<PAGE>
As filed with the Securities and Exchange Commission on August 12, 1997
Registration No. 333-28741
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
Amendment No. 3
to
Form S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------
Compass Plastics & Technologies, Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 2821 95-4611994
<S> <C> <C>
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer identification no.)
incorporation or organization) classification code number)
</TABLE>
15730 South Figueroa Street, Gardena, California 90248
telephone: (213) 770-8771; facsimile: (310) 523-9859
(Address and telephone number of principal executive offices and principal
place of business)
---------------------
MICHAEL A. GIBBS, President
Compass Plastics & Technologies, Inc.
15730 South Figueroa Street, Gardena, California 90248
telephone: (213) 770-8771; facsimile: (310) 523-9859
(Name, address and telephone number of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C>
STEPHEN A. WEISS, ESQ. SCOTT W. ALDERTON, ESQ.
SPENCER G. FELDMAN, ESQ. LINDA GIUNTA MICHAELSON, ESQ.
Greenberg, Traurig, Hoffman, Troop Meisinger Steuber & Pasich, LLP
Lipoff, Rosen & Quentel 10940 Wilshire Boulevard
153 East 53rd Street Los Angeles, California 90024
New York, New York 10022 telephone: (310) 824-7000 facsimile: (310) 443-8569
telephone: (212) 801-9200 facsimile: (212) 223-7161
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering./ /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED AUGUST 12, 1997
PROSPECTUS
1,333,333 Shares
[LOGO] Compass Plastics & Technologies, Inc.
Common Stock
------------
Of the 1,333,333 shares of Common Stock (the "Common Stock") offered
hereby, 1,200,000 shares are being sold by Compass Plastics & Technologies,
Inc. (the "Company") and 133,333 shares are being sold by certain stockholders
of the Company (the "Selling Stockholders"). See "Principal and Selling
Stockholders." The Company will not receive any proceeds from the sale of
shares by the Selling Stockholders. Prior to this offering, there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $8.50 and $9.50 per
share. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. The Common Stock has been
approved for quotation on the Nasdaq National Market ("Nasdaq") under the
symbol "CPTI."
Certain clients of JO Hambro & Partners Limited, including certain
existing stockholders of the Company, have indicated to the Company that they
have an interest in purchasing 105,000 shares of Common Stock in this offering.
---------------------
The shares offered hereby involve a high degree of risk. See "Risk Factors"
beginning on page 8 hereof.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds Proceeds to
Public Commissions (1) to Company (2) Selling Stockholders
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share ...... $ $ $ $
- -----------------------------------------------------------------------------------------
Total (3) ...... $ $ $ $
</TABLE>
================================================================================
(1) Excludes the value of warrants to be issued to Cruttenden Roth Incorporated
and Josephthal Lyon & Ross Incorporated, as the representatives of the
several Underwriters (the "Representatives") to purchase up to 133,333
shares of Common Stock (the "Representatives' Warrants"). The Company and
the Selling Stockholders have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities
Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
to be $792,000, including the Representatives' non-accountable expense
allowance.
(3) The Selling Stockholders have granted the Underwriters a 45-day option to
purchase up to 200,000 additional shares of Common Stock from the Selling
Stockholders solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Stockholders will
be $ , $ , $ and $ , respectively. See "Underwriting."
----------------
The shares of Common Stock are offered by the several Underwriters, when,
as and if delivered to and accepted by the Underwriters and subject to various
prior conditions, including their right to withdraw, cancel or modify such
offer and to reject orders in whole or in part. It is expected that delivery of
share certificates will be made against payment therefor at the offices of
Cruttenden Roth Incorporated in Irvine, California or through the facilities of
the Depository Trust Company, on or about , 1997.
CRUTTENDEN ROTH JOSEPHTHAL LYON & ROSS
INCORPORATED INCORPORATED
The date of this Prospectus is , 1997
<PAGE>
[Artwork depicting the Company's manufacturing operations]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
The Company intends to furnish annual reports to stockholders containing
audited financial statements and make available quarterly reports and such
other periodic reports as it may determine to be appropriate or as may be
required by law.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus, including information under "Risk Factors." The shares of
Common Stock offered hereby involve a high degree of risk and investors should
carefully consider information set forth in "Risk Factors." Unless otherwise
indicated, all information in this Prospectus (i) gives effect to a 4-for-1
stock split to be consummated prior to the effectiveness of this offering, and
(ii) assumes that the Underwriters' over-allotment option as described in
"Underwriting" is not exercised. As used in this Prospectus, (i) unless the
context otherwise requires, the term "Company" refers to Compass Plastics &
Technologies, Inc. and its wholly-owned subsidiary, and (ii) the term "year" or
"fiscal year" refers to the Company's fiscal year ending on the last Sunday of
the 52 consecutive weeks ending in October, and the fiscal year ended October
27, 1996 includes the operations of the Company and its predecessor, AB
Plastics. See "Selected Financial Data."
The Company
Compass Plastics & Technologies, Inc., through its wholly-owned
subsidiary, AB Plastics Corporation ("AB Plastics"), is a leading contract
manufacturer and assembler of custom injection-molded plastic components in the
western United States. The Company manufactures the plastic exteriors of
computer monitors, televisions, electronic music keyboards and other consumer
electronics equipment. In addition to injection-molded components, the Company
offers a broad range of "value-added" services, including painting, decorating
and assembly. A significant percentage of the Company's components are
manufactured using gas-assist molding technology which reduces material usage
and permits the molding of lighter and stronger parts. The Company believes its
technical and manufacturing capabilities to produce large injection-molded
plastic components on both a "just-in-time" basis and in production volumes
with low reject rates provide a significant competitive advantage.
The Company charges its customers a fixed price for each component or part
it manufactures, which components may consist of single or multiple parts.
Negotiated prices include the cost of thermoplastic resins, packaging, other
materials and parts, labor and overhead. Although thermoplastic resins have
historically accounted for at least 80% of its raw materials costs, the Company
does not believe that its results of operations are subject to the risk of
fluctuations in resin prices, since the Company's arrangements with most of its
customers provide that price changes in such resins are passed through to the
customer by changes in the component prices charged by the Company.
The Company's two major original equipment manufacturer ("OEM") customers
are Sony Corporation ("Sony"), through its computer monitor and television
manufacturing divisions, and Matsushita Electronic Corporation of America
("Matsushita"), through its Panasonic and Quasar brands. Sales to these
customers represented approximately 66.5% and 18.0%, respectively, of the
Company's total sales for the fiscal year ended October 27, 1996. Of sales to
Sony, computer monitor components accounted for approximately 39.1% and
television components accounted for approximately 27.4% of the Company's total
sales during the fiscal year ended October 27, 1996. The Company has been an
uninterrupted supplier of custom injection-molded components to Sony since
1972, to Matsushita since 1983 and to virtually all of its other customers for
at least seven years. To improve its ability to support major customers, in
addition to its current manufacturing facility in Gardena, California
(approximately 15 miles south of Los Angeles), the Company is currently
completing a new "build-to-suit" manufacturing facility in Tijuana, Mexico.
This new facility has been logistically located near many of its customers'
manufacturing plants in Mexico and is expected to add significant manufacturing
capacity by September 1997. Management believes that this facility will enable
the Company to capitalize on demand from new and existing customers which have
relocated their manufacturing operations from the Far East and the United
States to Mexico in recent years due to lower labor and transportation costs.
Closer proximity to its major customers will allow the Company to be more
efficient in delivering 15 to 20 daily truckloads of components to its
customers' production facilities and eliminate time-consuming border crossings.
3
<PAGE>
Injection-molded plastic components are used in a wide variety of
industries, including automotive, telecommunications, computer, consumer
electronics, medical and packaging. Based on information provided in Plastic
News, a leading industry publication, sales of the top 100 North American
plastic injection molders were approximately $11.3 billion in 1994, $12.5
billion in 1995 and $14.4 billion in 1996, reflecting a 12.9% industry-wide
average annual growth rate. The Company was ranked by 1996 sales as the 96th
largest custom plastic injection molder in North America, the 9th largest
plastic injection molder in the western United States (comprised of the states
of California, Arizona, Oregon and Washington), and one of the three largest
custom plastic injection molders in Southern California. According to Stanford
Resources' Monitrak Quarterly Report, United States sales of computer monitors,
the Company's major market, rose to approximately 21.7 million units in 1996,
from sales of approximately 13.4 million units in 1994.
The Company's goal is to be a dominant supplier of injection-molded
plastic components to the increasing number of computer monitor and television
OEM plants located in Southern California and Tijuana, Mexico. Management
believes that the commencement of digital broadcasting in the television
industry in the United States, starting in 1998, will create a demand for new
high-definition television sets ("HDTV") and flat panel displays as consumers
replace obsolete television sets unable to receive digital broadcasting with
HDTV quality. According to the Consumer Electronics Manufacturers Association,
at least 20 million television sets have been sold each year since 1991 and 380
million television sets have been sold since 1974 in the United States. The key
elements of the Company's growth strategy include the following:
o Continue to expand computer monitor and television component business --
through the continuation of the overall growth of the Company's computer
monitor sales to Sony, which have grown from $2.9 million in fiscal 1994
to $15.4 million in fiscal 1996, expansions into new products such as
Sony's personal computer, known as "Vaio," and by targeting sales to other
computer monitor and television OEMs doing business in Tijuana, Mexico;
o Acquire complementary businesses -- which the Company believes will
diversify its customer base, technical capabilities and geographic areas
served;
o Capitalize on customer demand in Tijuana market -- by completing the
construction of its manufacturing facility in Tijuana, Mexico to increase
manufacturing capacity by 50% and to be located near existing and
potential customers;
o Pursue long-term relationships with new customers -- that require
responsive manufacturing services in the computer, television and consumer
electronics industries; and
o Continue commitment to quality and service -- by continuing to achieve
the highest levels of quality control through continuous improvement of
its engineering and manufacturing capabilities.
The Company was incorporated under the laws of the State of Delaware in
May 1996 under the name AB Plastics Holding Corporation. In June 1997, the
Company changed its name to Compass Plastics & Technologies, Inc. The Company's
principal executive offices are located at 15730 South Figueroa Street,
Gardena, California 90248, and its telephone number is (213) 770-8771. For a
description of the background of the Company, see "The Company."
4
<PAGE>
The Offering
Common Stock offered by the
Company ...................... 1,200,000 shares of Common Stock
Common Stock offered by the
Selling Stockholders ......... 133,000 shares of Common Stock
Common Stock outstanding after
the offering ................. 4,760,000 shares of Common Stock(1)(2)
Use of Proceeds ............... The Company intends to use the net proceeds of
this offering to repay approximately $4.0
million of outstanding indebtedness under its
subordinated loan agreement with Sirrom
Investments, Inc. ("Sirrom"). The remaining net
proceeds of approximately $5.0 million will be
used to complete the construction of the
warehouse and distribution center at the
Company's Gardena, California facility
(approximately $1.6 million) and equip its
newly-constructed Tijuana, Mexico manufacturing
facility (approximately $3.4 million). Pending
such uses, the Company intends to temporarily
reduce approximately $5.0 million in borrowings
expected to be outstanding under the Company's
maximum $10.0 million revolving line of credit
facility with The Sumitomo Bank of California
("Sumitomo"). See "Use of Proceeds."
Nasdaq National
Market Symbol ................ CPTI
- ------------
(1) Gives effect to the exercise of outstanding stock options and warrants to
purchase an aggregate of 1,560,000 shares of Common Stock, of which stock
options and warrants to purchase 760,000 shares of Common Stock are
exercisable at $1.00 per share and a warrant to purchase 800,000 shares of
Common Stock is exercisable at a total exercise price of $2,000, which
will be effective on the date of this Prospectus. Stock options and
warrants issued to certain executive officers of the Company and AB
Plastics to purchase an aggregate of 646,932 shares of Common Stock will
be exercised by such officers by delivering to the Company $646,932
principal amount of promissory notes (of which $600,808 principal amount
of such notes delivered by the Chairman of the Board and the President of
the Company will be without recourse to such persons), representing the
amount of the aggregate exercise price applicable to their respective
stock options and warrants. See "Certain Transactions."
(2) Does not include (i) 133,333 shares of Common Stock issuable upon exercise
of the Representatives' Warrants, (ii) 440,000 shares of Common Stock
reserved for issuance upon exercise of outstanding options with an
exercise price of $1.00 per share under the Company's 1996 Stock Option
Plan and (iii) 222,222 shares of Common Stock reserved for issuance upon
exercise of outstanding options with an exercise price equal to the
initial public offering price per share, and 577,778 shares of Common
Stock reserved for issuance upon exercise of options reserved for future
grant, under the Company's 1997 Stock Option Plan. See "Management --
Employment Agreements," "-- Stock Option Plans," "Certain Transactions"
and "Underwriting."
5
<PAGE>
Summary Financial Data
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Predecessor(1)
---------------------------------------------------------------------------
52 Weeks Ended
----------------------------------------------------------
October 30,
1995-
October 25, October 31, October 30, October 29, September 27,
1992 1993 1994 1995 1996
------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Sales ........................ $28,235 $ 29,362 $ 34,027 $ 42,679 $ 36,080
Cost of sales ............... 24,891 26,456 30,695 38,961 32,127
------- --------- --------- --------- ----------
Gross profit .................. 3,344 2,906 3,332 3,718 3,953
Selling and administrative ... 2,044 2,053 1,715 1,683 1,872
------- --------- --------- --------- ----------
Operating income ............ 1,300 853 1,617 2,035 2,081
Net interest expense ......... 214 254 225 375 386
Other (income) expense ...... 4 (35) (218) (70) (5)
------- --------- --------- --------- ----------
Income before income taxes 1,082 634 1,610 1,730 1,700
Income tax expense(3) ......... 441 49 48 26 (10)
------- --------- --------- --------- ----------
Net income before extraordi-
nary income 641 585 1,562 1,704 1,710
Extraordinary item ............ -- 469 -- -- --
------- --------- --------- --------- ----------
Net income .................. $ 641 $ 1,054 $ 1,562 $ 1,704 $ 1,710
======= ========= ========= ========= ==========
Net income per share(4) ...... -- -- -- -- --
Weighted average number of
shares outstanding(4) ...... -- -- -- -- --
Supplemental pro forma net
income per share(5) ......... -- -- -- -- --
Other Data:
Depreciation and amortiza-
tion $ 693 $ 748 $ 746 $ 876 $ 826
EBITDA (6) .................. 1,993 1,601 2,363 2,911 2,907
Cash flows from operating
activities .................. 2,120 11 2,949 1,057 3,063
Cash flows from investing
activities .................. (829) (2,757) (1,425) (3,343) (496)
Cash flows from financing
activities .................. (672) 2,173 (1,661) 2,627 (2,718)
Pro forma net income(7) ...... 641 380 966 1,038 1,020
Pro forma net income per
share ........................ -- -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Company Predecessor Company
--------------- ------------- -------------
52 Weeks
Ended 26 Weeks 26 Weeks
September 28- October 27, Ended Ended
October 27, 1996 April 28, April 27,
1996 (Pro Forma)(2) 1996 1997
--------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Sales ........................ $ 3,265 $ 39,345 $ 19,410 $ 20,244
Cost of sales ............... 2,626 34,752 17,338 16,393
----------- ----------- --------- -----------
Gross profit .................. 639 4,593 2,072 3,851
Selling and administrative ... 241 2,173 1,021 1,456
----------- ----------- --------- -----------
Operating income ............ 398 2,420 1,051 2,395
Net interest expense ......... 99 1,200 226 451
Other (income) expense ...... 19 23 0 0
----------- ----------- --------- -----------
Income before income taxes 280 1,197 825 1,944
Income tax expense(3) ......... 117 526 12 764
----------- ----------- --------- -----------
Net income before extraordi-
nary income 163 671 813 1,180
Extraordinary item ............ -- -- -- --
----------- ----------- --------- -----------
Net income .................. $ 163 $ 671 $ 813 $ 1,180
=========== =========== ========= ===========
Net income per share(4) ...... $ 0.05 $ 0.19 -- $ 0.33
Weighted average number of
shares outstanding(4) ...... 3,600,000 3,600,000 -- 3,600,000
Supplemental pro forma net
income per share(5) ......... 0.05 0.26 -- 0.33
Other Data:
Depreciation and amortiza-
tion $ 82 $ 1,151 $ 492 $ 636
EBITDA (6) .................. 480 3,388 1,543 3,031
Cash flows from operating
activities .................. 103 2,206 1,902 3,534
Cash flows from investing
activities .................. (7,216) (7,712) (700) (449)
Cash flows from financing
activities .................. 7,525 (4,807) (2,179) (3,012)
Pro forma net income(7) ...... 163 671 495 1,180
Pro forma net income per
share ........................ 0.05 0.19 -- 0.33
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
April 27, 1997
----------------------------
Actual As Adjusted (8)
--------- ----------------
<S> <C> <C>
Balance Sheet Data:
Cash ........................... $ 803 $ 2,659
Working capital .................. 3,019 4,375
Total assets ..................... 19,470 21,485
Total current liabilities ......... 5,670 5,670
Total long-term liabilities ...... 9,656 2,506
Stockholders' equity ............ 4,143 13,309
</TABLE>
- ------------
(1) In September 1996, a corporate affiliate of Michael A. Gibbs, President of
the Company, and Private Equity Partners, L.L.C. ("PEP"), an affiliate of
Geoffrey J.F. Gorman, Chairman of the Board of the Company, formed the
Company and sponsored the acquisition of all of the outstanding capital
stock of AB Plastics (prior to the acquisition, the "Predecessor"). The
acquisition and its related financing resulted in higher interest expense
and a different capital structure. Due to such differences, net income per
share is not provided for periods prior to the 52 weeks ended October 27,
1996 (pro forma). See "The Company" and Note 1 of Notes to Financial
Statements.
(2) Gives effect to the acquisition of AB Plastics, assuming such transaction
had occured as of October 30, 1995. See "Pro Forma Statements of
Operations."
(3) The Predecessor elected to be taxed as a subchapter S corporation, as a
result of which all federal income taxes were paid by the stockholders.
Upon completion of the acquisition of AB Plastics, the Company terminated
such subchapter S corporation election.
6
<PAGE>
(4) Assumes that stock options and warrants to purchase an aggregate of
1,560,000 shares of Common Stock had been exercised as of the end of such
period. See Note 1 of Notes to Financial Statements for an explanation of
the basis used to calculate net income per share.
(5) Supplemental pro forma net income per share is based on the number of
shares of Common Stock used in the calculation of net income per share
plus the number of shares required to be sold by the Company to fund the
repayment of indebtedness as set forth in "Use of Proceeds."
(6) EBITDA is earnings (net income) before interest, taxes, depreciation,
amortization and other (income) expense. The Company believes that EBITDA
provides useful information, widely used in the injection molding
industry, because (i) due to the increased trend of consolidation in the
industry, it eliminates purchase accounting treatment such as increased
depreciation as a result of a write-up of fixed assets and amortization of
goodwill and financing costs and (ii) it is a more accurate measure of
operating cash flow to meet obligations for interest, income tax and
amortization of debt before new investments in property, plant and
equipment. The computation of EBITDA as presented may not be comparable to
computations presented by other companies. EBITDA is a financial measure
commonly used in financial analysis, but should not be construed as an
alternative to net income (as determined in accordance with generally
accepted accounting principles) as an indicator of operating performance.
(7) Pro forma net income reflects the Company's net income on a pro forma basis
as though the Company had been subject to full federal income taxes in
each of fiscal 1992, 1993, 1994, 1995 and 1996, calculated using a 40%
effective tax rate.
(8) Adjusted to reflect (i) the exercise of outstanding stock options and
warrants to purchase an aggregate of 1,560,000 shares of Common Stock and
(ii) the sale by the Company of 1,200,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $9.00 per share,
after deduction of underwriting discounts and commissions and estimated
offering expenses and the application of the estimated net proceeds
therefrom to the repayment of approximately $9.0 million in indebtedness
expected to be outstanding upon the consummation of this offering. See
"Use of Proceeds," "Capitalization" and "Certain Transactions."
Stockholders' equity is adjusted to reflect an anticipated extraordinary
loss of $599,000 (net of applicable income tax benefit of $400,000)
resulting from the write-off of deferred financing costs in connection
with the repayment of such indebtedness.
7
<PAGE>
RISK FACTORS
This Prospectus contains certain forward-looking statements within the
meaning of the Securities Act of 1933. Actual results could differ materially
from those projected in the forward-looking statements as a result of certain
risks and uncertainties set forth below and elsewhere in this Prospectus. An
investment in the shares of Common Stock offered hereby involves a high degree
of risk. Prospective investors should carefully consider the following risk
factors, in addition to the other information set forth in this Prospectus, in
connection with an investment in the shares of Common Stock offered hereby.
Dependence on Computer and Consumer Electronics Industries
The Company's principal customers are OEMs of computer monitors,
televisions, electronic music keyboards and other consumer electronics
equipment. These industry segments, as well as the computer and consumer
electronics industries as a whole, are subject to economic cycles,
technological change, product obsolescence and changes in consumer demand.
Discontinuance or modification of products containing injection-molded plastic
components manufactured by the Company could adversely affect the Company's
business, financial condition and results of operations. The Company believes,
for example, that consumers are currently postponing purchases of new
televisions in anticipation of the introduction of HDTV and flat panel
displays, which may result in the postponement of OEM orders on certain
television consoles. The Company's growth has resulted, in part, from its
ability to focus on customers in these industries. There can be no assurance
that the Company will continue to be able to identify and attract customers
with steady growth rates or that these industry segments will continue to grow
at their historical rates or at all. Pricing pressures, a general downturn in
the economy or any other event leading to excess capacity in the computer and
consumer electronics industries may result in intensified price competition,
reduced profit margins and a decrease in unit volume of custom injection-molded
plastic components ordered by OEMs, all of which could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business -- Customers."
Customer Concentration
The Company's largest customer, Sony, through its computer monitor and
television manufacturing divisions, accounted for approximately 66.5% of the
Company's sales for the fiscal year ended October 27, 1996, and 72.6% of the
Company's sales for the 26 weeks ended April 27, 1997. In addition, the
Company's two largest customers, Sony and Matsushita (through its Panasonic and
Quasar brands), together accounted for approximately 84.5% and 82.3%,
respectively, of the Company's sales for such periods. The loss of, or a
significant curtailment of purchases by, either of these major customers would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company anticipates that, by virtue of the
markets it serves, a significant portion of the Company's sales will continue
to be concentrated in a small number of customers. See "Business -- Customers."
Fluctuations in Operating Results
The Company's operating results are affected by a number of factors,
including timing of orders from major customers, process yields, timing of
capital expenditures in anticipation of future sales, economic conditions in
the computer and consumer electronics industries and the Company's mix of
products. As a result, the Company's results of operations have varied and may
continue to fluctuate significantly from period to period, including on a
quarterly basis. Historically, shipments of the Company's components have been
higher in the second and fourth fiscal quarters as a result of increased demand
for computer and consumer electronic products during the spring and year-end
holiday seasons. Operating results can also be significantly influenced by
development and introduction of new products or product models by the Company's
customers. In addition, a significant portion of the Company's operating
expenses are relatively fixed in nature and planned capital expenditures are
based in part on anticipated orders. Any inability to adjust spending quickly
enough to compensate for revenue shortfall may magnify the adverse impact of
such revenue shortfall on the Company's results of operations and cash flows.
