sale of COMPANY'S securities. (f) COMPANY shall cooperate fully and timely with GIVIGEST to enable GIVIGEST to perform its duties and obligations under this agreement. (h) COMPANY represents and warrants that it will provide to GIVIGEST evidence of its present capital structure, including authorized shares, outstanding shares, outstanding warrants, outstanding options, and outstanding convertible securities prior to this agreement becoming effective and further warrants that it is not negotiating or discussing the issuance of any additional warrants, options, or shares, common or otherwise, nor any repricing of any existing equity linked securities, except as specifically disclosed to GIVIGEST. Such Document of Capital structure shall be attached hereto as Addendum C (i) The execution and performance of this Investment Banking Agreement by COMPANY has been duly authorized by the Board of Directors of COMPANY in accordance with applicable law, and, to the extent required, by the requisite number of shareholders of COMPANY. (j) The performance by COMPANY of this Agreement will not violate any applicable court decree or order, law or regulation, nor will it violate any provision of the organizational documents and/or bylaws of COMPANY or any contractual obligation to which COMPANY may be bound. 12. Compensation (a) For its Investment Banking services, COMPANY shall make payment to GIVIGEST according to the terms and conditions set forth in Addendum "A". (b) All moneys payable hereunder shall be in U.S. funds and drawn on U.S. banks. (c) For all services not within the scope of this agreement, COMPANY shall pay to GIVIGEST such fee(s) as, and when, the parties determine in advance of performance of said special services, provided COMPANY has agreed to said special services in advance. 13. Billing And Payment Any Fees or expense reimbursements shall by paid by wire within three days after COMPANY has received a billing for the services or documentation for the reimbursements. Any monthly fees will be paid by wire by the tenth day of each month. Billing and payments for any special services shall be agreed on a case by case basis. 14. GIVIGEST As An Independent Contractor GIVIGEST shall provide said services as an independent contractor and not as an employee of COMPANY nor of any company affiliated with COMPANY. GIVIGEST has no authority to bind COMPANY or any affiliate of COMPANY to any legal action, contract, agreement, or purchase and such action can not be construed to be made in good faith or with the acceptance of COMPANY, thereby becoming the sole responsibility of GIVIGEST. GIVIGEST is not entitled to any medical coverage, life insurance, savings plans, health insurance, or any and all other benefits of afforded COMPANY employees. GIVIGEST shall be solely responsible for any Federal State or Local Taxes; and should COMPANY for any reason be required to pay taxes at a later date, GIVIGEST shall insure such payment is made by GIVIGEST and not COMPANY. GIVIGEST shall be responsible for all workers compensation payments and herein holds COMPANY harmless for any and all such payments and responsibilities related hereto. 15. GIVIGEST Not to engage in Conflicting Activities During the term of this agreement, GIVIGEST shall not engage in any activities that directly conflicts with the interests of COMPANY. COMPANY hereby acknowledges notification by GIVIGEST and understands that GIVIGEST does and shall represent and service other multiple clients in the same manner as it does COMPANY, and that COMPANY is not an exclusive client of GIVIGEST. 16. Proprietary Information GIVIGEST shall treat as proprietary any and all information, not previously publicly disclosed, belonging to COMPANY, its affiliates, or any third parties and disclosed to GIVIGEST in the course of the performance of GIVIGEST Services. 17. Inside information - Securities Violations In the course of the performance of this agreement it is expected that specific sensitive information concerning the operations of COMPANY business and/or affiliate companies shall be divulged to GIVIGEST. In such event GIVIGEST will not divulge, discuss, or otherwise reveal such information to any third parties. 18. Disclosure GIVIGEST shall disclose any outside activities or interests, including ownership or participation in the development of prior inventions, that conflict or may conflict with the best interests of COMPANY. It is mutually understood that prompt disclosure is required under this paragraph if the activity or interest is related directly or indirectly, to any activity that GIVIGEST may be involved with on behalf of COMPANY. 