Moreover, there can be no assurance that the industry-wide trends that have
benefitted the Company in recent periods will continue. Quarterly sales and
operating results depend in large part on the volume
8
<PAGE>
and timing of bookings received during the quarter, which are difficult to
forecast. The Company's customers generally require short production and
delivery cycles, and substantially all of the Company's backlog is typically
scheduled for delivery within 30 days. See "Business -- Industry Overview and
Trends" and " -- Customers."
Potential Significant Indebtedness and Leverage
At July 21, 1997, on an as adjusted basis after giving effect to this
offering and the application of the net proceeds therefrom, the Company
anticipates having outstanding long-term debt of approximately $1.7 million,
comprised of a $1.0 million loan from Transamerica Business Credit Corporation
("Transamerica") and approximately $660,000 in capitalized leases. In addition,
the Company will have up to an additional $10.0 million available for borrowing
under its revolving line of credit and $2.0 million available under its
equipment line of credit with Sumitomo. Subsequent to July 21, 1997, the
Company expects to spend approximately $5.1 million to purchase and expand its
Gardena, California facility and approximately $6.4 million for equipment and
leasehold improvements at its new Tijuana, Mexico facility. The Company expects
to finance the approximately $11.5 million in expansion by borrowing $3.5
million under a conventional mortgage facility with Sumitomo, $3.0 million from
General Electric Capital Corporation under a five-year term loan and
approximately $5.0 million from the revolving line of credit and equipment line
of credit with Sumitomo (which will be temporarily reduced with a portion of
the net proceeds of this offering). Although the Company expects to continue to
have sufficient earnings from operations to satisfy its anticipated increased
debt service obligations, there can be no assurance that the Company will be
able to meet its debt obligations in the future or to pay or refinance its
indebtedness as it becomes due. Borrowings under its revolving line of credit
facility bear interest at floating rates (currently 9.0%) and are secured by a
pledge of all of the capital stock of AB Plastics. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," "Business -- Facilities" and "Certain Transactions."
Competition
The injection-molded plastic industry is highly fragmented and
characterized by intense competition. The Company competes principally in the
custom injection-molded plastic market in the western United States, which is
also highly competitive but is much less fragmented than the industry as a
whole. Certain of the Company's competitors have substantially greater
manufacturing, financial, marketing and/or other resources than the Company. As
a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than the Company. In
addition, in recent years, several foreign plastic injection molders (primarily
from the Far East), including competitors of the Company, have established
manufacturing facilities in Tijuana, Mexico. There can be no assurance that the
Company will be able to compete successfully against present and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect the Company's business, financial condition and
results of operations. See "Business -- Competition."
Variability of Customer Requirements; Nature of Customer Commitments on Orders
The level and timing of orders placed by the Company's customers varies
due to a number of factors, including customer attempts to manage inventory,
changes in customers' manufacturing strategies and variations in demand for
their own products. Since the Company typically does not obtain firm long-term
purchase orders or commitments, it must anticipate the future volume of orders
based on discussions with its customers. The Company relies on its estimate of
anticipated future volumes when making commitments regarding the level of
business that it will seek and accept, the mix of products that it intends to
manufacture, the timing of production schedules and the levels and utilization
of equipment and personnel. A variety of conditions, both specific to the
individual customer and generally affecting the customer's industry, may cause
customers to cancel, reduce or delay orders that were previously made or
anticipated. Generally, customers may cancel, reduce or delay purchase orders
and commitments without penalty, except for payment for work and materials
expended through the cancellation date. Significant or numerous cancellations,
reductions or delays in orders by a customer or group of customers could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Customers."
9
<PAGE>
Integration of New Manufacturing Facility
For the first 35 years of its existence, substantially all of the
Company's sales were made to customers located in California. In the late
1980s, many of these customers relocated to Tijuana, Mexico, primarily due to
reduced labor costs. The Company is currently overseeing the construction of a
new manufacturing facility in Tijuana, Mexico, which it expects to lease from
an unaffiliated third-party commencing in September 1997. There can be no
assurance that the Company will be able to complete this facility in such time
frame. Consequently, if the Company is unsuccessful in Tijuana, the Company's
relationships with its most important customers could be damaged which would
have a material adverse effect on the business, financial condition and results
of operations of the Company. The Company's expanded manufacturing capacity has
and will continue to significantly increase its fixed costs, and the future
profitability of the Company will depend, in part, upon its ability to utilize
efficiently its manufacturing capacity. Gross profit margins, although
partially offset by lower labor costs in Mexico, may be adversely affected to
the extent that the Company does not fully utilize its increased manufacturing
capacity. Delays in completing construction and/or the Company's inability to
generate the additional sales necessary to utilize its additional capacity
could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, operating in Mexico subjects
the Company to certain additional risks, including unexpected changes in
regulatory requirements, political and economic conditions, difficulties in
staffing and managing international operations and other factors which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Because sales from this facility and all raw
material purchases for use at this facility will be U.S. dollar-denominated and
managed at the Company's Gardena, California executive offices, the Company
believes that it will not be significantly affected by exchange rate
fluctuations in the Mexican peso relative to the U.S. dollar. The Company
believes that the effects of such fluctuations will be limited to wages for
local laborers and operating supplies, neither of which is expected to be
material to the Company's results of operations when the new facility is
operational. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview" and "Business -- Manufacturing."
Technological Change; Intellectual Property
Injection-molded plastic manufacturing technology has continued to move
toward more highly engineered processes. Technological change is continuous
and, in the future, higher margin products will be the most demanding in terms
of technological and manufacturing expertise. There is no assurance that the
Company will be able to maintain its current technological position. In
addition, the introduction of new technologies could require the Company to
substantially increase its capital expenditures. The Company's success depends
in part on its proprietary techniques and manufacturing expertise in the area
of custom injection-molded plastic components. The Company has no patents for
these proprietary techniques and chooses to rely on trade secret protection.
There can be no assurance that the Company's precautions will provide
meaningful protection from competition or that the Company's competitors will
not develop superior technology. The Company believes that although such
techniques and expertise are subject to misappropriation or obsolescence, the
Company will continue to improve methods and processes and develop new
techniques on an ongoing basis as dictated by the technological needs of the
industry. See "Business -- Manufacturing."
Management of Growth
The Company's current construction of its new manufacturing facility in
Tijuana, Mexico has placed, and is expected to continue to place, significant
demands on the Company's managerial, technical, financial and other resources.
Utilization of the Company's expanded facilities will require the Company to
continue to invest in its financial, management information, engineering and
logistics systems, and to retain, motivate and effectively manage its
employees. There can be no assurance that the management skills and systems
currently in place will be adequate to implement the Company's strategy, and
the Company's failure to manage growth effectively or to implement its strategy
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Growth Strategy" and
"Management."
Dependence on Key Personnel
The Company's success depends to a significant degree upon the continued
contributions of members of its senior management team, particularly Michael A.
Gibbs, James S. Adams, G. Michael Frink, Stephen M. Adams,
10
<PAGE>
Jawed Ghias and Paul J. Iacono, as well as other key personnel, many of whom
would be difficult to replace. The Company does not possess any key-man life
insurance policies with respect to such persons. The future success of the
Company also depends on its ability to identify, attract and retain additional
qualified technical and managerial personnel. The loss of these officers or
other key personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's
President, Michael A. Gibbs, is engaged in other business activities, including
acting as a consultant and business broker to other businesses which do not
compete with the Company. Although Mr. Gibbs actively manages the Company and
spends approximately two weeks per month at the Company's Gardena, California
offices, he resides in Connecticut. In addition, pursuant to Mr. Gibbs'
employment agreement, he is required to spend only 75% of his business and
professional time on the affairs of the Company. There can be no assurance that
the inability of Mr. Gibbs to devote his full time and resources to the Company
will not adversely affect the Company's business, financial condition and
results of operations. See "Management."
Acquisitions
The Company intends from time to time to pursue the acquisition of other
companies, assets or product lines that would complement or expand its existing
business. Acquisitions involve a number of risks that could adversely affect
the Company's operating results, including the diversion of management's
attention, the assimilation of the operations and personnel of the acquired
companies, the amortization of acquired intangible assets and the potential
loss of key employees of the acquired companies. See "Business -- Growth
Strategy."
Equipment and Tool Failure
The Company's business involves manufacturing equipment that is subject to
failure. In the past, equipment and tool failures have occurred which have
resulted in temporary delays in product shipments. Although the Company has
in-house tooling and maintenance departments and maintains spare parts to
reduce the impact of such failures, there can be no assurance that failures
will not occur in the future. In addition, the Company currently has only one
manufacturing facility which is located in Southern California. The loss of
revenue and earnings to the Company from an equipment or tool failure, as well
as any disruption of the Company's operations resulting from a natural disaster
such as an earthquake, fire or flood, could have a material adverse effect on
its business, financial condition and results of operations.
Environmental Matters
The Company's operations and properties are subject to a wide variety of
international, federal, state and local laws and regulations, including those
governing the use, storage and handling, generation, treatment, emission,
release, discharge and disposal of certain materials, substances and wastes,
the remediation of contaminated soil and groundwater, and the health and safety
of employees. As such, the nature of the Company's operations exposes it to the
risk of claims with respect to such matters and there can be no assurance that
material costs or liabilities will not be incurred in connection with such
claims. See "Business -- Environmental Matters."
Availability of Raw Materials
Raw materials used by the Company in producing injection-molded plastic
components are purchased by the Company and, in certain limited circumstances,
the Company bears the risk of price fluctuations. In addition, shortages of
certain types of materials have occurred in the past and may occur in the
future. Future shortages or price fluctuations in raw materials or components
could have a material adverse effect on the Company's business, financial
condition and results of operations. Significant increases in the cost of
materials purchased by the Company could also have a material adverse effect on
the Company's results of operations in the event the Company is unable to pass
such price increases through to its customers. See "Business -- Raw Materials
and Supplies."
11
<PAGE>
Benefits of the Offering to Existing Stockholders
The Company intends to use approximately $4.0 million of the net proceeds
of this offering to repay the principal amount and interest outstanding under
its subordinated loan agreement with Sirrom, which will become a stockholder of
the Company upon the consummation of this offering and is a selling stockholder
in this offering. In addition, Sirrom and other stockholders of the Company,
including Geoffrey J.F. Gorman and Michael A. Gibbs, the Chairman of the Board
and the President of the Company, respectively, will purchase Common Stock
prior to the date of this Prospectus, upon exercise of outstanding stock
options and warrants, at prices significantly lower than the initial public
offering price of the shares offered hereby. Messrs. Gorman and Gibbs paid the
exercise price for such stock options and warrants by delivering 8%
non-recourse promissory notes due 2001 which are secured only by the pledge of
the shares underlying such options and warrants. In addition, certain existing
stockholders will be selling 10% of the shares of Common Stock offered hereby
(approximately 22% if the Underwriters' over-allotment option is exercised in
full), and Messrs. Gorman and Gibbs will receive certain benefits in connection
with such sale. See "Use of Proceeds," "Principal and Selling Stockholders" and
"Certain Transactions."
No Prior Public Market; Possible Volatility of Stock Price
Prior to this offering, there has been no public market for the Company's
Common Stock. Accordingly, there can be no assurance that an active trading
market will develop or be sustained subsequent to this offering. The initial
public offering price of the Common Stock will be determined by negotiations
among the Company and the Underwriters and may not be indicative of the prices
that may prevail in the public market. Upon commencement of this offering, the
Common Stock will be quoted on the Nasdaq National Market. This stock market
generally, and the plastics manufacturing sector in particular, have
experienced and are likely in the future to experience significant price and
volume fluctuations which could adversely affect the market price of the Common
Stock without regard to the Company's operating performance. The trading price
of the Common Stock could also be subject to significant fluctuations in
response to variations in quarterly operating results, shortfalls in sales or
earnings below analyst estimates, developments in the computer and consumer
electronics industries, stock market conditions and other factors. There can be
no assurance that the market price of the Common Stock will not experience
significant fluctuations or decline below the initial public offering price.
See "Underwriting."
Dilution
Purchasers of the Common Stock offered hereby will incur immediate
substantial dilution in pro forma net tangible book value per share from the
initial offering price in the amount of $6.50. To the extent outstanding
options to purchase the Company's Common Stock are exercised, there will be
further dilution to such new investors. See "Dilution."
Control by Certain Existing Stockholders
Following the sale of the shares offered hereby, the directors and
executive officers of the Company and their affiliates will own 40.0% of the
outstanding Common Stock. Based on their stock ownership, such persons will
continue to have significant influence over the Company's policies and affairs
and most corporate actions requiring stockholder approval, including the
election of directors. See "-- Anti-Takeover Considerations," "Management" and
"Principal and Selling Stockholders."
Shares Eligible for Future Sale; Potential for Adverse Effect on Stock Price
Sales of substantial amounts of Common Stock in the public market
following this offering could have an adverse effect on the market price of the
Common Stock. The 1,333,333 shares offered hereby will be freely tradeable
without restriction, unless purchased by an affiliate of the Company. All of
the Company's officers, directors and principal stockholders have agreed that
they will not sell any Common Stock without the prior consent of Cruttenden
Roth Incorporated for a period of 365 days from the date of this Prospectus
(the "Lock-up Period"). The Lock-up Period may be waived by Cruttenden Roth
Incorporated without notice to the Company's stockholders or the Nasdaq
National Market, the market on which the Company's securities will be initially
quoted; however, Cruttenden Roth Incorporated has no current intention to do
so. Additionally, at July 21, 1997,
12
<PAGE>
options to purchase 662,222 shares of Common Stock were outstanding, none of
which options were exercisable. The Company intends to register all shares
reserved for issuance under its stock option plans. Shares covered by such
registration will be eligible for resale in the public market, subject to Rule
144 limitations applicable to affiliates and to the lock-up agreements
described above. See "Management -- Stock Option Plans" and "Shares Eligible
for Future Sale."
Anti-Takeover Considerations
Certain provisions of the Company's Restated Certificate of Incorporation,
By-Laws and Delaware General Corporation Law ("Delaware Law") could, together
or separately, discourage potential acquisition proposals, delay or prevent a
change in control of the Company, and limit the price that certain investors
might be willing to pay in the future for the Company's Common Stock. These
provisions include the issuance, without further stockholder approval, of
preferred stock with rights and preferences which could be senior to the Common
Stock. The Company is also subject to Section 203 of the Delaware Law, which
may also inhibit a change in control of the Company. See "Description of
Securities -- Preferred Stock" and "-- Delaware Anti-Takeover Law."
13
<PAGE>
THE COMPANY
The Company's injection-molded plastic business began in 1952, and
operated until September 1996 as a family-owned business. In September 1996, a
corporate affiliate of Michael A. Gibbs, President of the Company, and PEP, an
affiliate of Geoffrey J.F. Gorman, Chairman of the Board of the Company, formed
the Company and sponsored the acquisition of all of the outstanding capital
stock of AB Plastics for a purchase price of $7.0 million. Of such purchase
price, $2.0 million was paid by equity contributions by PEP and certain
investors originated by PEP, and $5.0 million was financed from the proceeds of
a $4.0 million subordinated loan from Sirrom and $1.0 million of borrowings
under the Company's revolving line of credit with Sumitomo. In addition,
approximately $4.5 million in bank indebtedness then outstanding of AB Plastics
was refinanced by the Company with a portion of the Sumitomo revolving line of
credit, and approximately $700,000 in equipment financing was assumed by the
Company. The acquisition was accounted for as a purchase transaction and was
valued at approximately the fair value of the net assets acquired. The Company
has no tangible assets other than the shares of Common Stock of AB Plastics.
Prior to the acquisition of AB Plastics, in October 1995, a corporate
affiliate of Mr. Gibbs entered into a letter of intent to acquire AB Plastics
and a consulting agreement to evaluate the systems and manufacturing processes
of AB Plastics. Beginning in early 1996, and accelerated by a new management
team following the September 1996 acquisition, the Company initiated a profit
improvement program to focus on reducing overtime, staffing levels, tooling and
maintenance problems, rework and excessive warehousing costs, and on increasing
the use of robotics in its manufacturing process. Since October 1995, the
Company has reduced its work force by approximately 20% and achieved annualized
cost savings in excess of $3.0 million. From October 1995 to October 1996, the
Company increased income before income taxes by 14.4% and, from April 1996 to
April 1997, increased income before income taxes by 135.6%.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,200,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$9,004,000, assuming an initial public offering price of $9.00 per share (which
is the mid-point of the filing range) and after deducting underwriting
discounts and commissions and estimated offering expenses.
The Company intends to use the net proceeds of this offering to repay the
approximately $4.0 million in principal and accrued interest outstanding under
its subordinated loan agreement with Sirrom. The remaining net proceeds of
approximately $5.0 million will be used, in conjunction with additional lending
arrangements described below, to (i) purchase the Company's Gardena, California
facility and construct an additional 75,000 square foot warehouse and
distribution facility adjoining its existing manufacturing facility, and (ii)
equip and make leasehold improvements to the Company's newly-constructed
Tijuana, Mexico manufacturing facility.
The Company has agreed to purchase its Gardena, California facility from
its current owners for $3.1 million. Such purchase is expected to be completed
prior to the consummation of this offering. See "Certain Transactions." The
Company has additionally determined to demolish the existing 20,000 square foot
warehouse on such property and construct a new 75,000 square foot warehouse and
distribution facility adjoining its existing manufacturing facility. The
Company expects to commence such demolition in late July 1997, with
construction of the new warehouse and distribution facility to begin in August
1997 and to be completed by the end of 1997. The cost of demolition and
construction for this project is expected to be approximately $2.0 million. The
Company intends to finance the purchase of its Gardena, California facility and
the demolition and construction for its new warehouse facility by borrowing
$3.5 million under a conventional mortgage loan with Sumitomo and using
approximately $1.6 million of the net proceeds of this offering.
The Company also plans to equip and make leasehold improvements to its
newly-constructed Tijuana, Mexico manufacturing facility, including
installation of molding, decorating and painting equipment, improvements to
support plumbing and electrical requirements, and office equipment and
operating supplies to commence operations. The Company also intends to transfer
a number of molding machines and related equipment to this facility from its
Gardena, California facility. The Company expects that construction of its
Tijuana facility will be completed in July 1997 and installation of new
equipment and leasehold improvements will be completed by the end of August
1997, with the transfer of molding machines and related equipment to occur
through November 1997. The cost of new equipment and leasehold improvements for
the Tijuana facility is expected to be approximately $6.4 million, which the
Company intends to finance by borrowing $3.0 million under a five-year term
loan with General Electric Credit Corporation, which the Company is currently
negotiating, and using approximately $3.4 million of the net proceeds of this
offering.
Pending the use of the net proceeds of the offering for its facilities,
the Company intends to temporarily reduce approximately $5.0 million in
borrowings expected to be outstanding under the Company's revolving line of
credit facility with Sumitomo upon the consummation of this offering. Amounts
repaid under the Company's revolving line of credit may be reborrowed by the
Company, from time to time, based on certain percentages of eligible
inventories and accounts receivable, up to a maximum $10.0 million available
under such facility. The Company does not anticipate any limits on its ability
to reborrow the full amount of repayments made from the net proceeds of this
offering. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
The Sirrom subordinated loan matures in September 2001, subject to certain
mandatory prepayments, and has a stated interest rate of 13.5% per annum. The
repayment of the Sirrom subordinated loan will eliminate the Company's current
annual interest obligations thereunder of $540,000. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
The Company will not receive any of the proceeds from the sale of the
Common Stock offered by the Selling Stockholders. See "Principal and Selling
Stockholders."
15
<PAGE>
DIVIDEND POLICY
The Company has never paid or declared any cash dividends. The Company
intends to retain future earnings, if any, to finance the development and
expansion of its business and, therefore, does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. In addition, the
Company's revolving line of credit with Sumitomo prohibits the Company from
declaring, paying or making any dividends or distributions on its Common Stock.
CAPITALIZATION
The following table sets forth, as of April 27, 1997, the short-term debt
and capitalization of the Company on an actual basis and as adjusted to give
effect to (i) the exercise of outstanding stock options and warrants to
purchase an aggregate of 1,560,000 shares of Common Stock, of which stock
options and warrants to purchase 760,000 shares of Common Stock are exercisable
at $1.00 per share and a warrant to purchase 800,000 shares of Common Stock is
exercisable at a total exercise price of $2,000, and (ii) the sale and issuance
of the 1,200,000 shares of Common Stock offered by the Company hereby (after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses) at an assumed public offering price of $9.00 and the
application of the net proceeds therefrom as described in "Use of Proceeds."
This table should be read in conjunction with the Financial Statements and
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
April 27, 1997
------------------------
Actual As Adjusted
--------- ------------
(in thousands)
<S> <C> <C>
Short-term debt ............................................. $ 283 $ 283
======== ========
Long-term debt:
Revolving line of credit .................................... $ 3,150 $ 0
Subordinated term loan ....................................... 4,000 0
Capitalized leases, less current portion ..................... 625 625
-------- --------
Total long-term debt ....................................... 7,775 625
-------- --------
Stockholders' equity:
Preferred Stock, par value $.0001; 5,000,000 shares authorized;
no shares outstanding ....................................... -- --
Common Stock, par value $.0001; 20,000,000 shares authorized;
3,560,000 shares (actual) and 4,760,000 shares (as adjusted)
issued and outstanding(1) ................................. 0 0
Additional paid-in capital ................................. 2,800 12,565
Retained earnings .......................................... 1,343 744
-------- --------
Total stockholders' equity ................................. 4,143 13,309
-------- --------
Total capitalization .................................... $11,918 $13,934
======== ========
</TABLE>
- ------------
(1) Does not include (i) 133,333 shares of Common Stock issuable upon exercise
of the Representatives' Warrants, (ii) 440,000 shares of Common Stock
reserved for issuance upon exercise of outstanding options with an
exercise price of $1.00 per share under the Company's 1996 Stock Option
Plan and (iii) 222,222 shares of Common Stock reserved for issuance upon
exercise of outstanding options with an exercise price equal to the
initial public offering price per share, and 577,778 shares of Common
Stock reserved for issuance upon exercise of options reserved for future
grant, under the Company's 1997 Stock Option Plan. See "Management--
Employment Agreements," "-- Stock Option Plans," "Certain Transactions"
and "Underwriting."
16
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of April 27, 1997
was $1,732,253 or $0.49 per share of Common Stock. Pro forma net tangible book
value per share represents the amount of net tangible assets, less total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to (i) the exercise of outstanding stock options and warrants to
purchase an aggregate of 1,560,000 shares of Common Stock, of which stock
options and warrants to purchase 760,000 shares of Common Stock are exercisable
at $1.00 per share and a warrant to purchase 800,000 shares of Common Stock is
exercisable at a total exercise price of $2,000, and (ii) the sale by the
Company of 1,200,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $9.00 per share, and applying the net proceeds thereof
to the repayment in full of the Company's subordinated term loan from Sirrom
having an outstanding principal balance of $4.0 million at April 27, 1997, and
to effect a temporary reduction of the Company's revolving line of credit with
Sumitomo expected to be approximately $5.0 million upon the consummation of this
offering, the pro forma net tangible book value of the Company as of April 27,
1997 would have been $11,897,780, or $2.50 per share. The prepayment of the
Company's subordinated term loan from Sirrom will result in an extraordinary
charge of approximately $1.0 million from the write-off of deferred financing
costs, which will increase the net tangible book value of the Company by
$400,000, representing the tax benefit of such charge. The above represents an
immediate increase in net tangible book value of $2.01 per share to existing
stockholders and an immediate dilution of $6.50 per share to new investors. The
following table illustrates this per share dilution:
[CAPTION]
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share ........................ $ 9.00
Pro forma net tangible book value per share at April 27, 1997 ......... $0.49
Increase in pro forma net tangible book value per share attributable to
new investors ......................................................... 2.01
------
Pro forma net tangible book value per share after this offering ...... 2.50
---------
Dilution per share to new investors ................................. $ 6.50(1)
=========
</TABLE>
The following table summarizes, as of April 27, 1997, the differences in
the number of shares of Common Stock purchased from the Company (including
1,560,000 shares issuable upon the exercise of outstanding stock options and
warrants), the total consideration paid to the Company and the average price
paid per share by existing and new investors:
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration
----------------------- ------------------------- Price Per
Number Percent Amount Percent Share
----------- --------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1) ...... 3,560,000 74.8% $ 2,762,000 20.4% $0.78
New investors(1) ............... 1,200,000 25.2 10,800,000 79.6 9.00
--------- ------ ------------ ------
Total ........................ 4,760,000 100.0% $13,562,000 100.0%
========= ====== ============ ======
</TABLE>
- ------------
(1) Sales by the Selling Stockholders in this offering will reduce the number
of shares held by the existing stockholders to 3,426,667, or 72.0% of the
total number of shares of Common Stock to be outstanding after this
offering, and will increase the number of shares to be purchased by new
investors to 1,333,333, or 28.0% of the total shares of Common Stock to be
outstanding after this offering. If the Underwriters' over-allotment option
is exercised in full, the number of shares held by new investors will
increase to 1,533,333 shares, or approximately 32.2% of the total number of
shares to be outstanding after this offering. See "Principal and Selling
Stockholders" and "Underwriting."
17
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except share and per share data)
The selected financial data set forth below with respect to the Company's
statement of operations for the 52 weeks ended October 27, 1996 (pro forma) and
the period from September 28, 1996 to October 27, 1996, and with respect to the
balance sheet at October 27, 1996, are derived from the financial statements
audited by Marcum & Kliegman LLP, independent accountants, which are included
elsewhere in this Prospectus and are qualified by reference to such financial
statements. The selected financial data set forth below with respect to the
Company's statement of operations for the period from October 30, 1995 to
September 27, 1996 and for each of the 52 weeks ended October 29, 1995 and
October 30, 1994, and with respect to the balance sheet at October 29, 1995,
are derived from the financial statements audited by Block, Plant, Eisner,
Fiorito & Belak-Berger, independent accountants, which are included elsewhere
in this Prospectus and are qualified by reference to such financial statements.
The balance sheet data at October 30, 1994 and the data as of and for the 52
weeks ended October 31, 1993 and October 25, 1992 are derived from audited
financial statements not included in this Prospectus. The statement of
operations data for the 26 weeks ended April 27, 1997 and April 28, 1996, and
the balance sheet data at April 27, 1997 are derived from unaudited financial
statements included elsewhere in this Prospectus. The unaudited financial
statement data includes all adjustments, consisting only of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
the financial position and results of operations for such periods. Operating
results for the 26 weeks ended April 27, 1997 are not necessarily indicative of
the results that may be expected for the 52 weeks ending October 26, 1997. The
data set forth below should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and the Financial
Statements together with the related notes included herein.
<TABLE>
<CAPTION>
Predecessor(1)
---------------------------------------------------------------------------
52 Weeks Ended
----------------------------------------------------------
October 30,
1995-
October 25, October 31, October 30, October 29, September 27,
1992 1993 1994 1995 1996
------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Sales ........................ $28,235 $ 29,362 $ 34,027 $ 42,679 $ 36,080
Cost of sales ............... 24,891 26,456 30,695 38,961 32,127
------- --------- --------- --------- ----------
Gross profit .................. 3,344 2,906 3,332 3,718 3,953
Selling and administrative ... 2,044 2,053 1,715 1,683 1,872
------- --------- --------- --------- ----------
Operating income ............ 1,300 853 1,617 2,035 2,081
Net interest expense ......... 214 254 225 375 386
Other (income) expense ...... 4 (35) (218) (70) (5)
------- --------- --------- --------- ----------
Income before income taxes 1,082 634 1,610 1,730 1,700
Income tax expense(3) ......... 441 49 48 26 (10)
------- --------- --------- --------- ----------
Net income before extraordi-
nary income 641 585 1,562 1,704 1,710
Extraordinary item ............ -- 469 -- -- --
------- --------- --------- --------- ----------
Net income .................. $ 641 $ 1,054 $ 1,562 $ 1,704 $ 1,710
======= ========= ========= ========= ==========
Net income per share(4) ...... -- -- -- -- --
Weighted average number of
shares outstanding(4) ...... -- -- -- -- --
Supplemental pro forma net
income per share(5) ......... -- -- -- -- --
Other Data:
Depreciation and amortiza-
tion $ 693 $ 748 $ 746 $ 876 $ 826
EBITDA (6) .................. 1,993 1,601 2,363 2,911 2,907
Cash flows from operating
activities .................. 2,120 11 2,949 1,057 3,063
Cash flows from investing
activities .................. (829) (2,757) (1,425) (3,343) (496)
Cash flows from financing
activities .................. (672) 2,173 (1,661) 2,627 (2,718)
Pro forma net income(7) ...... 641 380 966 1,038 1,020
Pro forma net income per
share ........................ -- -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Company Predecessor Company
--------------- ------------- -------------
52 Weeks
Ended 26 Weeks 26 Weeks
September 28- October 27, Ended Ended
October 27, 1996 April 28, April 27,
1996 (Pro Forma)(2) 1996 1997
--------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Sales ........................ $ 3,265 $ 39,345 $ 19,410 $ 20,244
Cost of sales ............... 2,626 34,752 17,338 16,393
----------- ----------- --------- -----------
Gross profit .................. 639 4,593 2,072 3,851
Selling and administrative ... 241 2,173 1,021 1,456
----------- ----------- --------- -----------
Operating income ............ 398 2,420 1,051 2,395
Net interest expense ......... 99 1,200 226 451
Other (income) expense ...... 19 23 0 0
----------- ----------- --------- -----------
Income before income taxes 280 1,197 825 1,944
Income tax expense(3) ......... 117 526 12 764
----------- ----------- --------- -----------
Net income before extraordi-
nary income 163 671 813 1,180
Extraordinary item ............ -- -- -- --
----------- ----------- --------- -----------
Net income .................. $ 163 $ 671 $ 813 $ 1,180
=========== =========== ========= ===========
Net income per share(4) ...... $ 0.05 $ 0.19 -- $ 0.33
Weighted average number of
shares outstanding(4) ...... 3,600,000 3,600,000 -- 3,600,000
Supplemental pro forma net
income per share(5) ......... 0.05 0.26 -- 0.33
Other Data:
Depreciation and amortiza-
tion $ 82 $ 1,151 $ 492 $ 636
EBITDA (6) .................. 480 3,388 1,543 3,031
Cash flows from operating
activities .................. 103 2,206 1,902 3,534
Cash flows from investing
activities .................. (7,216) (7,712) (700) (449)
Cash flows from financing
activities .................. 7,525 (4,807) (2,179) (3,012)
Pro forma net income(7) ...... 163 671 495 1,180
Pro forma net income per
share ........................ 0.05 0.19 -- 0.33
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
October 25, October 31, October 30,
1992 1993 1994
------------- ------------- -------------
<S> <C> <C> <C>
Balance Sheet
Data:
Cash ............... $ 838 $ 265 $ 128
Working capital ... 2,516 2,334 2,590
Total assets ...... 9,336 12,796 14,349
Total current
liabilities ...... 2,737 5,105 5,479
Total long-term
liabilities ...... 2,277 2,593 3,288
Stockholders'
equity ............ 4,322 5,098 5,582
</TABLE>
<TABLE>
<CAPTION>
April 27, 1997
October 29, September 27, October 27, ---------------------------
1995 1996 1996 Actual As Adjusted(8)
------------- --------------- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Balance Sheet
Data:
Cash ............... $ 468 $ 318 $ 730 $ 803 $ 2,659
Working capital ... 801 2,236 4,714 3,019 4,375
Total assets ...... 20,613 18,267 20,194 19,470 21,485
Total current
liabilities ...... 10,855 7,175 5,109 5,670 5,670
Total long-term
liabilities ...... 2,886 3,444 12,121 9,656 2,506
Stockholders'
equity ............ 6,872 7,648 2,964 4,143 13,309
</TABLE>
- ------------
(1) AB Plastics was acquired in September 1996. The acquisition and its related
financing resulted in higher interest expense and a different capital
structure. Due to such differences, net income per share is not provided
for periods prior to the 52 weeks ended October 27, 1996 (pro forma). See
"The Company" and Note 1 of Notes to Financial Statements.
(2) Gives effect to the acquisition of AB Plastics, assuming such transaction
had occurred as of October 30, 1995. See "Pro Forma Statements of
Operations."
(3) The Predecessor elected to be taxed as a subchapter S corporation, as a
result of which all federal income taxes were paid by the stockholders.
Upon completion of the acquisition of AB Plastics, the Company terminated
such subchapter S corporation election.
(4) Assumes that stock options and warrants to purchase an aggregate of
1,560,000 shares of Common Stock, had been exercised as of the end of such
period. See Note 1 of Notes to Financial Statements for an explanation of
the basis used to calculate net income per share.
(5) Supplemental pro forma net income per share is based on the number of
shares of Common Stock used in the calculation of net income per share
plus the number of shares required to be sold by the Company to fund the
repayment of indebtedness as set forth in "Use of Proceeds."
(6) EBITDA is earnings (net income) before interest, taxes, depreciation,
amortization and other (income) expense. The Company believes that EBITDA
provides useful information, widely used in the injection molding
industry, because (i) due to the increased trend of consolidation in the
industry, it eliminates purchase accounting treatment such as increased
depreciation as a result of a write-up of fixed assets and amortization of
goodwill and financing costs and (ii) it is a more accurate measure of
operating cash flow to meet obligations for interest, income tax and
amortization of debt before new investments in property, plant and
equipment. The computation of EBITDA as presented may not be comparable to
computations presented by other companies. EBITDA is a financial measure
commonly used in financial analysis, but should not be construed as an
alternative to net income (as determined in accordance with generally
accepted accounting principles) as an indicator of operating performance.
(7) Pro forma net income reflects the Company's net income on a pro forma basis
as though the Company had been subject to full federal income taxes in
each of fiscal 1992, 1993, 1994, 1995 and 1996, calculated using a 40%
effective tax rate.
(8) Adjusted to reflect (i) the exercise of outstanding stock options and
warrants to purchase an aggregate of 1,560,000 shares of Common Stock and
(ii) the sale by the Company of 1,200,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $9.00 per share,
after deduction of underwriting discounts and commissions and estimated
offering expenses and the application of the estimated net proceeds
therefrom to the repayment of approximately $9.0 million in indebtedness
expected to be outstanding upon the consummation of this offering. See
"Use of Proceeds," "Capitalization" and "Certain Transactions."
Stockholders' equity is adjusted to reflect an anticipated extraordinary
loss of $599,000 (net of applicable income tax benefit of $400,000)
resulting from the write-off of deferred financing costs in connection
with the repayment of such indebtedness.
19
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
The following pro forma statements of operations (unaudited) for the 52
weeks ended October 27, 1996, which include the 48-week period ended September
27, 1996 ("Predecessor") and the four-week period ended October 27, 1996
("Company"), are based on the historical financial data of such companies,
assuming the Company's acquisition of AB Plastics had occurred as of October
30, 1995, the beginning of the 52 weeks ended October 27, 1996. The pro forma
statement of operations is not necessarily indicative of what the Company's
results of operations would have been had such transaction occurred at the
beginning of such period.
<TABLE>
<CAPTION>
Predecessor Company As Adjusted (6)
-------------------- ------------------ -----------------
For the 4 For the 52
For the 48 Weeks Ended Weeks Ended
Weeks Ended October 27, 1996 October 27, 1996
September 27, 1996 (Consolidated) Adjustments (Consolidated)
-------------------- ------------------ ------------- -----------------
<S> <C> <C> <C> <C> <C>
Operating Data:
Sales .............................. $36,080 $ 3,265 $ 39,345
Cost of sales ..................... 32,126 2,626 34,752
------- ---------- ----------
Gross profit ..................... 3,954 639 4,593
Operating expenses ............... 1,872 241 (4) $ 60 2,173
------- ---------- --- -------- ----------
Operating income .................. 2,082 398 (60) 2,420
Other expenses .................... (381) (118) (1) (495) (1,223)
(2) (183)
(3) (46)
Net income before income taxes ... 1,701 280 (784) 1,197
Income tax (expense) benefit ...... 10 (117) (5) (419) (526)
------- ---------- -------- ----------
Net income ........................ $ 1,711 $ 163 $ (1,203) $ 671
======= ========== ======== ==========
Per Share Data:
Net income per share ............... $ 0.05 $ 0.19
========== ==========
Weighted average shares outstanding 3,600,000 3,600,000
</TABLE>
- ------------
(1) Adjusted to give effect to the increase in interest expense on the Sirrom
loan which was obtained in connection with the acquisition.
(2) Reflects amortization expense of loan fees of the Sirrom loan.
(3) Adjusted to give effect to the reduction of interest income from officers'
loans receivable which were paid off by the officers in connection with
the acquisition.
(4) Reflects amortization of goodwill.
(5) Reflects deferred tax expense related to the above adjustments and
conversion to subchapter C corporation status.
(6) Does not reflect an extraordinary loss of $599,000 (net of applicable
income tax benefit of $400,000) resulting from the write-off of Sirrom
loan fees which will occur upon the completion of this offering.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations includes forward-looking statements with respect to
the Company's future financial performance. These forward-looking statements
are subject to various risks and uncertainties, including the factors described
under "Risk Factors" and elsewhere in this Prospectus, that could cause actual
results to differ materially from historical results or those currently
anticipated.
Overview
The Company is a leading contract manufacturer and assembler of custom
injection-molded plastic components for computer and consumer electronics OEMs
located in Southern California and Mexico. The Company supplies plastic
exteriors for direct-tube televisions ranging from 13" to 35" and frames for
50" and 60" projection televisions. The Company also supplies plastic exterior
and base stands for 17" computer monitors manufactured by Sony for leading PC
manufacturers, such as Gateway 2000, Dell Computer, Silicon Graphics, Sun
Microsystems and Digital Equipment Corporation, and, starting in August, the
plastic exteriors for Sony's personal computer, known as "Vaio," in both 15"
and 17" models. The Company also manufactures enclosures for electronic music
keyboards.
The Company maintains approximately 125 active molds for its customers,
pursuant to which it may produce all the plastic components for a product or
only select parts. During the product life cycle, components are ordered by the
Company's customers to meet their just-in-time production requirements. Typical
lead times range from two to four weeks. Historically, shipments of the
Company's components have been higher in the second and fourth fiscal quarters
as a result of increased demand for computer and consumer electronics products
during the spring and year-end holiday seasons. As a result, sales may vary
from period to period solely dictated by the demand for the products of the
Company's customers. As product introduction and acceptance are not determined
in advance, OEM customers generally allocate molds for new components to their
suppliers, such as the Company, before they know actual volume purchase
requirements. Traditionally, once a tool is allocated to a particular molder
and is in production, it is rarely moved to a competitor. The Company is one of
two principal regional suppliers to its two largest customers, Sony and
Matsushita.
For the first 35 years of its existence, substantially all of the
Company's sales were made to customers located in California. In the late
1980s, many of these firms relocated to Tijuana, Mexico, primarily due to
reduced labor costs. There are currently approximately 350 manufacturing plants
operating in Tijuana. Four of the Company's largest customers have a total of
seven plants located in Tijuana. Trends within the computer and consumer
electronics industries indicate that OEMs based in the Far East (such as Japan,
Taiwan and South Korea) will continue to relocate the manufacturing and
engineering of products for sale in the United States, formerly manufactured in
Far East facilities, to North America, in particular Tijuana.
Sony commenced manufacturing computer monitors at its computer monitor
manufacturing division in Rancho Bernardo, California in 1994. As one of two
principal United States injection-molders for Sony computer monitors, the
Company's monitor sales rose from $2.9 million in 1994 to $15.4 million in
fiscal 1996. The Company expects to manufacture additional models in 1997 and
1998 to supply Sony's anticipated computer monitor growth, including
anticipated public response to the Sony Vaio. In fiscal 1997, Sony transferred
all of its television production and a significant portion of its computer
monitor production from its Rancho Bernardo, California facility to its
Tijuana, Mexico plant. When operational, the Company's new Tijuana, Mexico
facility will manufacture components for computer monitors and televisions for
Sony's Tijuana manufacturing and assembly plant. Because sales from this
facility and all raw material purchases for use at this facility will be U.S.
dollar-denominated and managed at the Company's Gardena, California executive
offices, the Company does not believe that it will be significantly affected by
exchange rate fluctuations in the Mexican peso relative to the U.S. dollar. The
Company believes that the effects of such fluctuations will be limited to wages
for local laborers and operating supplies, neither of which is expected to be
material to the Company's results of operations when the new facility is
operational. The Company's Gardena, California plant will continue to service
Sony's Rancho Bernardo plant.
All molds held by the Company are owned by the customer but the Company is
responsible for general maintenance and safe storage during the life of the
mold. Costs for maintenance of the mold are expensed as incurred. Major tool
modifications are charged to the customer.
21
<PAGE>
Prices are quoted based on component drawings provided by customers with
estimates of part weight, resin costs, machine requirements and parts produced
per hour (cycle time). Most component prices are negotiated after initial
production runs, and weight and cycle times are verified. The Company charges
its customers a fixed price for each component it manufactures, which
components may consist of single or multiple parts. Negotiated prices include
the cost of thermoplastic resins, packaging, other materials and parts, labor
and overhead. Although thermoplastic resins have historically accounted for at
least 80% of its raw material costs, the Company does not believe that its
results of operations are subject to the risk of fluctuations in resin prices,
since the Company's arrangements with most of its customers provide that price
changes in such resins are passed through to the customer by changes in the
component prices charged by the Company. In addition, each of Sony, Matsushita
and Hitachi negotiate separate supply agreements with thermoplastic resin
producers which deliver such resins to the Company for use in their products.
During periods of rising resin prices, sales revenues tend to increase for the
same number of units while gross profit margin remains unchanged, but gross
profit margin as a percentage of sales decreases. The reverse tends to be true
in periods of declining resin prices. In fiscal 1995, resin prices increased by
20% over 1994 prices, resulting in $4.0 million of sales inflation. Resin
prices declined over 18% in fiscal 1996 and have been relatively stable the
first half of fiscal 1997. As customers generally seek price reductions during
the product life cycle, the Company's ability to improve operating performance
is generally dependent on increasing manufacturing efficiency through improved
process control, increased automation, engineering changes to molds and reduced
operating and labor expenses.
Results of Operations
26 Weeks ended April 27, 1997 Compared to 26 Weeks ended April 28, 1996
The Company's net sales for the 26 weeks ended April 27, 1997 were $20.2
million, an increase of $800,000, or 4.1%, from $19.4 million for the 26 weeks
ended April 28, 1996. For the 26 weeks ended April 27, 1997, net sales were
comprised of $9.7 million in computer monitor component sales, $8.4 million in
television component sales and $1.8 million in electronic music keyboard
component sales, and other component sales of approximately $280,000.
Television component sales decreased $1.3 million, or 13.4%, from sales of
$9.7 million for the 26 weeks ended April 28, 1996. This decrease was due to a
decrease in orders from Matsushita of $3.0 million (due to a periodic increase
in Matsushita's use of its internal capacity), which was partially offset by an
increase in orders from Sony of $1.6 million. Computer monitor component sales
increased $2.5 million, or 34.7%, from sales of $7.2 million for the 26 weeks
ended April 28, 1996. This increase was principally due to an increase in
orders from Sony of approximately $1.8 million, and an increase in orders from
a smaller customer of approximately $682,000. Electronic music keyboard
component sales increased approximately $112,000, or 6.6%, from sales of $1.7
million for the 26 weeks ended April 28, 1996. This increase was the result of
an increase in orders from Casio. During this time resin prices decreased and
were passed on to the customers in the form of lower prices.
The Company's gross profit for the 26 weeks ended April 27, 1997 was $3.8
million, or 19.0% of net sales, compared to $2.1 million, or 10.7% of net
sales, for the 26 weeks ended April 28, 1996. This increase was principally due
to productivity improvements through a 20% reduction in the Company's workforce
and tighter controls on operating expenses. The Company does not currently
anticipate that productivity improvements will continue at this level in the
future.
The Company's selling and administrative ("SGA") expenses for the 26 weeks
ended April 27, 1997 were $1.5 million, or 7.2% of net sales, compared to $1.0
million, or 5.3% of net sales, for the 26 weeks ended April 28, 1996. These
expenses consisted of increased administrative expenses and incentive
compensation accruals.
The Company's net interest expense for the 26 weeks ended April 27, 1997
was $451,000, or 2.2% of net sales, compared to $226,000, or 1.3% of net sales,
for the 26 weeks ended April 28, 1996. The increase in interest expense is due
to the increase in long-term debt related to the acquisition of AB Plastics by
the Company in September 1996.
The Company's net income tax expense for the 26 weeks ended April 27, 1997
was $764,000, or 3.8% of net sales, compared to $12,000 for the 26 weeks ended
April 28, 1996. Prior to the acquisition of AB Plastics
22
<PAGE>
by the Company in September 1996, the Company made an election to be taxed
under the provisions of subchapter S of the Internal Revenue Code of 1986, as
amended. Under these provisions, the Company did not pay federal corporate
income taxes on its taxable income and only paid 1.5% state income taxes.
Instead, the stockholders were liable for individual federal and state income
taxes on their respective shares of the Company's taxable income. Subsequent to
the date of acquisition, the Company terminated its subchapter S corporation
election and elected to be governed by the provisions under subchapter C of the
Internal Revenue Code. Under these provisions, the Company is liable for
federal and state income taxes on its taxable income.
Period from October 30, 1995 to September 27, 1996 and 52 Weeks ended
October 27, 1996 (Pro forma) Compared to Fiscal Year ended October 29, 1995
The discussion in this section generally compares the Company's actual
results for the fiscal year ended October 29, 1995, with (i) the results of the
Company's Predecessor for the period from October 30, 1995 to September 27,
1996 and (ii) the combined results of the Predecessor and the Company for the
fiscal year ended October 27, 1996.
The Company's net sales for the period from October 30, 1995 to September
27, 1996 were $36.1 million, a decrease of $6.7 million, or 15.5%, from $42.7
million in the fiscal year ended October 29, 1995 (the "1995 fiscal year").
Sales for the 52 weeks ended October 27, 1996 (pro forma) were $39.3 million, a
decrease of $3.3 million, or 7.7%, from the 1995 fiscal year. For the period
from October 30, 1995 to September 27, 1996 net sales were comprised of $17.5
million in television component sales, $14.4 million in computer monitor
component sales, $3.0 million in electronic music keyboard component sales, and
other component sales of $1.1 million. For the 52 weeks ended October 27, 1996
(pro forma), sales were comprised of $19.5 million in television component
sales, $15.6 million in computer monitor sales and $3.3 million in electronic
music keyboard components.