19. Warranty Against Contemplation of Agreement For Related Corrupt Practices GIVIGEST represents and warrants that all payments and other valuable consideration paid or to be paid under this agreement constitutes compensation for services rendered that this agreement; all payments and other valuable considerations and the use of those payments and valuable considerations are non-political in nature; and that said payments and valuable considerations will not be used to influence, sway or bribe any government or municipal party, either domestic or foreign, in any way. 20. Conditions Precedent to Performance by GIVIGEST Prior to GIVIGEST being required to perform any duties or obligations agreed to under the agreement, COMPANY shall have satisfied the following conditions precedent: (a) Perform any Duties under Section 10 above or Representations or warranties under Section 11 above that are to be performed prior to GIVIGEST undertaking its obligations and duties. (b) Provide evidence reasonably satisfactory to GIVIGEST that Company's key executives have agreed to enter into one year employment agreements. (c) Provide evidence that COMPANY is using its best efforts to acquire a D & O Insurance having a minimum combined limits of $2,500,000. (d) Reserve a minimum of one seat on the Board of Directors for a representative of GIVIGEST reasonably acceptable to the Board, if and when GIVIGEST requests such an appointment, such director(s) to sit until resignation or replacement by the shareholders of COMPANY. (e) COMPANY shall have reached a repricing of the COMPANY's 7% Convertible Notes due 2003 reasonably acceptable to GIVIGEST. 21. Severability If any provision of this agreement shall be held to be contrary to law, invalid or unenforceable for any reason, the remaining provisions shall continue to be valid and enforceable. If a court finds that any provision of this agreement is contrary to law, invalid or unenforceable and that by limiting such provision it would become valid and enforceable, then such provision shall be deemed to be written, construed, and enforceable as so limited. 22. Termination of Agreement This Investment Banking Agreement may not be terminated by either party prior to the expiration of the term provided in Paragraph 8 above except as follows: (a) Upon the bankruptcy or liquidation of the other party, whether voluntary or involuntary, (b) Upon the other party taking the benefit of any insolvency law, and/or (c) Upon the other party having or applying for a receiver appointment for either party. (d) Upon the discovery of false, misleading, or fraudulent misrepresentations by either party or the breach of any warranty, representation of covenant contained herein by either party. (e) In the event COMPANY fails or refuses to cooperate with GIVIGEST or fails or refuses to make timely payment of the compensation set forth above and/or in Addendum "A". In such a case, GIVIGEST shall have the right to terminate any further performance under this agreement and upon, notification thereof, all earned compensation shall become immediately due and payable. (f) In the event of any breach of any other section of this agreement which provides for termination, including but not limited to Sections 10(f) and 10(g). 23. Attorney Fees In the event either party is in default of the terms and conditions of this Investment Banking Agreement and legal action is initiated or suit be entered as a result of such a default, the prevailing party shall be entitled to recover all costs incurred as a result of such default including all costs, reasonable attorney fees, expenses, court costs through trial, appeal and to final disposition (if applicable), and all costs of arbitration provided for herein. 24. Return Of Records Upon termination of this agreement, GIVIGEST shall deliver all of Company's records, notes, data, memorandum, models and equipment of any nature that are in the control of GIVIGEST. 25. Miscellaneous (a) Effective date of representations shall be no later than the date of the signing of this agreement by both parties. (b) Currency: in all instances, references to dollars shall be deemed to be United States Dollars 26. Notices All notices hereunder shall be in writing and addressed to the party at the address herein set forth, or at such other address which notice pursuant to this section may be given and shall be given by either personal delivery, certified mail, express mail or other national overnight courier services. Notices shall be deemed given upon the earlier or actual receipt or three (3) business days after being mailed or delivered to such courier service. Any notices to be given hereunder shall be effective if executed by and sent by the attorneys for the parties giving such notice; and in connection therewith, the parties and their respective counsel agree that in giving such notice, such counsel may communicate directly in writing with such parties to the extent necessary to give such notice. Any notice required or permitted by this agreement to be given shall be given to the respective parties at the following addresses: GIVIGEST: GIVIGEST FIDUCIARIA SA Corso Elvezia 4, CH-6901 Lugano, Switzerland Telephone: +4191-921-5600 Fax: +4191-921-5606 COMPANY: AIR PACKAGING TECHNOLOGIES, INC. 25260 Rye Canyon Road, Valencia, California, USA Telephone 1-661-294-2222 Fax: 1-661-294-0947 27. Time Is Of The Essence Time is hereby expressly made of the essence of this Investment Banking Agreement with respect to the performance by the parties of their respective obligations hereunder. 28. Inurement This Investment Banking Agreement shall enure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, personal representatives, successors, assigns and any addenda attached hereto. 29. Entire Agreement This Investment Banking Agreement contains the entire agreement of the parties and may be modified or amended only by agreement, in writing, signed by the party against whom enforcement of any waiver, change, amendment, modification, extension or discharge is sought. It is declared by both parties that there are no oral or other agreements or understanding between them affecting this Investment Banking Agreement or relating to the business of GIVIGEST. This agreement supersedes all previous agreements between GIVIGEST and COMPANY. 30. Applicable Law This Agreement is executed pursuant to and shall be interpreted and governed for all purposes by the laws of the State of Ticino. If any provision of this Investment Banking Agreement is declared void, such provisions shall be deemed severed from this agreement, which shall otherwise remain in full force and effect. Any controversy or claim arising out of, relating to this agreement, or the breach thereof, shall be settled by arbitration in the Lugano District, Ticino in accordance with the rules then promulgated by said Courts, the Court shall appoint an arbitrator, and judgment upon award rendered may be entered in the courts of the Lugano District, Ticino or any other court having jurisdiction, which award and/or judgment shall include reasonable attorney's fees. 31. Acceptance by GIVIGEST This Investment Banking Agreement is not valid or binding upon GIVIGEST unless and until executed by the President or other duly authorized executive officer of GIVIGEST at its home office in Lugano, Switzerland. 32. Non-waiver The failure of either party at any time to require any such performance by any other part shall not be construed as a waiver of such right to require such performance and shall in no way affect such party's right to require such performance and shall in no way affect such party's right subsequently to require full performance hereunder. 33. Execution In Counterparts This agreement may be executed in counterparts, not withstanding the date or dates upon which this agreement is executed and delivered by any of the parties, and each shall be deemed to be an original and all of which will constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have set their hands in execution of this agreement. For and on behalf of: For and on behalf of: COMPANY GIVIGEST AIR PACKAGING TECHNOLOGIES, INC. GIVIGEST FIDUCIARIA SA a US Company a Swiss Company By /s/ Donald M. Ochacher By /s/ Claudio Gianascio ------------------------ ---------------------- Donald M. Ochacher Claudio Gianascio President President Date Signed 3/27/2000 Date Signed 3/31/00 --------- ------- GIVIGEST FIDUCIARIA SA One Time Program INVESTMENT BANKING AGREEMENT Addendum "A" A. SPECIFIC SERVICES 10 Act as an investor relations contact in Europe, such information as is approved by COMPANY, responding to shareholders requests, and coordinating shareholder communication with COMPANY. One of GIVIGEST's representatives will be in charge of answering a dedicated telephone line and dedicated email address and coordinate with COMPANY all shareholders' questions by telephone, fax, or email. GIVIGEST will advise COMPANY on the construction and management of a corporate website. All costs of construction and management shall be paid by COMPANY. 20 Coordinate with and advise COMPANY on the appointment of a US investor relations group and/or Investment Banking group. 30 Coordinate the preparation of research reports on COMPANY and its activities. An initial research report will be issued by GIVIGEST to be distributed to GIVIGEST's customers and associates as well as COMPANY's existing shareholders, if appropriate. All costs for printing and mailing will be pre-approved and paid for by COMPANY. 