Television component sales for the period from October 30, 1995 to
September 27, 1996 decreased $6.6 million, or 27.4%, from 1995 fiscal year
sales of $24.1 million. Of the decrease, $2.0 million is attributed to the
shorter period comparison. Television component sales for the 52 weeks ended
October 27, 1996 (pro forma) decreased $4.6 million, or 19.1%, from 1995 fiscal
year sales. This decrease, on a 52 week comparison basis, was due to a decrease
in orders from Sony of $3.9 million and a decrease in orders from Hitachi of
$1.7 million, slightly offset by an increase in orders from Matsushita of
approximately $800,000.
Computer monitor component sales for the period from October 30, 1995 to
September 27, 1996 increased $3.2 million, or 28.6%, from 1995 fiscal year
sales of $11.2 million. Computer monitor component sales for the 52 weeks ended
October 27, 1996 (pro forma) increased $4.3 million, or 38.3%, from 1995 fiscal
year sales. This increase was due to an increase in orders from Sony of $4.1
million and an increase from a smaller customer of approximately $179,000.
Electronic music keyboard component sales for the period from October 30,
1995 to September 27, 1996 decreased $3.2 million, or 51.6%, from 1995 fiscal
year sales of $6.2 million. Of this decrease, $300,000 is attributed to the
shorter period comparison. Sales for the 52 weeks ended October 27, 1996 (pro
forma) decreased $2.9 million, or 46.7%, from the 1995 fiscal year. This
decrease was the result of a decrease in orders from Casio. In addition, during
this time, resin prices decreased and were passed on to the customer in the
form of lower prices.
The Company's gross profit for the period from October 30, 1995 to
September 27, 1996 was $4.0 million, or 11.0% of sales, compared to $3.7
million, or 8.7% of net sales, for the 1995 fiscal year. The Company's gross
profit for the 52 weeks ended October 27, 1996 (pro forma) was $4.6 million, or
11.7% of sales. This increase in profitability was principally due to
productivity improvements through a 20% reduction in its workforce and tighter
controls on operating expenses. The Company does not currently anticipate that
productivity improvements will continue at this level in the future. These
improvements were offset by a one-time write-off and revaluation of certain
assets including $458,000 of inventory, $159,000 of disputed accounts
receivable which the Company decided not to pursue, and $80,000 of licensing
fees related to a discontinued product. These adjustments were recorded in the
period from October 30, 1995 to September 27, 1996.
The Company's SGA expenses for the period from October 30, 1995 to
September 27, 1996 were $1.9 million, or 5.2% of sales, compared to $1.7
million, or 3.9% of sales for the 1995 fiscal year. The increase in
23
<PAGE>
expenses were related to consulting and other professional services engaged to
evaluate and improve the operating performance of the Company, additional
administrative expenses relating to the sale of AB Plastics, and a change in
accounting policy which the Company will accrue in current year fees for its
year-end audit. For the 52 weeks ended October 27, 1996 (pro forma), in
addition to the above discussion, the Company began to record amortization of
goodwill.
The Company's net interest expense for the period from October 30, 1995 to
September 27, 1996 was $386,000, or 1.1% of sales, compared with $375,000, or
0.9% of sales, for the 1995 fiscal year. The increase was due to an increase in
borrowings by the Company. See "-- Liquidity and Capital Resources."
The Company's income tax expense was immaterial in the historical periods
reflecting the Predecessor's election of subchapter S status. On a going
forward basis, the Company will file consolidated tax returns under subchapter
C of the Internal Revenue Code.
Four Weeks ended October 27, 1996
The Company's net sales for the four weeks ended October 27, 1996 were
$3.3 million, consisting of $1.8 million of television component sales, $1.1
million of computer monitor component sales, and $300,000 of electronic music
keyboard component sales.
The Company's gross profit for the four weeks ended October 27, 1996 was
$639,000, or 19.3% of net sales.
The Company's SGA expenses for the four weeks ended October 27, 1996 were
$241,000. Interest expense during this period was $99,000, a substantial
portion of which was attributable to debt related to the acquisition.
The Company's income tax expense for the four weeks ended October 27, 1996
was $117,000, reflecting the Company's change in tax status to subchapter C of
the Internal Revenue Code.
Fiscal Year ended October 29, 1995 Compared to Fiscal Year ended October
30, 1994
The Company's net sales for the 1995 fiscal year were $42.7 million, an
increase of $8.7 million, or 25.5%, from $34.0 million in the fiscal year ended
October 30, 1994 (the "1994 fiscal year"). For the 1995 fiscal year, net sales
were comprised of $24.1 million in television component sales, $11.2 million in
computer monitor component sales, and $6.2 million in electronic keyboard
component sales, and other component sales of $1.2 million.
Television component sales in the 1995 fiscal year decreased $1.5 million,
or 5.9%, from 1994 fiscal year sales of $25.6 million. This decrease was due to
a reduction in orders from Sony of $2.9 million, offset by increases from both
Matsushita of approximately $756,000 and Hitachi of approximately $591,000.
Computer monitor component sales in the 1995 fiscal year increased $8.4
million, or 290%, from 1994 fiscal year sales of $2.9 million. This increase
was due to the growth of Sony's computer monitor business in Rancho Bernardo,
California and resin price increases which were passed on to customers in terms
of higher prices. Electronic music keyboard component sales increased $2.6
million, or 70.2%, from 1994 fiscal year sales of $3.7 million. This increase
was the result of market demand for Casio's keyboard products.
The Company's gross profit for the 1995 fiscal year was $3.7 million, or
8.7% of net sales, compared to $3.3 million, or 9.8% of net sales, for the 1994
fiscal year. This increase in gross profit was principally due to higher
revenue. The decrease in gross profit as a percentage of sales was due to
higher resin prices.
The Company's SGA expenses for the 1995 fiscal year were $1.7 million, or
3.9% of net sales, compared to $1.7 million, or 5.0% of net sales, for the 1994
fiscal year. The decrease in expense as a percentage of sales was due solely to
the increase in revenue.
The Company's net interest expense for the 1995 fiscal year was $375,000,
or 0.9% of net sales, compared to $225,000, or 0.6% of net sales, for the 1994
fiscal year.
The Company's other income for the 1995 fiscal year was $70,000, or 0.2%
of net sales, compared to income of $218,000, or 0.6% of net sales, for the
1994 fiscal year. Other income consisted mainly of workers' compensation and
other insurance rebates.
24
<PAGE>
The Company's income tax expense for the 1995 fiscal year was
approximately $26,000, or 0.1% of net sales, compared to approximately $48,000,
or 0.1% of net sales, for the 1994 fiscal year.
Liquidity and Capital Resources
As of April 27, 1997, the Company had working capital of $3.0 million
compared to $4.7 million at the end of the 1996 fiscal year. The reduction was
attributable to improved collection of accounts receivable and increased trade
payables and accrued wages and benefits. The Company used such funds to pay
down its revolving line of credit, which is classified as a long-term
liability. The Company's available borrowings under its revolving line of
credit were $4.1 million at April 27, 1997.
Net cash provided by operating activities for the 26 weeks ended April 27,
1997 was approximately $3.5 million, compared to $1.9 million for the 26 weeks
ended April 28, 1996. The difference between the Company's net income of $1.2
million and operating cash flow of $3.4 million was attributable to $600,000 in
depreciation and amortization, reduction in accounts receivable of $2.3
million, an increase in accounts payable of $600,000, less an increase in
inventory of $1.1 million.
Net cash used in investing activities for the 26 weeks ended April 27,
1997 was $449,000, compared to $700,000 for the 26 weeks ended April 28, 1996.
Cash flow for the 26 weeks ended April 27, 1997 reflects the capital
expenditures incurred in connection with the Company's routine replacement of
manufacturing and support equipment and leasehold improvements related to
expansion of its administrative offices.
Net cash used for financing activities for the 26 weeks ended April 27,
1997 was $3.0 million, compared to $2.2 million used for the 26 weeks ended
April 28, 1996. This reflects approximately $2.9 million in payments to reduce
the Company's outstanding line of credit borrowings and approximately $162,000
in principal payments related to equipment lease obligations during the 26
weeks ended April 27, 1997. The Company also entered into $396,000 in
capitalized leases at such time relating to the addition of two molding
machines.
AB Plastics is party to a loan agreement with Sumitomo, which includes (a)
a revolving line of credit facility (the "Revolver"), available through July
31, 2001, with a maximum borrowing limit equal to the lesser of $10.0 million
or the sum of (i) 85% of AB Plastics' eligible accounts receivable, plus (ii)
50% of AB Plastics' eligible inventory, plus (iii) a supplemental amount of
$5.2 million (reducing at the rate of $100,000 per month commencing June 30,
1997), and (b) an equipment line of credit (the "Equipment Line"), available
through October 31, 1997, in an aggregate principal amount of up to $2.0
million to be utilized for the purchase of equip-ment. The loans under the
Sumitomo loan agreement are secured by a first priority lien and security
interest on substantially all of the assets of AB Plastics, and by a guaranty
of the Company which is secured by a pledge of all of the outstanding capital
stock of AB Plastics. The loans bear interest at prime rate plus 0.50% per
annum (or, at AB Plastics' option, at short-term LIBOR plus 2.75% per annum)
with respect to the Revolver, and at prime rate (through October 31, 1997) and
prime rate plus 0.25% per annum (from and after November 1, 1997) under the
Equipment Line. Advances under the Revolver are repayable in full on July 31,
2001, and advances under the Equipment Line as of October 31, 1997 are
repayable in 48 equal monthly payments from December 1, 1997 through November
1, 2001. It is contemplated that approximately $5.0 million in principal amount
of loans will be outstanding under the Revolver upon the consummation of this
offering. Pending the use of the net proceeds of this offering for its
facilities, the Company intends to use approximately $5.0 million of the net
proceeds of this offering for the reduction of the outstanding loans under the
Revolver. See "Use of Proceeds."
The Company and AB Plastics are co-borrowers under a subordinated loan
agreement with Sirrom, pursuant to which the Company and AB Plastics borrowed
from Sirrom a subordinated term loan in the original principal amount of $4.0
million, bearing interest at the rate of 13.5% per annum, and secured by a lien
and security interest on substantially all of the assets of AB Plastics and a
pledge of all of the outstanding capital stock of AB Plastics. The Sirrom loan
and the liens, security interests and pledge securing the Sirrom loan are
subordinated to the Sumitomo loans and the liens, security interests and pledge
securing the Sumitomo loans. The interest on the Sirrom loan is payable in
monthly installments of $45,000 through September 2001, when the then
outstanding principal amount matures, subject to certain mandatory prepayments
out of excess cash flow (if any) achieved in the calendar years 1998, 1999 and
2000. As of July 21, 1997, the outstanding principal balance of the Sirrom loan
was $4.0 million. The Company intends to use a portion of the net proceeds of
this offering to repay the Sirrom loan in full. See "Use of Proceeds."
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<PAGE>
In May 1997, AB Plastics borrowed the sum of $1.0 million from
Transamerica Business Credit Corporation ("Transamerica"). Of such $1.0
million, approximately $535,000 was utilized to pay in full the remaining
outstanding balances of certain capitalized leases, and the remaining $465,000
was retained by AB Plastics with the intent of utilizing such funds to acquire
equipment for the new Tijuana, Mexico facility. The loan from Transamerica
bears interest at the rate of 10.03% per annum, is repayable in 60 equal
monthly installments of combined principal and interest payable monthly through
May 2002, and is secured by a lien on the equipment acquired under the
refinanced capitalized leases and by a guaranty of the Company. In July 1997,
the Company entered into an additional $310,000 in capitalized lease
obligations and received $468,000 in proceeds from its equipment line of
credit.
The contemplated repayment of approximately $9.0 million of the Company's
existing indebtedness with the net proceeds of this offering is expected to
significantly improve the Company's liquidity by reducing both the Company's
interest expense and the principal amount of indebtedness required to be repaid
by the Company in the future. The Company believes that, subsequent to this
offering and such repayments, funds generated from operations and expected
borrowing availability under the Company's revolving line of credit will be
sufficient to satisfy the Company's working capital requirements.
Capital Expenditures
At April 27, 1997, the Company's commitments for capital expenditures
totaled approximately $2.7 million related primarily to equipment for its new
Tijuana, Mexico manufacturing facility. The Company also expects to spend an
additional $3.7 million on equipment and improvements on such facility. The
Company intends to finance these expenditures through separate lending
arrangements, as well as a portion of the net proceeds of this offering. The
Company expects to spend approximately $5.1 million to purchase the land and
buildings at its Gardena, California manufacturing facility and construct an
additional 75,000 square foot warehouse and distribution facility to replace an
off-site leased facility of roughly equivalent size. The Company intends to pay
for the purchase of the Gardena, California property by borrowing approximately
$3.5 million under a conventional mortgage loan, with the balance to be funded
from a portion of the net proceeds of this offering.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires compensation expense
to be recorded (i) using the new fair value method or (ii) using existing
accounting rules prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations with pro forma disclosure of what net income and earnings per
share would have been had the Company adopted the new fair value method. The
Company intends to continue to account for its stock-based compensation plans
in accordance with the provisions of APB 25.
26
<PAGE>
BUSINESS
Overview
The Company believes that it is one of the leading contract manufacturers
and assemblers of custom injection-molded plastic components in the western
United States based on 1996 sales. The Company manufactures the plastic
exteriors of computer monitors, televisions, electronic music keyboards and
other consumer electronics equipment. In addition to injection-molded
components, the Company offers a broad range of "value-added" services,
including painting, decorating and assembly. A significant percentage of the
Company's components are manufactured using gas-assist molding technology which
reduces material usage and permits the molding of lighter and stronger parts.
The Company believes its technical and manufacturing capabilities to produce
large injection-molded plastic components on both a "just-in-time" basis and in
production volumes with low reject rates provides a significant competitive
advantage.
The Company's two major OEM customers are Sony, through its computer
monitor and television manufacturing divisions, and Matsushita, through its
Panasonic and Quasar brands. Sales to these customers represented approximately
66.5% and 18.0%, respectively, of the Company's total sales for the fiscal year
ended October 27, 1996. Of sales to Sony, computer monitor components accounted
for approximately 39.1% and television components accounted for approximately
27.4% of the Company's total sales during the fiscal year ended October 27,
1996. The Company has been an uninterrupted supplier of custom injection-molded
components to Sony since 1972, to Matsushita since 1983 and to virtually all of
its other customers for at least seven years. To improve its ability to support
major customers, in addition to its current manufacturing facility in Gardena,
California, the Company is currently completing a new "build-to-suit"
manufacturing facility in Tijuana, Mexico. This new facility has been
logistically located near many of its customers' manufacturing plants in Mexico
and is expected to add significant manufacturing capacity by September 1997.
Management believes that this facility will enable the Company to capitalize on
demand from new and existing customers which have relocated their manufacturing
operations from the Far East and the United States to Mexico in recent years
due to lower labor and transportation costs. Closer proximity to its major
customers will allow the Company to be more efficient in delivering 15 to 20
daily truckloads of components to its customers' production facilities and
eliminate time-consuming border crossings.
Industry Overview and Trends
Custom injection-molded plastic components are essential in virtually all
computer monitors, televisions, electronic music keyboards and other consumer
electronic products that require an enclosure or cabinet. The continuing
development and refinement of these products by OEMs has created a strong
demand for injection-molded plastic components for new and replacement sales of
these products. According to Stanford Resources' Monitrak Quarterly Report,
United States sales of computer monitors, the Company's major market, rose to
approximately 21.7 million units in 1996, representing an increase of 61.9%
from sales of approximately 13.4 million units in 1994. As computer monitors
are built to incorporate more features of a television, videocassette recorder,
videophone and gameplayer, and with the anticipated introduction of cable-ready
monitors, cable modems, ISDN and 3-D graphics applications, the Company
believes that these technological advancements will spur continued growth in
the computer monitor market. In addition, according to the Consumer Electronics
Manufacturers Association ("CEMA"), United States direct-view color television
sales were approximately 22.1 million units in 1996 and, since 1991, sales have
exceeded 20 million units per year. The Company believes that the anticipated
availability of digital broadcasting, Internet access, HDTV and flat panel
displays has the potential to increase significantly television sales over the
next ten years.
Injection-molded plastic components are used in a wide variety of
industries, including automotive, telecommunications, computer, consumer
electronics, medical and packaging. Based on information provided in Plastic
News, a leading industry publication, sales of the top 100 North American
plastic injection-molders were approximately $11.3 billion in 1994, $12.5
billion in 1995 and $14.4 billion in 1996, reflecting a 12.9% industry-wide
average annual growth rate. The Company was ranked by sales in 1996 as the 96th
largest plastic injection molder in North America, the 9th largest plastic
injection molder in the western United States (comprised of the states of
California, Arizona, Oregon and Washington), and one of the three largest
custom plastic
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<PAGE>
injection molders in Southern California. In addition, according to CIT's Sixth
Annual Plastics Industry Outlook 1997-1999, the electronics industry, which has
itself been experiencing significant growth in recent years, is expected to
increase its plastic consumption the most rapidly of all other industries
through 1999.
Management believes that the Company is well positioned to take advantage
of the following trends in the injection-molded plastic industry:
Continued Demand for Plastic Components. In recent years, OEMs have
focused their efforts on developing and employing lower-cost and lighter
materials, such as plastic, in the design of components for televisions,
electronic and computer products. Plastic provides OEMs with a number of design
advantages over metal, including increased design flexibility and aesthetic
appeal and resistance to corrosion. Substituting plastic for metal can also
reduce manufacturing costs by eliminating machining costs, reducing painting
costs, facilitating assembly, minimizing tooling costs and reducing the number
of parts used in a particular product. The continued growth of high performance
engineered plastics and the ability of resin suppliers to deliver resins with
specific properties, such as high-impact strength and flame retardancy, will
allow a more diverse range of plastics applications. The Company believes that
while the majority of opportunities for converting metal into plastic have
already occurred in computer and television exterior applications, there are
significant growth opportunities in the use of plastic in computer base stands
and business equipment that require electromagnetic and radio frequency
interference shielding.
Further Outsourcing by OEMs. Since the early 1990s, OEMs have purchased an
increasingly larger share of their total injection-molded plastic requirements
from independent manufacturers. Management believes that this trend toward
greater outsourcing is driven by increasingly sophisticated engineering and
manufacturing requirements and the substantial capital investment required to
manufacture injection-molded plastic. In addition, this trend in outsourcing of
injection-molded plastic requirements is part of another trend among OEMs
toward outsourcing manufacturing services to those suppliers which accept
significant responsibility for product management and meet strict standards for
product quality, on-time delivery and manufacturing costs.
Increased Demand for Just-in-Time Deliveries. Because production delays
resulting from undelivered or late production orders can have severe
consequences and stockpiling of inventory entails significant carrying costs,
OEMs are increasingly asking for the assistance of component manufacturers with
the management of their inventories by providing just-in-time delivery to avoid
temporary inventory shortages and unnecessary carrying costs.
Consolidation of Industry. The number of North American injection-molded
plastic manufacturers has decreased from the late 1970s due to significant
mergers and acquisitions activity. The Company believes that this consolidation
is primarily due to the substantial capital investment and the engineering and
manufacturing expertise required to remain technologically competitive and
thereby meet customer specifications for injection-molded plastic, as well as
national and global relationships with customers and price competition in the
injection-molded plastic market.
Growth Strategy
The Company's goal is to be a dominant supplier of injection-molded
plastic components to the increasing number of computer monitor and television
OEMs' plants located in Southern California and Tijuana, Mexico. Management
believes that the commencement of digital broadcasting in the television
industry in the United States, starting in 1998, will create a demand for new
HDTV and flat panel displays as consumers replace obsolete television sets
unable to receive digital braodcasting with HDTV quality. According to CEMA, at
least 20 million television sets have been sold each year since 1991 and 380
million television sets have been sold since 1974 in the United States.
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The key elements of the Company's growth strategy include the following:
Continue to Expand Computer Monitor and Television Component Business. The
Company will seek to expand its computer monitor component business through the
continuation of the overall growth of the Company's computer monitor sales to
Sony, which have grown from $2.9 million in fiscal 1994 to $15.4 million in
fiscal 1996, a 431% increase. The Company will continue to support not only
Sony's private label programs on behalf of leading computer hardware companies
such as Gateway 2000, Dell Computer, Silicon Graphics, Sun Microsystems and
Digital Equipment Corporation, but also Sony's personal computer, known as
Vaio, beginning in July 1997. In addition, the Company's recent marketing
strategy includes targeting sales to other computer monitor and television OEMs
doing business in Tijuana, Mexico.
Acquire Complementary Businesses. The Company believes that the
acquisition of manufacturers of injection-molded plastics products will enable
the Company to diversify its customer base, technical capabilities and
geographic areas served, capitalize on consolidation opportunities in its
fragmented market and on OEMs' desire to outsource their supply requirements,
reduce the number of suppliers used and use only those suppliers who can
provide a broad range of products and services. Accordingly, the Company
regularly reviews acquisition prospects that would augment or complement the
Company's existing operations or otherwise offer significant growth
opportunities. At the present time, while the Company has held exploratory
discussions with several potential acquisition candidates, the Company does not
have any arrangement or agreement with respect to any acquisition transactions.
Capitalize on Customer Demand in Tijuana Market. The Company intends to
lease and purchase equipment for a newly-constructed "build-to-suit"
manufacturing facility in Tijuana, Mexico, adjacent to its largest customer's
manufacturing facilities. Management believes the new facility will increase
existing manufacturing space by 50% and house initially 12 molding machines
with the potential to house 33 to 35 molding machines. The Company believes
that the new facility will begin to add significant manufacturing capacity by
September 1997, thereby enabling the Company to capitalize on current demand
from existing customers and to attract new customers located in Tijuana,
Mexico. The Company's strategic focus will continue to be on niche markets,
such as computer monitors and televisions, as well as other business equipment
and telecommunications.
Pursue Long-Term Relationships with New Customers. The Company intends to
continue to develop long-term alliances with new and existing customers in the
computer and consumer electronics industries. The Company seeks to establish
and maintain long-term relationships by providing total manufacturing solutions
for new and proposed products, just-in-time delivery services and strong
engineering support, including design for manufacturability analyses that
assist customers in the tool design phase of the development process. The
Company believes that frequent interaction with its customers in the tool
design phase of their product development process allows the Company to
anticipate the customers' future technological requirements, prepare the
appropriate manufacturing infrastructure and develop long-term relationships
across a number of products and through multiple product models.
Continue Commitment to Quality and Service. The Company strives to ensure
the highest levels of quality control in all phases of its operations,
primarily through continuous improvement of its engineering capabilities,
manufacturing processes and quality assurance systems. The Company believes
that its strategy of investing in real-time computer process and quality
systems provides improved management controls which maximize scheduling
flexibility and increase product throughput and yields. The Company is
currently in the process of ISO 9002 certification.