40 Introduce COMPANY to institutional investors that would indicate an interest in COMPANY's business and activities. At COMPANY's request, or when it is deemed appropriate, GIVIGEST will organize one-on-one presentations or road shows to introduce COMPANY to the European financial community. The first of these will be held in Switzerland and Italy. COMPANY will pre-approve and pay for all costs, including travel, accommodations, space rental, and materials supplied during the presentations. 50 Evaluate and negotiate alternative listings of the COMPANY's stock. 60 Introduce COMPANY to additional market makers and brokerage firms to broaden its base of investors. 70 Introduce COMPANY to one or more individuals who would have education, talents, or business experience that could bring additional breadth to the Board of Directors. 80 During the term of this agreement, use its best efforts, based upon market conditions, to raise up to $2.5 million in additional capital or convertible debt at terms to be fixed according to market conditions. As a part thereof, GIVIGEST will ,on a firm basis, raise $250,000 within one month from the execution of this agreement upon terms to be agreed and assuming that COMPANY will have an immediate need for such funds to finance the purchase of equipment and inventory for a substantial new order that COMPANY has indicated should be received shortly. B. COMPENSATION 10 All expenses incurred by GIVIGEST which have been pre-approved by the President of COMPANY, including but not limited to stationery, printing, travel, accommodations, and related business meals 20 A monthly retainer of $5,000 payable, in advance, by the last day of the previous month beginning March 31, 2000. 30 100,000 shares of the common stock of COMPANY, upon the execution of the agreement, to be issued in the name of GIVIGEST and delivered as soon as practicable, said shares to be issued as "restricted shares" and to carry upon them the normal restrictive legend which prohibits their sale or transfer in the absence of a registration statement covering the same or an exemption from registration being applicable to the shares and transaction. 40 250,000 warrants to purchase the common stock of COMPANY upon execution of the agreement. Each warrant shall entitle the holder to purchaser one share of the common stock of COMPANY at a determined price (see below) for a period of three years from the ending day of the month in which this agreement is executed 50 250,000 additional warrants on the same terms as II(4) above on the basis of one warrant for every $10 raised pursuant to I.(8) above. 60 The price at which the aforementioned warrants are to be issued shall be a fixed price which shall equal the average of the closing bid prices of the Company's common stock for the twenty-five trading days prior to execution of this agreement, but not less than $0.50 per share 70 A Finder's fee equal to ten percent (10%) of all funds raised on behalf of COMPANY by GIVIGEST during the term of this agreement. 80 As additional consideration, GIVIGEST will have the following registration rights: i. In the event that COMPANY shall file, at any time any of the warrants are outstanding, a registration statement under which the issued shares and the shares underlying the above warrants could be registered, the COMPANY, upon the request of GIVIGEST, will use its best efforts to include the same under said registration statement. ii. In addition, GIVIGEST shall have the one time right to request the registration of the issued shares and/or the shares underlying the above warrants and COMPANY will use its best efforts to secure said registration. iii. In the case of any such registration filed by the COMPANY under either i or ii above, COMPANY shall use its best efforts to maintain it in an effective status for a minimum of one year from the effective date of the registration For and in behalf of: For and in behalf of: COMPANY GIVIGEST AIR PACKAGING TECHNOLOGIES, INC. GIVIGEST FIDUCIARIA SA a US Company a Swiss Company By /s/ Donald M. Ochacher By /s/ Claudio Gianascio ------------------------ ---------------------- Donald M. Ochacher Claudio Gianascio President President EX-27 4
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S BALANCE SHEET AT DEC-31-1999 AND STATEMENT OF OPERATIONS FOR THE YEAR-ENDED DEC-31-1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS REPORTED ON FORM 10K. 1
YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1150151 0 80233 (22630) 577389 1827038 2213135 (1498949) 2970285 410826 0 0 0 79664 979795 2970285 959712 959712 1012083 1012083 1802547 17500 30444 (1853012) 0 (1852012) 0 0 0 (1853012) (.25) (.25) FOR PURPOSES OF THIS EXHIBIT PRIMARY MEANS BASIC.
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