Products and Services
The Company manufactures and assembles custom injection-molded plastic
components. These components consist primarily of the entire plastic exteriors
of computer monitors, televisions, electronic music keyboards and other
consumer electronics equipment. The Company also offers a broad range of
value-added services, including painting, decorating and assembly. The
Company's three primary lines of components are as follows:
Computer Monitor Components. The Company focuses on the production of
computer monitor components which require the molding and assembly of multiple
parts. Computer monitor components manufactured by the Company include the
front (or "bezel") assembly, the rear cover and the base stand. The bezel
assembly consists of the bezel frame, door latch, light pipe, logo badge and
pad printing. The Company manufactures these
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components pursuant to the strict color, cosmetic and dimensional
specifications of its customers and assembles the parts on automated production
lines. At the present time, the Company manufactures computer monitor
components only for Sony. Sony manufactures computer monitors for private label
programs on behalf of leading computer hardware companies such as Gateway 2000,
Dell Computer, Silicon Graphics, Sun Microsystems and Digital Equipment
Corporation. Sony began manufacturing computer monitors at its computer
manufacturing division in Rancho Bernardo, California in 1994, and sales to
such division have grown from $2.9 million in the fiscal year ended October 30,
1994 to $15.4 million for the fiscal year ended October 27, 1996. The Company
has been selected to manufacture computer monitor components beginning in July
1997 for Sony's personal computer, known as Vaio. The Vaio computer was
introduced in April 1996, in the United States. Computer monitor components
represented approximately 44.5% and 39.1% of the Company's product sales for
the 26 weeks ended April 27, 1997 and the fiscal year ended October 27, 1996,
respectively.
Television Components. Television components include the bezel and the
rear cover. For projection televisions, the Company also manufactures the
exterior frame housing the projection screen. All bezels are pad printed to
include the logo and the operating instructions. Historically, the Company's
largest customers for its television components have been Sony, Matsushita
(Panasonic and Quasar brands) and Hitachi. Television components represented
approximately 40.8% and 49.0% of the Company's product sales for the 26 weeks
ended April 27, 1997 and the fiscal year ended October 27, 1996, respectively.
Electronic Music Keyboards and Other Consumer Electronics Components. The
Company manufactures a variety of consumer electronics components, such as the
top and bottom covers for electronic music keyboards, and storage containers
for various consumer products. As part of this process, electronic music
keyboards are manufactured for Casio using a specialized thermal transfer
process, which automatically prints the whole surface display of logos and
instructions in a single step. Electronic music keyboards and other consumer
electronics components represented approximately 14.8% and 11.9% of the
Company's product sales for the 26 weeks ended April 27, 1997 and the fiscal
year ended October 27, 1996, respectively.
Value-Added Services. In addition to injection-molded plastic components,
the Company offers a broad range of value-added services including painting,
finishing and assembly services. These services include solvent and waterborne
painting, electromagnetic and radio frequency interference shielding, hot
stamping, pad printing, silkscreening, solvent bonding, impulse welding,
ultrasonic welding and insertion, and heat staking. See "-- Manufacturing."
The Company provides design and engineering assistance in the early stages
of product development, thus assuring that tooling, process and assembly
considerations achieve reproducible, high-quality and cost effective products.
The Company evaluates customer designs for manufacturability and, when
appropriate, recommends design changes to reduce manufacturing costs or lead
times or to increase manufacturing yields and the quality of finished
components. The Company believes that by offering this range of services it has
established a "partnership" relationship with its customers.
The Company assists its customers by reducing their inventories through
just-in-time deliveries in which finished components are inspected at the
Company's facilities to conform to a pre-approved quality plan and shipped
directly to the customer for use in its manufacturing process without the need
for incoming inspection at the customer's facility.
Customers
The Company's principal customers are Sony, Matsushita, Casio and Hitachi,
for which it supplies components for computer monitors, televisions and other
consumer electronics equipment. The Company has focused its marketing efforts
on maintaining long-term relationships with its existing OEM customers while
pursuing new customers in the computer and consumer electronics industries.
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Historical sales of the Company by principal customer are set forth in the
table below (dollars in thousands):
<TABLE>
<CAPTION>
52 Weeks Ended
October 27, 1996 26 Weeks Ended 26 Weeks Ended
(pro forma) April 28, 1996 April 27, 1997
---------------------- ---------------------- ----------------------
Customer Amount % Amount % Amount %
- ---------------------------------------------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sony -- Computer manufacturing division $15,373 39.1% $ 7,174 37.0% $ 8,999 44.5%
Sony -- Television manufacturing division . 10,773 27.4 4,081 21.0 5,679 28.1
Matsushita -- Panasonic and Quasar ......... 7,093 18.0 4,918 25.3 1,954 9.7
Others ....................................... 6,106 15.5 3,237 16.7 3,612 17.8
-------- ------ -------- ------ -------- ------
Total sales .............................. $39,345 100.0% $19,410 100.0% $20,244 100.0%
======== ====== ======== ====== ======== ======
</TABLE>
The Company's customers typically have relationships with a limited number
of injection molders, and allocate the molding of individual components or
parts to one of their molders. In the Company's experience, purchase orders
will be placed with the same molder for a particular component or part
generally for three-month periods, but typically the order will remain in place
until the component is redesigned or eliminated in a model change. Customers
generally provide the Company with periodic forecasts for their requirements,
which are updated regularly. Customers give the Company non-cancellable
releases from their purchase orders based on two to four week lead times and,
therefore, the Company does not have a significant amount of backlog orders. In
the event a customer were to cancel a purchase order prior to release, the
customer would be typically obligated to reimburse the Company only for raw
materials purchased and finished goods, if any, made in reliance of the
purchase order. Except for Sony and Matsushita, no other single customer
accounted for more than 10% of the Company's sales during the fiscal year ended
October 27, 1996 and the 26 weeks ended April 27, 1997.
Prices are quoted based on component drawings provided by customers with
estimates of part weight, resin costs, machine requirements and parts produced
per hour (cycle time). Most component prices are negotiated after initial
production runs, and weight and cycle times are verified. The Company charges
its customers a fixed price for each component it manufactures, which
components may consist of single or multiple parts. Negotiated prices include
the cost of thermoplastic resins, packaging, other materials and parts, labor
and overhead. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview." As customers generally seek price
reductions during the product life cycle, the Company's ability to improve
operating performance is generally dependent on increasing manufacturing
efficiency through improved process control, increased automation, engineering
changes to molds and reduced operating and labor expenses. In all cases, the
Company's customer specifies the resin type and supplier desired. See "-- Raw
Materials and Supplies."
The Company has been selected as a supplier of a variety of
injection-molded plastic components. The following table presents an overview
of the major products for which the Company currently produces components for
its OEM customers:
Customer Product
- ------------------------------------- ------------------------------------
Sony ........................ Computer monitors:
Private label programs--
Gateway 2000
Dell Computer
Silicon Graphics
Sun Microsystems
Digital Equipment Corporation
Vaio brand (beginning in July 1997)
Sony ........................ Television monitors
13" to 32" models
Matsushita (Panasonic) ...... Television monitors
13" to 61" models
Matsushita (Quasar) ......... Television monitors
20" to 32" models
Hitachi ..................... Television monitors
27" to 60" models
Casio ........................ Electronic music keyboards
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Sony has been a customer for 25 years, Matsushita has been a customer for
14 years, and Hitachi and Casio have been customers for more than seven years.
The Company believes that, as it adds new customers and completes acquisitions
of complementary businesses, it will diversify its customer base and reduce its
dependence on these major customers. The Company anticipates, however, that a
significant portion of its sales, by virtue of the markets it serves, will
continue to be concentrated in a small number of customers.
As reflected in the first customer table above, in the first half of the
Company's 1997 fiscal year, the Company experienced a decline in sales to
Matsushita. This decrease in sales was attributable in part to Matsushita's
periodic use of internal capacity at its molding facility in Tijuana, Mexico.
The Company's rate of sales to Matsushita has increased during the second half
of the 1997 fiscal year to date.
Sales
The Company's primary sales strategy is to develop and maintain close
working relationships with the engineering, procurement, quality, tooling and
manufacturing departments of its customers. Sales of the Company's products to
OEMs are made directly by the Company's sales and production teams. Through
these teams, the Company services its OEM customers and manages its continuing
programs of product design improvement and development. The Company's sales and
technical teams currently consist of 14 executives and senior technical
personnel.
Since January 1996, the Company has expanded its in-house sales department
to solicit new customer accounts and has hired three full-time senior sales
executives, each with substantial experience in the injection-molded plastic
industry. With these executives, the Company has targeted 30 prospects for new
business. These prospects include computer monitor and television OEMs, as well
as other business equipment and telecommunications manufacturers that require a
plastic enclosure or cabinet as part of their products. The Company is actively
quoting terms for new business. There can be no assurance that any such new
business will be obtained.
The Company's products are typically sold on net 30-day terms under
separate purchase orders. The Company offers no formal warranty but generally
adheres to a replacement policy of products with defects in materials or
workmanship.
Customer Molds
The Company maintains an in-house tooling department. In the plastics
industry, the molds to make plastic parts are commonly referred to as "tools."
With each new project, the Company's tooling engineers may attend an initial
meeting with the OEM and contract mold maker to review drawings,
specifications, timing and other information. Following the design stage, the
Company may be asked to attend one or more mold trials to ensure the accuracy
and completeness of the mold and mold part, record process parameters and begin
assuring the capability of the process. The next milestone, the new project
meeting, brings the Company's decorating and assembly, engineering, production
control, quality assurance and tooling departments together to ensure that the
entire project is understood throughout the organization. Once the mold is
received by the Company, the mold is inspected, prepared for production and
tested by the Company. Generally, sample parts are produced initially and
submitted to the customer for final approval. The Company's tooling department
frequently makes engineering changes to the mold. For the life of the tool, the
Company is obligated to maintain it at its expense and to make major repairs at
the Customer's expense. The Company's tooling department is headed by a tooling
engineer and eight toolmakers. As of July 21, 1997, the Company held
approximately 125 molds of its customers which are being actively used to
produce injection-molded plastic components.
Manufacturing
The Company currently conducts its molding, assembly and finishing
operations at its facility in Gardena, California, which consists of
approximately 100,000 square feet of manufacturing space. The Company operates
29 injection molding machines ranging in size from 60 to 1,800 tons of clamping
pressure and processes more
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than 20 million pounds of resin per year. Since 1993, 16 of the Company's
molding machines have been purchased and all other machines have been updated
with electronic controls. The Company stores bulk resin in four silos with a
combined capacity of approximately 400,000 pounds. The Company has an automated
materials handling system that transports resin from each of the four silos to
any of the 29 molding machines. The Company also stores other resin in 1,000
pound corrugated containers. The Company's finishing equipment is "state of the
art" and includes 24 paint stations, a 1,265-foot overhead conveyor, infrared
and gas fired drying ovens, hot stamp machines, pad printing machines, silk
screen machines, ten motorized assembly lines and sonic welders.
The Company is currently completing a new "build-to-suit" manufacturing
facility in Tijuana, Mexico, which will consist of approximately 90,000 square
feet of manufacturing and warehouse space and will house initially 12 injection
molding machines, eight paint lines and four automated assembly lines. Of the
12 machines, five are newly-purchased and seven will be transferred from the
Company's Gardena facility. The Company's facility in Tijuana is leased
pursuant to a lease expiring in 2007, with a one year option and thereafter a
right of first refusal to expand its manufacturing space by 50,000 square feet,
with the capacity to house 33 to 35 molding machines. This new facility has
been located logistically near many of its customers' Tijuana manufacturing
plants and is expected to add significant manufacturing capacity by September
1997. It is expected that the Company will relocate a significant amount of its
assembly operations to this facility, primarily due to the area's lower-cost
labor pool and customer requirements.
The Company employs six process engineers who utilize extensive CAD/CAM
(computer-aided design/computer-aided manufacturing) capabilities to transfer
design data, generate tooling processes and verify manufacturing efficiencies.
As a result of the Company's use of real-time statistical quality and process
controls and protective packaging, customers report that they have fewer than
500 defects in 1,000,000 units in their production lines. The Company has a
fully integrated management information system which enhances its inventory
control scheduling and machine efficiency. The Company implements a continuous
quality improvement program to ensure that competitive advantages through
cost-efficient operations are maintained. The Company is currently in the
process of ISO 9002 certification.
A significant percentage of the Company's components are manufactured
using gas-assist molding technology, which is a low-pressure process that works
in conjunction with injection molding. In this process, nitrogen gas is
injected into the plastic exterior part to hollow out that part, which saves on
material usage and creates a more cosmetically appealing part by eliminating
flow marks, surface splay and warp. Using this technology, the Company is able
to offer its customers the competitive advantages of (i) eliminating thicker
than necessary wall sections that control the cycle time and increase part
weight, (ii) allowing designers more freedom to incorporate thick and thin
sections in the same part and (iii) making parts stronger by creating high
strength, cored-out sections, rib patterns or box structures, all of which
improve deflection or impact strength. The Company licenses, on a non-exclusive
basis, the use of gas-assist molding technology from Melea Limited pursuant to
a long-term license under which the Company is obligated to make its last
payment of $50,000 to such licensor in May 1998. The Company has a central
nitrogen generator connected to all 29 of its molding machines to efficiently
utilize this technology.
While the Company has developed proprietary techniques and manufacturing
expertise for the manufacture of injection-molded plastic components, the
Company has no patents for these proprietary techniques and chooses to rely on
trade secret protection. The Company believes that although its proprietary
techniques and expertise are subject to misappropriation or obsolescence,
development of improved methods and processes and new techniques by the Company
will continue on an ongoing basis as dictated by the technological needs of the
business.
Manufacturing occurs primarily on a 24 hour per day, three shift, seven
day per week schedule at the Company's current manufacturing facility. The
Company provides training to all of its molding, finishing and assembly
personnel before they are put on the production line and on a periodic basis
thereafter. The Company provides such training in accordance with ISO 9002
certification standards. The Company believes that its manufacturing work force
is well-trained and is comprised of a dedicated staff of experienced personnel,
approximately 40% of whom have been employees of the Company for at least ten
years.
33
<PAGE>
Raw Materials and Supplies
The Company orders certain materials and supplies based on its purchase
orders and seeks to minimize its inventory of other materials that are not
identified for use in filling specific orders. Raw materials used in connection
with the Company's components consist mainly of thermoplastic resins such as
high impact, ignition resistant polystyrene and
acrylonitrile-butadiene-styrene, and paint and ink, as well as corrugated
cardboard packaging. Although the Company uses a select group of suppliers, the
materials used in manufacturing injection-molded plastic components are
generally readily available in the open market. The Company has not experienced
any significant raw material shortages in the past ten years and does not
anticipate raw material shortages in the foreseeable future.
Although thermoplastic resins have historically accounted for at least 80%
of its raw material costs, the Company does not believe that its results of
operations are subject to the risk of fluctuations in resin prices, since the
Company's arrangements with most of its customers provide that increases or
decreases in the price of such resins are passed through to the customer by
changes in the component prices charged by the Company. In addition, each of
Sony, Matsushita and Hitachi negotiate separate supply agreements with
thermoplastic resin producers which deliver such resins to the Company for use
in their products.
Competition
The injection-molded plastic industry is highly fragmented and
characterized by intense competition. According to Plastic News, sales of the
top 100 plastic injection-molders in North America were approximately $14.4
billion in 1996. The Company's competitive market, however, is regional due to
the significant relative impact of freight costs. As a result, the Company
believes that it has only six principal competitors, two of which are also
located in California and five of which are already located in Tijuana, Mexico.
The Company believes that none of its competitors has a dominant position in
the market, although certain of the Company's competitors have substantially
greater manufacturing, financial, marketing and/or other resources than the
Company. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements than the Company.
The Company believes that the primary bases of competition in the market for
injection-molded plastic are product quality, responsiveness to customers,
delivery time, volume capabilities, advanced manufacturing technology and
engineering skills and price. The Company further believes that the Company's
primary competitive strengths include its ability to provide technologically
advanced design and manufacturing services, to hire and retain experienced
product managers and a skilled manufacturing work force, maintain superior
product quality and deliver finished products on a just-in-time or scheduled
lead-time basis. See "Risk Factors -- Competition."
Environmental Matters
The Company's operations and properties are subject to a wide variety of
international, federal, state and local laws and regulations, including those
governing the use, storage and handling, generation, treatment, emission,
release, discharge and disposal of certain materials, substances and wastes,
the remediation of contaminated soil and groundwater, and the health and safety
of employees (collectively, "Environmental Laws"). As such, the nature of the
Company's operations exposes it to the risk of claims with respect to such
matters and there can be no assurance that material costs or liabilities will
not be incurred in connection with such claims. The Company has taken steps to
reduce the environmental risks associated with its operations and believes that
it is currently in substantial compliance with applicable Environmental Laws.
The Company is also subject to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), and similar
state laws which impose liability, without regard to fault or to the legality
of the original action, on certain classes of persons (referred to as
potentially responsible parties or "PRPs") associated with the release or
threat of release of certain hazardous substances to the environment.
Generally, liability of PRPs to the government under CERCLA is joint and
several. Financial responsibility for the remediation of contaminated property
or for natural resources damage can extend to properties owned by third
parties. The Company believes that it is in substantial compliance with all
Environmental Laws applicable to its business.
34
<PAGE>
Employees
As of July 21, 1997, the Company had approximately 379 full-time
employees, of which 361 were engaged in manufacturing activities and 18 in
sales, office administration and management functions. None of the employees is
represented by a union and the Company believes there is an adequate pool of
labor available to satisfy its foreseeable hiring needs. The Company has not
experienced any labor-related work stoppage and considers its relations with
employees to be good.
Facilities
The Company maintains its principal executive offices and conducts its
molding, assembly and finishing operations from two adjacent buildings in
Gardena, California (approximately 15 miles south of Los Angeles), which
consist of a 100,000 square foot manfacturing facility and a 20,000 square foot
warehouse on eight acres of land. This facility is leased from an entity
affiliated with the former owners of AB Plastics under a lease expiring in 2006
and providing for rent of $35,200 per month. See "Certain Transactions." The
Company also maintains an off-site leased facility in Compton, California
consisting of approximately 60,000 square feet, from which the Company's
warehousing and distribution activities are conducted. The Compton facility is
leased from an unaffiliated entity under a lease expiring in December 2000 and
providing for rent of $19,465 per month.
The Company has exercised its option to purchase the Gardena, California
facility for $3.1 million from a partnership whose interests are held by
certain members of the Adams family, who include the former principal
stockholders of AB Plastics. Following the purchase, the Company intends to
demolish the 20,000 square foot warehouse and construct a 75,000 square foot
warehouse and distribution facility attached to the existing manufacturing
facility. Construction costs for such warehouse and distribution facility are
anticipated to be approximately $2.0 million, for a total capital expenditure
of $5.1 million at such site. Subsequent to the completion of the warehouse
construction, the Company intends to sublease the Compton warehouse. The
purchase is expected to be completed prior to the consummation of this offering
and, with the construction, will be financed by a mortgage and construction
loan facility of $3.5 million provided by Sumitomo and the $1.6 million balance
with a portion of the net proceeds of this offering. The Company expects the
annual operating savings from owning this expanded facility to be approximately
$900,000 (before mortgage payments and depreciation) from the elimination of
rent, certain personnel and other operating expenses. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Certain Transactions."
The Company is currently completing a new "build-to-suit" manufacturing
facility in Tijuana, Mexico, which will consist of approximately 90,000 square
feet of manufacturing and warehouse space and will house initially 12 injection
molding machines. The new facility will be leased from an unaffiliated entity
under a lease which will commence upon completion of construction (estimated to
be in September 1997) and expire in 2007, and which will require the payment of
approximately $38,000 per month in rent. The Company also has a one-year option
and thereafter a right of first refusal to expand the facility by 50,000 square
feet. In addition, the Company has committed to expend approximately $6.4
million to equip the new Tijuana facility, of which approximately $2.7 million
of capital expenditures have been committed as of April 27, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Expenditures."
Legal Proceedings
The Company is not a party to any legal proceedings other than routine
litigation incidental to its business, none of which is material.
35
<PAGE>
MANAGEMENT
Executive Officers and Directors
The directors and executive officers of the Company and the executive
officers and key employees of AB Plastics, and their ages at July 21, 1997, are
as follows:
<TABLE>
<CAPTION>
Name Age Positions
- --------------------------------- ----- -----------------------------------------------------------
<S> <C> <C>
Geoffrey J.F. Gorman ......... 40 Chairman of the Board of the Company and AB Plastics
Michael A. Gibbs ............ 61 President and Director of the Company and Chief Executive
Officer of AB Plastics
James S. Adams ............... 68 President of AB Plastics
G. Michael Frink ............ 47 Vice President -- Sales and Marketing of AB Plastics
Stephen M. Adams ............ 36 Vice President -- Technology of AB Plastics
Jawed Ghias .................. 42 Vice President -- Manufacturing of AB Plastics
Paul J. Iacono ............... 36 Vice President -- Finance of the Company and AB Plastics
Christopher H.B. Mills ...... 44 Director
Jay M. Swanson ............... 44 Director
</TABLE>
Geoffrey J.F. Gorman became the Chairman of the Board of the Company and
AB Plastics in September 1996. Mr. Gorman also serves as managing partner of
Private Equity Partners, L.L.C., an investment fund, which he founded in March
1996. From 1985 to June 1996, Mr. Gorman was a managing partner and shareholder
of Ardshiel, Inc., an investment fund specializing in leveraged buyouts. Mr.
Gorman is currently the Co-Chairman of the Board of Santa Maria Foods
Corporation, a producer and distributor of Italian specialty foods, and a
director of Analab, Inc., an environmental testing company. He was previously a
director of Golden State Vintners, Koala Springs International, Inc., Protein
Genetics, Inc. and The Swanson Company. Mr. Gorman received a B.A. from Boston
University in 1979 and an M.B.A. from the Amos Tuck School of Business
Administration at Dartmouth College in 1985.
Michael A. Gibbs became the President of the Company, Chief Executive
Officer of AB Plastics and a director of the Company and AB Plastics in
September 1996. Mr. Gibbs is also the President of Page Mill Corporation, a
consulting firm which he began in 1971. Mr. Gibbs has been involved since 1991
as an advisor and principal in the identification, evaluation, acquisition and
operation of companies in the plastics industry including Styrex Industries,
Inc., an injection-molded plastics components manufacturer which was sold in
1993 to PureTech Industries, Inc. Mr. Gibbs began his business career in 1964
with the international business consulting firm of Booz Allen & Hamilton and
spent five years as Vice President of Corporate Planning for Reliance Holdings
Corporation (formerly, Leasco Corporation) before becoming an independent
entrepreneur and business advisor in 1973. For the past 25 years, Mr. Gibbs has
served as a financial and business advisor to third parties in the
identification, financing, acquisition and operation of approximately 42
businesses, and has participated as a principal stockholder, executive officer
and director in certain of such businesses. A food distribution business and a
glass distribution business in which Mr. Gibbs was the sole stockholder and
served as chief executive officer filed for Chapter 11 reorganization under the
federal Bankruptcy Code in 1980 and 1991, respectively. From July 1991 through
October 1993, Mr. Gibbs rendered services for various corporate affiliates of
The Selzer Group and Transnational Capital Ventures, Inc., privately-owned
companies engaged in situations involving financially and/or operationally
troubled companies. In connection with providing such services, Mr. Gibbs
served in various capacities as an executive officer or director of C-B/Murray
Corporation, Inc. and American Specialty Equipment Corp., companies which filed
for Chapter 11 reorganization within the past five years. Mr. Gibbs received a
B.S. degree in Engineering from the University of Alabama in 1957 and a Masters
degree in Industrial Management from New York Polytechnic Institute in 1965.
In June 1995, Mr. Gibbs individually filed a petition for reorganization
under Chapter 11 of the Bankruptcy Code. Such filing was occasioned primarily
as a result of litigation commenced against Mr. Gibbs by a financial
institution seeking payment of a personal loan made by such institution to Mr.
Gibbs in 1989. Mr. Gibbs accepted such loan principally in reliance upon the
completion of the sale of a business in which Mr. Gibbs was a principal
stockholder and which such financial institution had committed to finance, but
which sale was not completed. Mr. Gibbs has counterclaimed against the
institution alleging breach of its financial commitment. In
36
<PAGE>
April 1997, Mr. Gibbs filed a plan of reorganization with the federal
bankruptcy court in Connecticut. Such plan, as well as the litigation between
Mr. Gibbs and the financial institution, is currently pending. Mr. Gibbs has
been advised by bankruptcy counsel that inasmuch as his investment in the
securities of the Company was made following the filing of his petition for
reorganization, the shares of Common Stock of the Company owned of record and
beneficially by Mr. Gibbs would not be part of the bankruptcy estate or be
required to be used to finance his plan of reorganization in a Chapter 11
proceeding.
James S. Adams is one of the co-founders of AB Plastics and for the past
40 years has served as a senior executive officer of AB Plastics. Since 1982,
Mr. Adams has served as President of AB Plastics. Mr. Adams received a B.S. in
Business Management from Pepperdine University in 1979. Mr. Adams is the uncle
of Stephen M. Adams.
G. Michael Frink became Vice President -- Sales and Marketing of AB
Plastics in February 1997. He previously served as a Regional Manager of
Business Development of Southern Plastic Mold, Inc., a custom plastic injection
molder, from January 1992 to November 1996, and as West Coast Regional Manager
of Tenera, Inc., a plastic and sheet metal component manufacturer, from
November 1996 to February 1997. Mr. Frink also held positions in sales and
program management at Avedon Engineering, a custom plastic injection molder,
from 1984 to December 1991. Mr. Frink received a B.A. in Business
Administration from the University of Oregon in 1972.
Stephen M. Adams, the son of one of the co-founders of AB Plastics, became
the Company's Vice President -- Technology in September 1996. Since 1982, Mr.
Adams has served in a number of engineering and technology-related positions
with AB Plastics, the most recent being Vice President -- Operations. Mr. Adams
received a B.S. in Industrial Technology from Chico State University in 1983
and is currently completing on a part-time basis an M.B.A. from the University
of Phoenix. Mr. Adams is the nephew of James S. Adams.
Jawed Ghias became Vice President -- Manufacturing of AB Plastics in
February 1996. From 1985 to February 1996, Mr. Ghias held a number of positions
with Industrial Molding Corporation ("IMC"), a custom plastic injection molder,
including Vice President of the Plastics Division, Plant Manager, Quality
Assurance Manager and Assembly Manager. Mr. Ghias received a B.S. in Mechanical
Engineering from N.E.D. University of Engineering and Technology in Pakistan in
1983.
Paul J. Iacono became Vice President -- Finance of the Company and AB
Plastics in October 1996. He previously served as Director of Finance of
Compounding Technology, Inc., a plastic compounding subsidiary of M.A. Hanna
Company, from March 1993 to September 1996. Mr. Iacono also served as Manager
of Business Operations of Ele Corporation, a custom plastic injection molder,
from October 1991 to February 1993, and in variety of positions in accounting
and operations including Controller and Materials Manager of IMC from 1980 to
1991. Mr. Iacono received a B.A. in Accounting from California State University
at Fullerton in 1984 and an M.B.A. from Pepperdine University in 1996.
Christopher H.B. Mills joined the Company's Board of Directors in
September 1996. Mr. Mills has been a managing director of North Atlantic
Smaller Companies Investment Trust plc, an investment trust, since 1984, and a
director and senior investment manager of JO Hambro & Partners Limited, an
investment advisor, since 1993, both of which are based in London. Mr. Mills
serves as a director of American Opportunity Trust plc, an investment trust,
Horace Small Apparel plc, a manufacturer of occupational uniforms, and Oryx
International Growth Food plc, an investment fund, which are publicly-traded
companies in the United Kingdom. Mr. Mills also serves as a director of D.S.
Bancor Inc., a bank holding company, and PS Group Holdings Inc., an aircraft
leasing company, which are publicly-traded companies in the United States. Mr.
Mills was educated at Eton College and received a degree in Business Studies
from the Guildhall University in London in 1974,
Jay M. Swanson joined the Company's Board of Directors in May 1997. Since
February 1994, Mr. Swanson has been the Managing Partner of Swanson Ventures
and Blacksmith Partners, private investment firms specializing in leveraged
buyouts. Mr. Swanson currently serves as the Co-Chairman of the Board of Santa
Maria Foods Corporation, a producer and distributor of Italian specialty foods,
is on the Board of Directors of Green Acre Foods, Inc. and Northern Management
Corp. and is a partner in The Contrarion Group, an investment fund. From 1976
to January 1994, Mr. Swanson served in various roles with John Hancock
Financial Services managing portfolios of investments. In 1994, Mr. Swanson was
appointed to the Advisory Board of the Competitiveness Center of the Hudson
Institute. Mr. Swanson received a B.S. in Finance from the University of
Illinois in 1974.
37
<PAGE>
All directors are elected annually and hold office until the next annual
meeting of stockholders of the Company and until their successors have been
duly elected and qualified. The Company's By-laws provide that the Board of
Directors will consist of between three and nine members, and the number of
directors is currently set at four. Officers are elected by and serve at the
discretion of the Board of Directors. Except for the relationship between James
S. Adams and Stephen M. Adams, there are no family relationships among the
directors and officers of the Company.
Committees of the Board of Directors
The Company will establish an Audit Committee and a Compensation Committee
prior to the consummation of this offering, each of which will be comprised of
at least two independent directors. The Audit Committee will, among other
things, make recommendations to the Board of Directors regarding the
independent auditors to be nominated for ratification by the stockholders,
review the independence of those auditors and review audit results. The
Compensation Committee will recommend to the Board compensation plans and
arrangements with respect to the Company's executive officers and key
personnel. It is contemplated that the Audit Committee will initially include
Michael A. Gibbs, Christopher H.B. Mills and Jay M. Swanson, and the
Compensation Committee will initially include Geoffrey J.F. Gorman and Messrs.
Mills and Swanson. The Board of Directors does not currently have and does not
intend to establish a Nominating Committee as such functions are to be
performed by the entire Board of Directors.
Compensation of Directors
Non-employee directors of the Company currently receive no cash
compensation for serving on the Board of Directors other than reimbursement of
reasonable expenses incurred in attending meetings, except that the Company
pays JO Hambro & Partners Limited ("JO Hambro"), of which Christopher H.B.
Mills, a director of the Company, is a director, an annual fee of $50,000,
payable quarterly, as a director's fee. Under a September 1996 agreement with
JO Hambro, the Company is required to make these payments to JO Hambro as long
as a representative of JO Hambro serves on the Board of Directors of the
Company or AB Plastics and certain investors, previously introduced to the
Company by JO Hambro, hold in the aggregate in excess of 10% of the outstanding
shares of the Company's Common Stock on a full-diluted basis. See "Certain
Transactions." The Company does not intend to separately compensate employees
for serving as directors.
Limitation of Liability and Indemnification
Pursuant to the provisions of the Delaware Law, the Company has adopted
provisions in its Certificate of Incorporation which provide that directors of
the Company shall not be personally liable for monetary damages to the Company
or its stockholders for a breach of fiduciary duty as a director, except for
liability as a result of (i) a breach of the director's duty of loyalty to the
Company or its stockholders, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) an act
related to the unlawful stock repurchase or payment of a dividend under Section
174 of the Delaware Law, and (iv) transactions from which the director derived
an improper personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, in accordance with the
Company's By-laws, agreements or otherwise, to the full extent permitted under
the Delaware Law. The Company intends to enter into indemnification agreements
with its directors and officers which may, in some cases, be broader than the
specific indemnification provisions contained in the Delaware Law. The
indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
38
<PAGE>
Executive Compensation
The following table sets forth the total compensation paid by the Company
to the Company's President and to the President and Vice
President-Manufacturing of AB Plastics (collectively, the "Named Executive
Officers"), the only executive officers whose total compensation exceeded
$100,000 for the fiscal year ended October 27, 1996:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
-------------
Annual Compensation(1) No. of
-------------------------------- Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation
- ---------------------------------- -------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Michael A. Gibbs ............... 1996 $0(2) $ 0 200,000 $0
President of the Company and Chief
Executive Officer of AB Plastics
James S. Adams .................. 1996 $232,365 $ 0 46,124 $0
President of AB Plastics
Jawed Ghias ..................... 1996 $ 99,523 $5,000 160,000 $0
Vice President-Manufacturing of AB
Plastics
</TABLE>
(1) The column for "Other Annual Compensation" has been omitted because there
is no compensation required to be reported in such column. The aggregate
amount of perquisites and other personal benefits provided to any Named
Executive Officer did not exceed the lesser of $50,000 or 10% of the total
annual compensation paid to such officer.
(2) Mr. Gibbs and a corporate affiliate of Mr. Gibbs received in the aggregate
approximately $200,000 from the Company pursuant to a consulting agreement
commencing in February 1996, superseded by a management agreement
effective as of August 1, 1996. See "--Employment Agreements."
Options Granted During 1996
The following table sets forth certain information regarding grants of
options to purchase the Company's Common Stock made to each of the Named
Executive Officers during the fiscal year ended October 27, 1996:
<TABLE>
<CAPTION>
Individual Grants
Number Percent of ------------------------------------------
of Securities Total Options
Underlying Granted Exercise Fair Market
Options to Employees Price Value on Expiration
Name Granted in Fiscal Year Per Share Date of Grant Date
- ------------------------- --------------- ---------------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Michael A. Gibbs ...... 200,000 36.4% $1.00 $1.00 09/27/2002
President of the
Company and Chief
Executive Officer of AB
Plastics
James S. Adams ......... 46,124 8.4% $1.00 $1.00 09/27/2002
President of AB Plastics
Jawed Ghias ............ 160,000 29.1% $1.00 $1.00 09/27/2002
Vice President-
Manufacturing of AB
Plastics
</TABLE>
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed
Annual Rates of
Stock Price
Appreciated for
Option Term(1)
------------------
Name 0%(2) 5% 10%
- ------------------------- ------- -------- --------
<S> <C> <C> <C>
Michael A. Gibbs ...... 0 68,019 189,74
President of the
Company and Chief
Executive Officer of AB
Plastics
James S. Adams ......... 0 15,687 43,75
President of AB Plastics
Jawed Ghias ............ 0 54,415 151,79
Vice President-
Manufacturing of AB
Plastics
</TABLE>
(footnotes appear on next page)
39
<PAGE>
- ------------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5% and 10% rates of stock price appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price.
(2) Represents the difference between the fair market value of the Common Stock
on the date of grant and the exercise price of such options.
Aggregated Fiscal Year-End Option Values
The following table sets forth information regarding the number and value
of unexercised stock options held at October 27, 1996 by each of the Named
Executive Officers. No options were exercised by the Named Executive Officers
during the fiscal year ended October 27, 1996:
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Dollar Value of Unexercised
Options at In-the-Money Options
Fiscal Year End at Fiscal Year End(1)
Name (Exercisable/Unexercisable) (Exercisable/Unexercisable)
- ---------------------------------- ----------------------------- ----------------------------
<S> <C> <C>
Michael A. Gibbs ............... 200,000/0 1,600,000/0
President of the Company and Chief
Executive Officer of AB Plastics
James S. Adams .................. 46,124/0 368,992/0
President of AB Plastics
Jawed Ghias ..................... 0/160,000 0/1,280,000
Vice President-Manufacturing of AB
Plastics
</TABLE>
- ------------
(1) The value of the options is based upon the difference between the exercise
price and an assumed initial per share public offering price of $9.00.
Employment Agreements
In October 1996, the Company entered into a management agreement with PEP,
effective as of August 1, 1996, of which Geoffrey J.F. Gorman, the Chairman of
the Board of the Company, is the managing partner. Under this agreement, PEP
and Mr. Gorman have agreed to serve as consultants to the Company and AB
Plastics with primary responsibilities, subject to the direction of the
Company's Board, to review the general policies of the companies and to render
assistance in connection with various forms of financings on their behalf. In
exchange for such services, in October 1996, the Company paid PEP an aggregate
of $225,000, representing $150,000 in fees for services provided prior to the
date of such agreement and $75,000 of reimbursable expenses, and the Company
and AB Plastics have agreed jointly to pay PEP an annual consulting fee of
$100,000, payable in monthly installments, and to provide benefits to Mr.
Gorman comparable to those provided to the Company's executive officers. The
management agreement extends through September 30, 2001, and includes non-
disclosure, non-competition and non-solicitation provisions through the later
of such date or so long as PEP or Mr. Gorman continue to own shares of Common
Stock of the Company or hold options or warrants to purchase such Common Stock.
In October 1996, the Company entered into a management agreement,
effective as of August 1, 1996, with a corporate affiliate of Michael A. Gibbs,
the President of the Company, and Mr. Gibbs, individually. Under this
agreement, Mr. Gibbs and his affiliate have agreed to serve as a consultant to
the Company with primary responsibilities, subject to the direction of the
Company's Board, to review the general policies of the companies and to work
with management of the Company in all aspects of manufacturing, sales,
distribution and customer relations, the establishment of operating systems,
cost savings methods and budgets. In exchange for such services, in October
1996, the Company paid Mr. Gibbs and his affiliate an aggregate of $183,333,
representing fees for services provided prior to the date of such agreement,
and has agreed to pay Mr. Gibbs and his affiliate an
40
<PAGE>
aggregate annual consulting fee of $200,000, payable in monthly installments
until the earlier of December 31, 1998 or the employment by the Company of a
full-time chief executive officer. Following such period (or sooner if Mr.
Gibbs' time commitment is reduced as provided below), the annual consulting fee
is to be reduced to $100,000 per annum. In addition, the Company has agreed to
provide benefits to Mr. Gibbs comparable to those provided to the Company's
executive officers. The management agreement extends through September 30,
2001, and includes non-disclosure, non-competition and non-solicitation
provisions through the later of such date or so long as Mr. Gibbs continues to
own shares of Common Stock of the Company or hold options or warrants to
purchase such Common Stock.
Under the terms of the management agreement, Mr. Gibbs agreed to devote
approximately 66-2/3% of his business and professional time to the Company for
a period of up to six months (through January 31, 1997) and thereafter 25% of
such business and professional time. Since September 1996, Mr. Gibbs has served
in the capacity of President of the Company and Chief Executive Officer of AB
Plastics, and has devoted a minimum of 75% of his business and professional
time to the affairs of these companies.
Upon consummation of this offering, the existing management agreement
between the Company and Mr. Gibbs and his affiliate will terminate. Effective
as of the date of this Prospectus, Mr. Gibbs will enter into an employment
agreement with the Company expiring October 31, 2000. Pursuant to such
agreement, Mr. Gibbs shall serve as the President of the Company and Chief
Executive Officer of AB Plastics, and devote not less than 75% of his business
and professional time to the affairs of the Company and AB Plastics. Under the
terms of such employment agreement, Mr. Gibbs will receive a base salary of
$275,000 per year, and be entitled to receive annual bonuses of between
$100,000 and $300,000 in each of the Company's fiscal years ending in 1998,
1999 and 2000, respectively, if the Company's EBITDA (as defined) shall equal
or exceed $12.0 million, $18.0 million and $24.0 million, or increments
thereof, in the fiscal years ending in 1998, 1999 and 2000, respectively. In
addition, the Company has agreed to provide benefits to Mr. Gibbs comparable to
those provided to the Company's executive officers. The employment agreement
includes non-disclosure, non-competition and non-solicitation provisions.
Pursuant to his employment agreement, the Company has granted Mr. Gibbs
options to purchase an aggregate of 222,222 shares of Common Stock of the
Company pursuant to the 1997 Stock Option Plan. Such options expire October 31,
2002 and are only exercisable at a time in which Mr. Gibbs shall be performing
services for the Company, unless such services are terminated by the Company
"without cause," as defined in his employment agreement. In addition, the
options vest and are exercisable prior to their expiration date, only to the
extent of (i) 74,074 shares if the average of the closing prices of the
Company's Common Stock, as reported on Nasdaq or any national securities
exchange for any 30 consecutive trading days (the "Average Closing Price"),
shall equal or exceed $17.00 per share, (ii) 148,148 shares if the Average
Closing Price shall equal or exceed $25.50 per share, and (iii) 222,222 shares
if the Average Closing Price shall equal or exceed $34.00 per share. See
"--Stock Option Plans."
In September 1996, in connection with the acquisition of AB Plastics, AB
Plastics entered into employment agreements with James S. Adams to serve
initially as the President of AB Plastics through June 1999 and with Stephen M.
Adams to serve as the Vice President-Technology of AB Plastics through
September 1999. Pursuant to the employment agreements, James S. Adams has
agreed to continue to perform services primarily in connection with customer
relations and strategic long-term planning and Stephen M. Adams has agreed to
continue to supervise, on a day-to-day basis, the technical aspects of the
Company's business. The Company currently pays each of James S. Adams and
Stephen M. Adams an annual salary of $100,000 and provides them with customary
health and medical benefits. These individuals have also agreed not to compete
with the Company for the period through September 2001 and September 2000,
respectively, and not to disclose confidential information relating to the
Company at any time.
AB Plastics has also entered into employment agreements with each of G.
Michael Frink, Jawed Ghias and Paul J. Iacono to serve as Vice President-Sales
and Marketing, Vice President-Manufacturing and Vice President-Finance of AB
Plastics, respectively. Under such agreements, AB Plastics currently pays
annual base salaries of $100,000, $140,000 and $85,000 to Messrs. Frink, Ghias
and Iacono, respectively. Mr. Iacono's annual base salary will be increased to
$100,000 in September 1997. Each of such individuals is also eligible to
receive an annual bonus, with Mr. Frink entitled to receive up to $80,000 for
achieving target performance levels based on
41
<PAGE>
sales and diversification of AB Plastics' customer base, with a minimum of
$20,000. Mr. Ghias is entitled to participate in AB Plastics' bonus pool for
executive employees, to be established by the Board, to receive up to one-half
of his annual base salary, and Mr. Iacono is entitled to receive in September
1997 a bonus in the amount of $42,500. Subject to achievement of AB Plastics'
business plan (in whole or in part), Mr. Iacono is eligible to receive a bonus
of up to $50,000 in September 1998. Each of such individuals has also agreed
not to compete with the Company during the term of his agreement and for one
year thereafter and not to disclose confidential information relating to AB
Plastics at any time.
Stock Option Plans
1996 Stock Option Plan. In September 1996, the stockholders of the Company
approved the Company's 1996 Stock Option Plan, as previously adopted by the
Company's Board of Directors (the "1996 Plan"), pursuant to which officers,
directors, key employees and consultants of the Company are eligible to receive
incentive stock options and non-qualified stock options to purchase up to an
aggregate of 800,000 shares of Common Stock. There are currently outstanding
under the 1996 Plan stock options to purchase an aggregate of 440,000 shares of
Common Stock at an exercise price of $1.00 per share, expiring on December 31,
2002. The exercise price under such outstanding stock options represents not
less than 100% of the fair market value of the underlying Common Stock as of
the date that such options were granted, as determined by the Board of
Directors of the Company on the date that such options were granted. Options to
purchase 50,808 shares were granted to Mr. Gorman in 1996 at an exercise price
of $1.00 per share, and options to purchase 200,000 shares were granted to Mr.
Gibbs in 1996 at an exercise price of $1.00 per share, all of which options are
being exercised upon the consummation of this offering. See "Certain
Transactions."
With respect to incentive stock options, the 1996 Plan provides that the
exercise price of each such option must be at least equal to 100% of the fair
market value of the Common Stock on the date that such option is granted (and
110% of fair market value in the case of stockholders who, at the time the
option is granted, own more than 10% of the total outstanding Common Stock),
and requires that all such options have an expiration date not later than that
date which is one day before the tenth anniversary of the date of the grant of
such options (or the fifth anniversary of the date of grant in the case of 10%
or greater stockholders). However, with certain limited exceptions, in the
event that the option holder ceases to be associated with the Company, or
engages in or is involved with any business similar to that of the Company,
such option holder's incentive options immediately terminate. Pursuant to the
1996 Plan, the aggregate fair market value, determined as of the date(s) of
grant, for which incentive stock options are first exercisable by an option
holder during any one calendar year cannot exceed $100,000.
1997 Stock Option Plan. In June 1997, the stockholders of the Company
approved the Company's 1997 Stock Option Plan, as previously adopted by the
Company's Board of Directors (the "1997 Plan"), pursuant to which officers,
directors, key employees and consultants of the Company are eligible to receive
incentive stock options and non-qualified stock options to purchase up to an
aggregate of 800,000 shares of Common Stock. The Plan also provides for the
grant of stock appreciation rights, restricted stock, performance shares and
performance units at the discretion of the Company's Board of Directors. There
are currently outstanding under the 1997 Plan stock options to purchase an
aggregate of 222,222 shares of Common Stock at an exercise price equal to the
initial public offering price. See "-- Employment Agreements." The requirements
of the 1997 Plan with respect to incentive stock options are identical to the
requirements of the 1996 Plan.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of July 21, 1997, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, by: (i) each of
the Named Executive Officers who beneficially owns any shares, (ii) each of the
Company's directors who beneficially owns any shares, (iii) each Selling
Stockholder, (iv) all directors and executive officers of the Company as a
group, and (v) each other person known by the Company to own beneficially more
than 5% of the Company's Common Stock. Except as otherwise noted, the persons
named in this table, based upon information provided by such persons, have sole
voting and investment power with respect to all shares of Common Stock
beneficially owned by them.
<TABLE>
<CAPTION>
Shares Beneficially
Shares Beneficially Owned After the
Owned Prior to Number of Offering(2)
the Offering(2) Shares --------------------------
--------------------------- Offered(3) Number Percent
Name and Address of Beneficial Owner(1) Number Percent ----------------- ---------------- --------
- ------------------------------------------------ ---------------- --------- <C> <C> <C>
<S> <C> <C>
North Atlantic Smaller Companies 0 787,500 16.5%
Investment Trust plc ........................ 787,500 22.1% 51,333 448,667 9.4
Private Equity Partners, L.P.(4) ............... 500,000 14.0 82,000 718,000 15.1
Sirrom Investments, Inc ........................ 800,000(5) 22.5 0 649,475(6) 13.6
Geoffrey J.F. Gorman ........................... 700,808(6) 19.7 0 474,778(7) 10.0
Michael A. Gibbs .............................. 483,333(7) 13.6 0 46,124 1.0
James S. Adams ................................. 46,124(8) 1.3 0 23,064 *
Stephen M. Adams .............................. 23,064(9) * 0 787,500 16.5
Christopher H.B. Mills ........................ 787,500(10) 22.1
All directors and executive officers as a group 51,333(11) 1,906,163 40.0
(8 persons) ................................. 1,957,496 55.0
</TABLE>
- ------------
* Represents less than 1% of outstanding Common Stock or voting power.
(1) The address of North Atlantic Smaller Companies Investment Trust plc is
c/o JO Hambro & Partners Limited, 10 Park Place, London SW1A 1LP, United
Kingdom. The address of Private Equity Partners, L.P. and Geoffrey J.F.
Gorman is 808 Lexington Avenue, 2nd Floor, New York, New York 10021. The
address of Sirrom Investments, Inc. is 500 Church Street, Suite 200,
Nashville, Tennessee 37219. The address of each other beneficial owner is
c/o AB Plastics Corporation, 15730 South Figueroa Street, Gardena,
California 90248.
(2) Shares beneficially owned and percentage of ownership are based on
3,560,000 shares of Common Stock outstanding before this offering and
4,760,000 shares of Common Stock to be outstanding after the consummation
of this offering, and assumes no exercise of the Underwriters'
over-allotment option. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and generally
includes voting or dispositive power with respect to such shares.
(3) Does not reflect 200,000 shares of Common Stock subject to the
Underwriters' over-allotment option, which, if exercised in full, will
result in Private Equity Partners, L.P. and Sirrom Investments, Inc.
selling 77,000 and 123,000 additional shares of Common Stock,
respectively. In such event, Private Equity Partners, L.P. would own
371,667 shares and Sirrom Investments, Inc. would own 636,000 shares, or
7.8% and 13.4% of the then outstanding shares of Common Stock,
respectively.
(4) PEP is the general partner of Private Equity Partners, L.P., a Delaware
limited partnership.
(5) Represents shares of Common Stock issued on the date of this Prospectus
for $2,000 upon exercise of a warrant granted in connection with a $4.0
million subordinated term loan made by Sirrom in connection with the
original capitalization of the Company and acquisition of AB Plastics in
September 1996. See "Certain Transactions."
(6) Includes (i) 500,000 shares of Common Stock owned by Private Equity
Partners, L.P. (448,667 shares after the offering), of which Mr. Gorman is
the managing partner of PEP, its general partner, (ii) 150,000 shares
43
<PAGE>
of Common Stock issued on the date of this Prospectus upon exercise of a
warrant issued in September 1996 at $1.00 per share, and (iii) 50,808
shares of Common Stock issued on the date of this Prospectus upon exercise
of a stock option issued in September 1996 at $1.00 per share. Under the
terms of the Private Equity Partners, L.P. limited partnership agreement,
PEP is entitled to participate to the extent of 20% of the Net Profits (as
defined in such agreement) derived by certain of the limited partners from
the sale of partnership investments. See "Certain Transactions."
(7) Includes (i) 83,333 shares of Common Stock (74,778 shares after the
offering) owned beneficially through Private Equity Partners, L.P. which
were purchased for $1.00 per share in September 1996, (ii) 200,000 shares
issued on the date of this Prospectus upon exercise of a warrant issued in
September 1996 at $1.00 per share, and (ii) 200,000 shares of Common Stock
issued on the date of this Prospectus upon exercise of a stock option
issued in September 1996 at $1.00 per share. Does not include 222,222
shares of Common Stock which may be issued in the future upon the
occurrence of certain events under options granted to Mr. Gibbs pursuant
to the Company's 1997 Plan. See "Management -- Employment Agreements" and
"Certain Transactions."
(8) Represents shares of Common Stock issued on the date of this Prospectus
upon exercise of a stock option issued in September 1996 at $1.00 per
share. See "Certain Transactions."
(9) Represents shares of Common Stock which are issuable at $1.00 per share
upon the exercise of outstanding stock options. See "Management -- Stock
Option Plans."
(10) Represents shares owned beneficially by North Atlantic Smaller Companies
Investment Trust plc, of which Mr. Mills is a managing director.
(11) Represents 51,333 shares of Common Stock being sold by Private Equity
Partners, L.P., of which PEP, an affiliate of Geoffrey J.F. Gorman,
Chairman of the Board of the Company, is the general partner.
44
<PAGE>
CERTAIN TRANSACTIONS
In connection with the capitalization of the Company and the acquisition
of AB Plastics, in September 1996, the Company issued a $4.0 million, 13.5%
subordinated term note to Sirrom, due September 2001, and a five-year warrant
to purchase an aggregate of 800,000 shares of Common Stock of the Company, at a
total exercise price of $2,000. Sirrom has elected to exercise such warrant on
the date of this Prospectus. The Company has granted to Sirrom certain
"piggyback" and demand registration rights with respect to the shares issued to
Sirrom upon exercise of such warrant, which registration rights Sirrom has
agreed not to exercise until at least 180 days from the date of this
Prospectus. See "Shares Eligible for Future Sale."
In September 1996, the Company sold an aggregate of 500,000 shares of
Common Stock to Private Equity Partners, L.P. for $500,000, or $1.00 per share,
of which Geoffrey J.F. Gorman, the Company's Chairman of the Board is the
managing partner of PEP, the general partner of Private Equity Partners, L.P.
Michael A. Gibbs, the President of the Company, purchased an undivided
one-sixth interest in the equity holdings of Private Equity Partners, L.P. for
$83,333 and beneficially owns 83,333 of the shares owned by such limited
partnership.
In September 1996, the Company issued five-year stock options and warrants
exercisable at $1.00 per share to a number of persons, including Geoffrey J.F.
Gorman, Chairman of the Board of the Company, Michael A. Gibbs, President of
the Company, and James S. Adams, President of AB Plastics. Effective on the
date of this Prospectus, each of Messrs. Gorman, Gibbs and Adams will exercise
all stock options and warrants issued to them, as a result of which Mr. Gorman
will purchase an aggregate of 200,808 shares of Common Stock for $200,808, Mr.
Gibbs will purchase an aggregate of 400,000 shares of Common Stock for
$400,000, and Mr. Adams will purchase an aggregate of 46,124 shares of Common
Stock for $46,124. The purchase price for such shares will be paid by Messrs.
Gorman and Gibbs by delivering to the Company 8% non-recourse promissory notes
(secured only by a pledge of their respective shares), and by Mr. Adams by
delivering a 8% full-recourse promissory note, in each case payable
semi-annually as to interest, and as to principal on the earlier to occur of
(a) the sale of the Company to any unaffiliated third party, whether through
merger, sale of assets or like consolidation or combination, or (b) September
30, 2001. In addition, to the extent that any of Messrs. Gorman, Gibbs or Adams
shall effect any public or private sale, transfer or other disposition of any
of their shares of Common Stock, they will be obligated to apply all cash
proceeds received by them, net of applicable federal and state taxes, to the
prepayment of their respective notes, plus accrued and unpaid interest thereon
to the date of sale, transfer or disposition.
Under the terms of its partnership agreement with the limited partners of
Private Equity Partners, L.P., PEP is entitled to receive 20% of the Net
Profits (defined as all amounts received by the subject limited partners in
excess of their total cash capital investment in the partnership) derived by
all limited partners, other than Michael A. Gibbs, from the sale or disposition
of partnership investments. Under the terms of the partnership agreement, as a
result of the sale of a portion of the Company shares owned by Private Equity
Partners, L.P., PEP will receive a maximum cash payment of $95,000 only if the
Underwriters' over-allotment is exercised in full and no cash payment unless
more than 35,500 shares are sold under the Underwriters' over-allotment option.
In addition, Michael A. Gibbs, who owns 16-2/3% of the limited partnership
interests of Private Equity Partners, L.P., will receive an aggregate of
$67,756 ($169,393 if the Underwriters' over-allotment is exercised in full)
from the sale of a minimum of 8,555 shares (a maximum of 21,388 shares if the
Underwriters' over-allotment option is exercised in full) beneficially owned by
him through Private Equity Partners, L.P.
In October 1996, the Company entered into a management agreement effective
as of August 1, 1996, with PEP, of which Geoffrey J.F. Gorman, the Chairman of
the Board of the Company, is the managing partner. In October 1996, the Company
entered into a management agreement, effective as of August 1, 1996, with a
corporate affiliate of Michael A. Gibbs, the President of the Company, and Mr.
Gibbs, individually. See "Management -- Employment Agreements."
In September 1996, the Company entered into an agreement with JO Hambro &
Partners Limited ("JO Hambro"), of which Christopher H.B. Mills, a director of
the Company, is a director. Pursuant to such agreement, the Company pays JO
Hambro an annual fee of $50,000, payable quarterly, as a director's fee. The
Company is required to make these payments to JO Hambro as long as a
representative of JO Hambro serves on the Board of Directors of the Company or
AB Plastics and certain investors, previously introduced to the Company by JO
Hambro, hold in the aggregate in excess of 10% of the outstanding shares of the
Company's Common Stock on a fully-diluted basis.
45
<PAGE>
The Company leases its principal executive offices in Gardena, California
from 15730 South Figueroa Properties, a California general partnership, of
which James S. Adams, President of AB Plastics, is a general partner and holds
a 50% interest in the partnership through a family trust. The other 50%
interest in the partnership is currently held by the estate of Robert J. Adams,
the brother of James S. Adams and father of Stephen M. Adams, who died in 1996.
The Company has exercised its option to purchase this facility for $3.1
million, the fair market value of such property as determined by two
independent real estate appraisal firms. The partnership acquired the original
lot and facility in 1980, and the side parcel in 1983, for a total of
approximately $3.9 million. Such purchase is expected to be completed prior to
the consummation of this offering. See "Business -- Facilities."
The Company's Certificate of Incorporation provides for indemnification of
the Company's officers and directors in certain circumstances. The Company
intends to enter into indemnification agreements with each of its directors and
executive officers. See "Management -- Limitation of Liability and
Indemnification."
46
<PAGE>
DESCRIPTION OF SECURITIES
General
The Company's authorized capital stock consists of (i) 20,000,000 shares
of Common Stock, par value $.0001 per share, and (ii) 5,000,000 shares of
Preferred Stock, par value $.0001 per share. As of the date of this Prospectus,
an aggregate of 3,560,000 shares of Common Stock were outstanding and held by
16 stockholders. No shares of Preferred Stock have been issued or are
outstanding.
Common Stock
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders of the Company. In addition, such
holders are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. In the event of the dissolution, liquidation or winding up
of the Company, the holders of Common Stock are entitled to share ratably in
all assets remaining after payment of all liabilities of the Company. All
outstanding shares of Common Stock are fully paid and nonassessable.
The holders of Common Stock do not have any subscription, redemption or
conversion rights, nor do they have any preemptive or other rights to acquire
or subscribe for additional, unissued or treasury shares. Accordingly, if the
Company were to elect to sell additional shares of Common Stock following this
offering, persons acquiring Common Stock in this offering would have no right
to purchase additional shares, and as a result, their percentage equity
interest in the Company would be reduced.
Pursuant to the Company's By-Laws, except for any matters which, pursuant
to the Delaware Law, require a greater percentage vote for approval, the
holders of a majority of the outstanding Common Stock, if present in person or
by proxy, are sufficient to constitute a quorum for the transaction of business
at meetings of the Company's stockholders. Holders of shares of Common Stock
are entitled to one vote per share on all matters submitted to the vote of
Company stockholders. Except as to any matters which, pursuant to Delaware Law,
require a greater percentage vote for approval, the affirmative vote of the
holders of a majority of the Common Stock present in person or by proxy at any
meeting (provided a quorum as aforesaid is present thereat) is sufficient to
authorize, affirm or ratify any act or action, including the election of
directors.
The holders of Common Stock do not have cumulative rights. Accordingly,
the holders of more than half of the outstanding shares of Common Stock can
elect all of the directors to be elected in any election, if they choose to do
so. In such event, the holders of the remaining shares of Common Stock would
not be able to elect any directors. The Board is empowered to fill any
vacancies on the Board created by the resignation, death or removal of
directors.
In addition to voting at duly called meetings at which a quorum is present
in person or by proxy, Delaware Law and the Company's By-Laws provide that the
stockholders may take action without the holding of a meeting by written
consent or consents signed by the holders of a majority of the outstanding
shares of the capital stock of the Company entitled to vote thereon. Prompt
notice of the taking of any action without a meeting by less than unanimous
consent of the stockholders will be given to those stockholders who do not
consent in writing to the action. The purposes of this provision are to
facilitate action by stockholders and to reduce the corporate expense
associated with annual and special meetings of stockholders. Pursuant to the
rules and regulations of the Commission, if stockholder action is taken by
written consent, the Company will be required to send to each stockholder
entitled to vote on the matter acted on, but whose consent was not solicited,
an information statement containing information substantially similar to that
which would have been contained in a proxy statement.
Preferred Stock
The Board of Directors has the authority to issue up to 5,000,000 shares
of Preferred Stock in one or more series and to fix the number of shares
constituting any such series, the voting powers, designation, preferences and
relative participation, optional or other special rights and qualifications,
limitations or restrictions thereof, including the dividend rights and dividend
rate, terms of redemption (including sinking fund provisions),
47
<PAGE>
redemption price or prices, conversion rights and liquidation preferences of
the shares constituting any series, without any further vote or action by the
stockholders. The issuance of Preferred Stock by the Board of Directors could
affect the rights of the holders of Common Stock. For example, such issuance
could result in a class of securities outstanding that would have preferences
with respect to voting rights and dividends, and in liquidation, over the
Common Stock, and could (upon conversion or otherwise) enjoy all of the rights
appurtenant to Common Stock.
The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by others to obtain control of
the Company through merger, tender offer, proxy contest or otherwise by making
such attempts more difficult to achieve or more costly. The Board of Directors
may issue the Preferred Stock with voting and conversion rights that could
adversely affect the voting power of the holders of Common Stock. There are no
agreements for the issuance of Preferred Stock and the Board of Directors has
no present intention to issue Preferred Stock.
Delaware Anti-Takeover Law
The Company is subject to Section 203 of the Delaware Law, which prohibits
a publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
(i) prior to the date of the business combination, the transaction is approved
by the board of directors of the corporation, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock, or (iii) on or after such date, the business combination is
approved by the board of directors and by the affirmative vote of at least
662/3% of the outstanding voting stock that is not owned by the interested
stockholder. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person, who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock.
Transfer Agent
The transfer agent for the Common Stock is American Stock Transfer & Trust
Company, New York, New York.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for the
Common Stock and there can be no assurance that a significant public market for
the Common Stock will develop or be sustained after this offering. Sales of
substantial amounts of Common Stock in the public market after this offering,
or the possibility of such sales occurring, could adversely affect prevailing
market prices of the Common Stock or the future ability of the Company to raise
capital through an offering of equity securities.
Upon the completion of this offering, the Company will have outstanding
4,760,000 shares of Common Stock. Of such shares, the 1,333,333 shares of
Common Stock sold in the offering (assuming no exercise of the Underwriter's
over-allotment option) will be freely tradeable in the public market without
restriction under the Securities Act, unless purchased by "affiliates" of the
Company, as defined in Rule 144 under the Securities Act.
The remaining 3,426,667 shares of Common Stock outstanding are "restricted
securities," as defined in Rule 144 under the Securities Act (the "Restricted
Shares"). The Restricted Shares were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the Securities
Act. Restricted Shares may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rules
144 or 701 under the Securities Act, which are summarized below.
Pursuant to certain "lock-up" agreements, all of the Company's officers,
directors and principal stockholders have agreed, subject to certain limited
exceptions, not to offer, sell, contract to sell, grant any option to purchase
or otherwise dispose of any shares of Common Stock of the Company or any
securities exercisable for or convertible into the Company's Common Stock owned
by them for a period of 365 days from the date of this Prospectus. Such
agreements provide that Cruttenden Roth Incorporated may, in its sole
discretion and at any time without notice, release all or a portion of the
shares subject to these lock-up agreements; however,
Cruttenden Roth Incorporated has no current intention to do so.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
imposed under Rule 144. In general, under Rule 144, as amended, beginning 90
days after the date of this Prospectus, a person (or persons whose shares of
the Company are aggregated) who has beneficially owned Restricted Shares for at
least one year (including the holding period of any prior owner who is not an
affiliate of the Company) would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of (i) one percent
of the then outstanding shares of Common Stock (approximately 47,600 shares
following this offering), or (ii) the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the filing of a Form 144
with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale and notice requirements and to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale and who has beneficially owned the shares proposed to be sold
for at least two years (including the holding period of any prior owner who is
not an affiliate of the Company) is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
49
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom Cruttenden Roth
Incorporated and Josephthal Lyon & Ross Incorporated are acting as
Representatives, have severally agreed to purchase from the Company and the
Selling Stockholders and the Company and the Selling Stockholders have agreed
to sell to the Underwriters, the respective number of shares of Common Stock
set forth opposite each Underwriter's name below:
Underwriters Number of Shares
- -------------------------------------------------- -----------------
Cruttenden Roth Incorporated ............
Josephthal Lyon & Ross Incorporated ......
Total .................................
----------
1,333,333
==========
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to certain conditions precedent, including
the absence of any material adverse change in the Company's business and the
receipt of certain certificates, opinions and letters from the Company's
counsel and independent public accountants. The nature of the Underwriters'
obligation is such that they are committed to purchase and pay for all the
shares of Common Stock if any are purchased.
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and to certain securities dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such selected dealers may reallow, a discount not in excess of $
per share to certain brokers and dealers. After the initial public offering of
the shares, the public offering price and other selling terms may be changed by
the Representatives. No change in such terms shall change the amount of
proceeds to be received by the Company as set forth on the cover page of this
Prospectus.
The Selling Stockholders have granted an option to the Underwriters,
exercisable for a period of 45 days after the date of this Prospectus, to
purchase up to an additional 200,000 shares of Common Stock at the public
offering price set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. The Underwriters may exercise this
option only to cover over-allotments, if any. To the extent that the
Underwriters exercise this option, each of the Underwriters will be committed,
subject to certain conditions, to purchase such additional shares of Common
Stock in approximately the same proportion as set forth in the above table.
The Company has agreed to issue to the Representatives, for a total of
$133, warrants (the "Representatives' Warrants") to purchase up to 133,333
shares of Common Stock at an exercise price per share equal to 120% of the
initial public offering price. The Representatives' Warrants are exercisable
for a period of four years beginning one year from the date of this Prospectus.
The holders of the Representatives' Warrants will have no voting, dividend or
other stockholder rights until the Representatives' Warrants are exercised. In
addition, the Company has granted certain rights to the holders of the
Representatives' Warrants to register the Representatives' Warrants and the
Common Stock underlying the Representatives' Warrants under the Securities Act,
all of which are being registered as part of this offering.
The Company and the Selling Stockholders have agreed to pay the
Representatives a non-accountable expense allowance equal to 3% of the
aggregate Price to Public (including with respect to shares of Common Stock
underlying the over-allotment option, if and to the extent it is exercised) set
forth on the front cover of this Prospectus for expenses in connection with
this offering, of which the sum of $50,000 has been paid by the Company. The
Representatives' expenses in excess of such allowance will be borne by the
Representatives. To the extent that the expenses of the Representatives are
less than the non-accountable expense allowance, the excess may be deemed to be
compensation to the Representatives.
50
<PAGE>
The Representatives have advised the Company that they do not expect any
sales of the shares of Common Stock offered hereby to be made to discretionary
accounts controlled by the Underwriters.
Prior to this offering, there has been no established trading market for
the Common Stock. Consequently, the initial public offering price for the
Common Stock offered hereby has been determined by negotiation among the
Company, the Selling Stockholders and the Representatives. Among the factors
considered in such negotiations were the preliminary demand for the Common
Stock, the prevailing market and economic conditions, the Company's results of
operations, estimates of the business potential and prospects of the Company,
the present state of the Company's business operations, an assessment of the
Company's management, the consideration of these factors in relation to the
market valuation of comparable companies in related businesses, the current
condition of the markets in which the Company operates, and other factors
deemed relevant. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to this offering at or above the initial public offering
price.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters and their controlling persons
against certain liabilities under the Securities Act or will contribute to
payments the Underwriters and their controlling persons may be required to make
in respect thereof.
Certain clients of JO Hambro & Partners Limited, including certain
existing stockholders of the Company, have indicated to the Company that they
have an interest in purchasing 105,000 shares of Common Stock in this offering.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company and the Selling Stockholders by Greenberg Traurig Hoffman Lipoff
Rosen & Quentel, New York, New York. Certain legal matters relating to the
offering will be passed upon for the Underwriters by Troop Meisinger Steuber &
Pasich, LLP, Los Angeles, California.
EXPERTS
The financial statements as of October 27, 1996 and for the 48 weeks ended
September 27, 1996 and the four weeks ended October 27, 1996 included in this
Prospectus have been so included in reliance on the report of Marcum & Kliegman
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements as of October 29, 1995 and for the fiscal years
ended October 29, 1995 and October 30, 1994 included in this Prospectus have
been so included in reliance on the report of Block, Plant, Eisner, Fiorito &
Belak-Berger ("BPEFB"), independent accountants, given on the authority of said
firm as experts in auditing and accounting.
As approved by the Company's Board of Directors, the Company replaced
BPEFB in January 1997. The reports of BPEFB for each of the fiscal years ended
October 29, 1995 and October 30, 1994 contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle. There were no disagreements on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of BPEFB would have caused it to make reference to the subject
matter of the disagreements in conjunction with its reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendments
thereto) on Form S-1 under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are contained in exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. For
51
<PAGE>
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, and the financial statements and notes filed as a part thereof.
Statements made in this Prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved. The Registration Statement, including the exhibits thereto and the
financial statements and notes filed as a part thereof, as well as such reports
and other information filed with the Commission, may be inspected without
charge at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the Commission.
Such reports and other information may also be inspected without charge at a
Web site maintained by the Commission. The address of such site is
http://www.sec.gov.
52
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS ................................................ F-2
FINANCIAL STATEMENTS
Balance Sheet as of October 29, 1995 (Predecessor), Consolidated Balance Sheets as
of October 27, 1996 and as of April 27, 1997 (Unaudited) (Company) ............ F-4
Statements of Operations for the Fifty-Two Weeks Ended October 30, 1994 and
October 29, 1995, Twenty-Six Weeks Ended April 28, 1996 (Unaudited) and for
the Forty-Eight Weeks Ended September 27, 1996 (Predecessor) .................. F-6
Consolidated Statements of Operations for the Four Weeks Ended October 27, 1996
and for the Twenty-six Weeks Ended April 27, 1997 (Unaudited) (Company) ......... F-6
Statements of Stockholders' Equity for the Fifty-Two Weeks Ended October 30, 1994
and October 29, 1995, and for the Forty-Eight Weeks Ended September 27, 1996
(Predecessor) .................................................................. F-7
Consolidated Statements of Stockholders' Equity for the Four Weeks Ended
October 27, 1996 and for the Twenty-Six Weeks Ended April 27, 1997
(Unaudited) (Company) ......................................................... F-7
Statements of Cash Flows for the Fifty-Two Weeks Ended October 30, 1994, and
October 29, 1995, Twenty-Six Weeks Ended April 28, 1996 (Unaudited) and for
the Forty-Eight Weeks Ended September 27, 1996 (Predecessor) .................. F-8
Consolidated Statements of Cash Flows for the Four Weeks Ended October 27, 1996
and for the Twenty-Six Weeks Ended April 27, 1997 (Unaudited) (Company) ......... F-8
NOTES TO FINANCIAL STATEMENTS ...................................................... F-10
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Compass Plastics & Technologies, Inc. (formerly
AB Plastics Holding Corporation) and Subsidiary
We have audited the accompanying consolidated balance sheet of Compass
Plastics & Technologies, Inc. (formerly AB Plastics Holding Corporation) and
Subsidiary as of October 27, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the forty-eight weeks ended
September 27, 1996 ("Predecessor") and for the four weeks ended October 27,
1996 ("Company"). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements of
Predecessor as of October 29, 1995 and October 30, 1994, and for the fifty-two
week periods then ended, were audited by other auditors, whose report dated
June 19, 1997, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Compass
Plastics & Technologies, Inc. (formerly AB Plastics Holding Corporation) and
Subsidiary as of October 27, 1996 and the results of their operations and their
cash flows for the forty-eight weeks ended September 27, 1996 and the four
weeks ended October 27, 1996 in conformity with generally accepted accounting
principles.
MARCUM & KLIEGMAN LLP
Woodbury, New York
December 31, 1996, except for
Note 12, as to which the date is July 18, 1997
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
AB Plastics Corporation
Gardena, California
We have audited the accompanying balance sheet of AB Plastics Corporation
(an S Corporation) as of October 29, 1995 and the related statements of
operations, shareholders' equity and cash flows for the fifty-two weeks ended
October 29, 1995 and October 30, 1994. 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AB Plastics Corporation (an
S Corporation) as of October 29, 1995, and the results of its operations and
its cash flows for the fifty-two weeks ended October 29, 1995 and October 30,
1994 in conformity with generally accepted accounting principles.
BLOCK, PLANT, EISNER, FIORITO & BELAK-BERGER
Encino, California
June 19, 1997
F-3
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
Predecessor Company
------------- ----------------------------------
October 29, October 27, April 27,
1995 1996 1997
------------- ---------------- ---------------
(Consolidated) (Consolidated)
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ............ $ 468,344 $ 729,729 $ 802,634
Accounts receivable, net ............ 6,494,304 5,915,207 3,568,967
Accounts receivable, other ......... 12,735 36,196 94,772
Inventories ........................ 3,296,803 1,893,668 2,991,337
Prepaid expenses ..................... 653,084 1,124,185 1,032,509
Prepaid income taxes ............... 34,393 18,515 -0-
Income tax refund receivable ......... -0- 78,220 121,162
Notes receivable, other ............ 696,791 27,631 77,631
------------ ------------ ------------
Total Current Assets ............... 11,656,454 9,823,351 8,689,012
------------ ------------ ------------
EQUIPMENT AND IMPROVEMENTS, Net ...... 8,799,087 8,622,927 8,888,725
------------ ------------ ------------
OTHER ASSETS
Goodwill, net ........................ -0- 1,376,523 1,341,966
Deposits ........................... -0- 167,953 389,599
Other assets, net .................. 157,298 203,447 160,558
------------ ------------ ------------
Total Other Assets ............... 157,298 1,747,923 1,892,123
------------ ------------ ------------
TOTAL ASSETS ..................... $20,612,839 $20,194,201 $19,469,860
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Predecessor Company
------------- ----------------------------------
October 29, October 27, April 27,
1995 1996 1997
------------- ---------------- ---------------
(Consolidated) (Consolidated)
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses ..................... $ 5,919,615 $ 4,181,770 $ 4,436,526
Accrued wages ............................................. 494,743 498,717 784,757
Current portion of capitalized lease obligations ............ 312,087 286,705 282,789
Payroll taxes payable ....................................... 61,886 65,648 165,856
Income taxes payable ....................................... 21,423 76,300 -0-
Notes payable, other ....................................... 140,000 -0- -0-
Current portion of long-term debt ........................... 3,677,498 -0- -0-
Distributions payable ....................................... 227,800 -0- -0-
------------ ------------ ------------
Total Current Liabilities ................................. 10,855,052 5,109,140 5,669,928
------------ ------------ ------------
OTHER LIABILITIES
Capitalized lease obligations, net of current portion ...... 673,740 387,034 625,004
Long-term debt ............................................. 2,129,171 10,000,000 7,150,000
Deferred income taxes payable .............................. 82,768 1,734,437 1,881,434
------------ ------------ ------------
Total Other Liabilities .................................... 2,885,679 12,121,471 9,656,438
------------ ------------ ------------
TOTAL LIABILITIES ...................................... . 13,740,731 17,230,611 15,326,366
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock ............................................. -- -- --
Common stock ................................................ 110,840 200 200
Additional paid-in capital ................................. -0- 2,799,800 2,799,800
Retained earnings .......................................... 6,761,268 163,590 1,343,494
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY ................................. 6,872,108 2,963,590 4,143,494
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ................................................... $20,612,839 $20,194,201 $19,469,860
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Predecessor Company Predecessor Company
------------------------------------------------- ---------------- ------------- -------------
For the 48 For the 26
For the 52 Weeks Ended Weeks For the 4 Weeks For the 26
-------------------------------- Ended Weeks Ended Ended Weeks Ended
October 30, October 29, September October 27, April 28, April 27,
1994 1995 27, 1996 1996 1996 1997
--------------- --------------- --------------- ---------------- ------------- -------------
(Consolidated) (Unaudited) (Consolidated
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
SALES ........................ $34,026,925 $42,678,959 $36,080,237 $3,265,206 $19,409,976 $20,244,365
COST OF SALES ............... 30,695,123 38,960,968 32,126,687 2,625,813 17,337,835 16,393,249
----------- ----------- ----------- ---------- ----------- -----------
GROSS PROFIT .................. 3,331,802 3,717,991 3,953,550 639,393 2,072,141 3,851,116
----------- ----------- ----------- ---------- ----------- -----------
OPERATING EXPENSES
Selling ..................... 431,992 443,916 478,866 36,922 223,637 294,133
Administrative ............... 1,283,188 1,239,549 1,393,184 203,906 797,067 1,162,066
----------- ----------- ----------- ---------- ----------- -----------
TOTAL OPERATING
EXPENSE .................. 1,715,180 1,683,465 1,872,050 240,828 1,020,704 1,456,199
----------- ----------- ----------- ---------- ----------- -----------
OPERATING INCOME ......... 1,616,622 2,034,526 2,081,500 398,565 1,051,437 2,394,917
----------- ----------- ----------- ---------- ----------- -----------
OTHER INCOME (EXPENSE)
Other income ............... 284,183 130,676 48,296 -0- -0- -0-
Interest expense ............ (290,837) (434,761) (429,216) (98,742) (226,088) (451,243)
Other expenses ............... -0- -0- -0- (19,397) -0- -0-
----------- ----------- ----------- ---------- ----------- -----------
TOTAL OTHER EXPENSE . (6,654) (304,085) (380,920) (118,139) (226,088) (451,243)
----------- ----------- ----------- ---------- ----------- -----------
INCOME BEFORE INCOME
TAXES ........................ 1,609,968 1,730,441 1,700,580 280,426 825,349 1,943,674
INCOME TAX (EXPENSE)
BENEFIT ..................... (48,127) (26,457) 9,526 (116,836) (12,445) (763,770)
----------- ----------- ----------- ---------- ----------- -----------
NET INCOME .................. $ 1,561,841 $ 1,703,984 $ 1,710,106 $ 163,590 $ 812,904 $ 1,179,904
=========== =========== =========== ========== =========== ===========
Net income per share ......... $ 0.05 $ 0.33
Weighted average common stock ========== ===========
and common stock equivalents
outstanding .................. 3,600,000 3,600,000
PRO FORMA INCOME TAX DATA ========== ===========
INCOME BEFORE INCOME
TAXES ..................... $ 1,609,968 $ 1,730,441 $ 1,700,580 $ 825,349
PROVISION FOR INCOME
TAXES (UNAUDITED) ......... (643,987) (692,176) (680,232) (330,140)
----------- ----------- ----------- -----------
NET INCOME (Unaudited) ...... $ 965,981 $ 1,038,265 $ 1,020,348 $ 495,209
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Total
Number of Common Paid-In Retained Stockholders'
Predecessor Shares Stock Capital Earnings Equity
- ----------------------------------------- --------------- ------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, November 1, 1993 ............ 9,965.40 $ 110,840 $ -0- $ 4,987,020 $ 5,097,860
Net Income ........................... -0- -0- -0- 1,561,841 1,561,841
Distributions ........................ -0- -0- -0- (1,077,977) (1,077,977)
------------ ---------- ----------- ------------ ------------
Balance, October 30, 1994 ............ 9,965.40 110,840 -0- 5,470,884 5,581,724
Net Income ........................... -0- -0- -0- 1,703,984 1,703,984
Distributions ........................ -0- -0- -0- (413,600) (413,600)
------------ ---------- ----------- ------------ ------------
Balance, October 29, 1995 ............ 9,965.40 110,840 -0- 6,761,268 6,872,108
Net Income ........................... -0- -0- -0- 1,710,106 1,710,106
Distributions ........................ -0- -0- -0- (933,868) (933,868)
------------ ---------- ----------- ------------ ------------
Balance, September 27, 1996 ............ 9,965.40 110,840 -0- 7,537,506 7,648,346
Company
- ---------------------------------------
Recapitalization ..................... -0- $ -0- $ -0- $ (7,537,506) $(7,537,506)
Net Income ........................... -0- -0- -0- 163,590 163,590
Issuance of warrants .................. -0- -0- 799,950 -0- 799,950
Stock retirement ..................... (9,965.40) (110,840) -0- -0- (110,840)
Issuance of stock ..................... 500,000.00 50 2,000,000 -0- 2,000,050
Stock split ........................... 1,500,000.00 150 (150) -0- -0-
------------ ---------- ----------- ------------ ------------
Consolidated Balance, October 27, 1996 2,000,000.00 200 2,799,800 163,590 2,963,590
Net Income ........................... -0- -0- -0- 1,179,904 1,179,904
------------ ---------- ----------- ------------ ------------
Consolidated Balance, April 27, 1997
(Unaudited) ........................... 2,000,000.00 $ 200 $ 2,799,800 $ 1,343,494 $ 4,143,494
============ ========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Predecessor
---------------------------------------------------
For the 48
For the 52 Weeks Ended Weeks
---------------------------------- Ended
October 30, October 29, September 27,
1994 1995 1996
---------------- ---------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income ........................ $ 1,561,841 $ 1,703,984 $ 1,710,106
------------ ------------ -------------
Adjustments to reconcile net income
to net cash provided by operating
activities:
(Gain) loss on sale of
equipment ..................... (59,961) 7,975 -0-
Depreciation and amortization 746,137 875,651 826,238
Deferred income taxes ............ 27,390 5,775 (1,587)
Changes in assets - (increase)
decrease:
Accounts receivable, net ......... (81,220) (2,562,502) 325,737
Accounts receivable, other ......... (6,723) 184 10,892
Inventories ........................ (703,138) (708,385) 1,285,098
Prepaid expenses .................. 65,911 17,566 434,866
Prepaid income taxes ............... 30,422 24,749 -0-
Income tax refund receivable ...... -0- -0- (78,220)
Deposits ........................... (206,893) (75,008) (167,953)
Other assets ..................... (50,000) (160,208) 132,060
Changes in liabilities - increase
(decrease):
Accounts payable and accrued
expenses ........................ 1,731,337 1,865,574 (1,417,354)
Accrued wages and payroll taxes
payable ........................ (97,316) 65,521 10,602
Income taxes payable ............... (9,203) (4,067) (7,939)
------------ ------------ -------------
TOTAL ADJUSTMENTS .................. 1,386,743 (647,175) 1,352,440
------------ ------------ -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ............ 2,948,584 1,056,809 3,062,546
------------ ------------ -------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Proceeds from sale of equipment ... 65,400 91,462 -0-
Purchase of equipment and
improvements ..................... (1,625,162) (3,490,848) (764,287)
Collection on note receivable, other 134,791 145,979 268,845
Proceeds from notes receivable,
other .............................. -0- (90,000) -0-
Investment in subsidiary ............ -0- -0- -0-
------------ ------------ -------------
NET CASH USED IN
INVESTING ACTIVITIES ............ $ (1,424,971) $ (3,343,407) $ (495,442)
------------ ------------ -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Company Predecessor Company
---------------- --------------- ---------------
For the 26
For the 4 Weeks For the 26
Weeks Ended Ended Weeks Ended
October 27, April 28, April 27,
1996 1996 1997
---------------- --------------- ---------------
(Consolidated) (Unaudited) (Consolidated)
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income ........................ $ 163,590 $ 812,904 $ 1,179,904
------------ ------------- -------------
Adjustments to reconcile net income
to net cash provided by operating
activities:
(Gain) loss on sale of
equipment ..................... 19,397 -0- -0-
Depreciation and amortization 82,385 491,704 635,963
Deferred income taxes ............ 38,142 1,343 146,997
Changes in assets - (increase)
decrease:
Accounts receivable, net ......... 253,360 3,237,602 2,346,239
Accounts receivable, other ......... (34,353) (244) (57,976)
Inventories ........................ 118,037 (34,146) (1,097,669)
Prepaid expenses .................. (305,967) 128,355 62,072
Prepaid income taxes ............... 15,878 -0- 18,515
Income tax refund receivable ...... -0- -0- (42,942)
Deposits ........................... -0- 159,862 (221,646)
Other assets ..................... 13,298 51,078 -0-
Changes in liabilities - increase
(decrease):
Accounts payable and accrued
expenses ........................ (320,491) (2,977,858) 254,756
Accrued wages and payroll taxes
payable ........................ (2,866) 20,254 386,248
Income taxes payable ............... 62,816 11,102 (76,300)
------------ ------------- -------------
TOTAL ADJUSTMENTS .................. (60,364) 1,089,052 2,354,257
------------ ------------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ............ 103,226 1,901,956 3,534,161
------------ ------------- -------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Proceeds from sale of equipment ... 6,000 -0- -0-
Purchase of equipment and
improvements ..................... (15,930) (769,511) (399,068)
Collection on note receivable, other 431,165 69,429 -0-
Proceeds from notes receivable,
other .............................. -0- -0- (50,000)
Investment in subsidiary ............ (7,637,555) -0- -0-
------------ ------------- -------------
NET CASH USED IN
INVESTING ACTIVITIES ............ $ (7,216,320) $ (700,082) $ (449,068)
------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
<TABLE>
<CAPTION>
Predecessor
-----------------------------------------------
For the 48
For the 52 Weeks Ended Weeks
------------------------------ Ended
October 30, October 29, September 27,
1994 1995 1996
--------------- ------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from long-term debt ......... $ 184,600 $3,615,439 $ -0-
Proceeds from line of credit ......... -0- -0- 2,050,000
Repayment of long-term debt ......... (511,886) (490,000) (3,545,419)
Repayment of capitalized lease
obligations ........................ (255,961) (312,358) (288,349)
Repayment of line of credit ......... -0- -0- -0-
Proceeds from issuance of stock ...... -0- -0- -0-
Distributions to shareholders ......... (1,077,977) (185,800) (933,868)
------------- ---------- -------------
NET CASH (USED IN)
PROVIDED BY FINANCING
ACTIVITIES ........................... (1,661,224) 2,627,281 (2,717,636)
------------- ---------- -------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS ........................ (137,611) 340,683 (150,532)
CASH AND CASH
EQUIVALENTS - Beginning ............ 265,272 127,661 468,344
------------- ---------- -------------
CASH AND CASH
EQUIVALENTS (CASH
OVERDRAFT) - Ending .................. $ 127,661 $ 468,344 $ 317,812
============= ========== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest .............................. $ 293,452 $ 396,569 $ 389,328
Income taxes ........................ $ 50,057 $ -0- -0-
Noncash investing and financing
activities:
Sale of equipment for a note
receivable ........................... $ -0- $ -0- -0-
Issuance of warrants .................. $ -0- $ -0- $ -0-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Company Predecessor Company
---------------- --------------- ---------------
For the 26
For the 4 Weeks For the 26
Weeks Ended Ended Weeks Ended
October 27, April 28, April 27,
1996 1996 1997
---------------- --------------- ---------------
(Consolidated) (Unaudited) (Consolidated)
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from long-term debt ......... $ 4,000,000 $ -0- $ -0-
Proceeds from line of credit ......... 6,000,000 -0- -0-
Repayment of long-term debt ......... (4,451,250) (1,545,000) -0-
Repayment of capitalized lease
obligations ........................ (23,739) (171,920) (162,189)
Repayment of line of credit ......... -0- -0- (2,850,000)
Proceeds from issuance of stock ...... 2,000,000 -0- -0-
Distributions to shareholders ......... -0- (461,801) -0-
------------- ------------- -------------
NET CASH (USED IN)
PROVIDED BY FINANCING
ACTIVITIES ........................... 7,525,011 (2,178,721) (3,012,189)
------------- ------------- -------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS ........................ 411,917 (976,847) 72,904
CASH AND CASH
EQUIVALENTS - Beginning ............ 317,812 468,344 729,730
------------- ------------- -------------
CASH AND CASH
EQUIVALENTS (CASH
OVERDRAFT) - Ending .................. $ 729,729 $ (508,503) $ 802,634
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest .............................. $ -0- $ 231,558 $ 451,470
Income taxes ........................ $ -0- $ -0- $ 717,500
Noncash investing and financing
activities:
Sale of equipment for a note
receivable ........................... $ 27,631 -0- $ -0-
Issuance of warrants .................. $ 800,000 $ -0- $ -0-
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
NOTES TO FINANCIAL STATEMENTS
For the fifty-two weeks ended October 30, 1994 and October 29, 1995,
twenty-six weeks ended April 28, 1996 (unaudited), forty-eight weeks ended
September 27, 1996, four weeks ended October 27, 1996 and
for the twenty-six weeks ended April 27, 1997 (unaudited)
NOTE 1 - Summary of Significant Accounting Policies
Description of Business
Compass Plastics & Technologies, Inc. (formerly AB Plastics Holding
Corporation) and Subsidiary (collectively, the "Company") manufactures plastic
parts to customer specifications using custom-made injection molds. The Company
has a concentration of credit risk in accounts receivable from Japanese-owned
television and computer manufacturing companies. Most of the Company's revenues
are derived from several major Japanese television and computer manufacturers.
Business Combination
Compass Plastics & Technologies, Inc. (formerly AB Plastics Holding
Corporation) ("Compass") was formed on May 30, 1996 for the purpose of
acquiring the stock of AB Plastics Corporation ("AB Plastics"). The acquisition
was accounted for as a purchase effective September 27, 1996. Compass did not
have any activities during the period from May 30, 1996 to September 27, 1996.
All financial statements for periods subsequent to September 27, 1996, the date
the acquisition was consummated, will include the accounts of Compass and its
wholly-owned subsidiary, AB Plastics. The Predecessor refers to AB Plastics
prior to the consummation of the acquisition.
The aggregate purchase price for the acquisition of AB Plastics stock was
$7,637,555, which includes the cost of the acquisition, was financed through
equity capital infusion, refinancing of long-term debt and issuance of a
promissory note payable, and has been allocated to the assets purchased and the
liabilities assumed of AB Plastics based upon the fair value on the date of
acquisition. The excess of the purchase price over the fair value of the net
assets acquired was $1,381,797 and has been recorded as goodwill on the books
of AB Plastics.
General Accounting Policies
The Company's accounting policies are substantially the same as that of
the Predecessor.
Principles of Consolidation
The consolidated financial statements for the four weeks ended October 27,
1996 and for the twenty-six weeks ended April 27, 1997 (unaudited) include the
accounts of Compass and its wholly-owned subsidiary, AB Plastics. All
significant intercompany transactions have been eliminated in consolidation.
Fiscal Year
The Company maintains its books on a 52/53 week year ending on the last
Sunday in October. Fiscal years in the three-year period including the fiscal
years ended October 27, 1996, October 29, 1995 and October 30, 1994, each
contained 52 weeks.
Goodwill
Goodwill is being amortized on a straight-line basis over a twenty-year
period. Amortization of goodwill charged to operations for the fifty-two weeks
ended October 30, 1994 and October 29,1995, twenty-six weeks ended April 28,
1996 (unaudited), forty-eight weeks ended September 27, 1996, four weeks ended
October 27, 1996 and for the twenty-six weeks ended April 27, 1997(unaudited)
amounted to $0, $0, $0, $0, $5,274 and $34,557, respectively.
F-10
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
For the fifty-two weeks ended October 30, 1994 and October 29, 1995,
twenty-six weeks ended April 28, 1996 (unaudited), forty-eight weeks ended
September 27, 1996, four weeks ended October 27, 1996 and
for the twenty-six weeks ended April 27, 1997 (unaudited)
NOTE 1 - Summary of Significant Accounting Policies -- (Continued)
Advertising
The Company expenses advertising costs as incurred.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term investments with an original maturity of three months or less to be
cash equivalents.
The Company has cash balances in banks in excess of the maximum amount
insured by the FDIC as of October 27, 1996, October 29, 1995 and April 27, 1997
(unaudited).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation is being
provided on the straight-line and accelerated methods over the estimated useful
lives of the assets.
Deferred Income Taxes
Deferred income taxes result mainly from temporary differences resulting
from using straight-line depreciation for financial statement reporting and
accelerated depreciation for income tax purposes.
Stock Options
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires compensation expense
to be recorded (i) using the new fair value method or (ii) using existing
accounting rules prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations with pro forma disclosure of what net income and earnings per
share would have been had the Company adopted the new fair value method. The
Company intends to continue to account for its stock based compensation plans
in accordance with the provisions of APB 25 (see Notes 9 and 12).
Interim Financial Information
Financial information as of and for the twenty-six weeks ended April 27,
1997 and April 28, 1996 is unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of the results for such period
have been included; all adjustments are of a normal and recurring nature.
Interim results are not necessarily indicative of results for a full year.
F-11
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
For the fifty-two weeks ended October 30, 1994 and October 29, 1995,
twenty-six weeks ended April 28, 1996 (unaudited), forty-eight weeks ended
September 27, 1996, four weeks ended October 27, 1996 and
for the twenty-six weeks ended April 27, 1997 (unaudited)
NOTE 1 - Summary of Significant Accounting Policies -- (Continued)
Fair Value of Financial Instruments
The Company's financial instruments include cash, accounts receivable and
accounts payable. Due to the short-term nature of these instruments, the fair
value of these instruments approximate their recorded value. The Company has
long-term debt which it believes is stated at estimated fair market value.
Revenue Recognition
Revenue from sales of products is recognized when products are shipped to
the customer.
Proforma Income Tax Provision (Unaudited)
The unaudited income tax provision presented for the fifty-two weeks ended
October 30, 1994 and October 29 1995, twenty-six weeks ended April 28, 1996 and
forty-eight weeks ended September 27, 1996 have been prepared assuming an
effective combined federal and state tax rate of 40%.
Proforma Operating Results (Unaudited)
The following are the proforma operating results for the fifty-two week
period ended October 27, 1996 and October 29, 1995, as if the acquisition by
the Company described above had occurred on October 30, 1995 and October 31,
1994, respectively. The proforma results give effect to changes in amortization
and deferred income taxes from valuing the acquired net assets at estimated
fair value and recording the excess of purchase price over the net assets
acquired.
<TABLE>
<CAPTION>
52 Weeks Ended 52 Weeks Ended
October 27, 1996 October 29, 1995
(Unaudited) (Unaudited)
------------------ -----------------
<S> <C> <C>
Revenue .................................... $ 39,345,443 $ 42,678,959
Operating income ........................... $ 2,420,065 $ 2,034,526
Other expenses .............................. $ 1,223,059 $ 1,065,390
Net income ................................. $ 670,644 $ 535,450
Net income per share ........................ $ 0.19 $ 0.15
Weighted average common stock and common stock
equivalents outstanding .................. 3,600,000 3,600,000
</TABLE>
The proforma results of operations are not necessarily indicative of the
actual operating results that would have occurred had the acquisition been
consummated at the beginning of the period.
Earnings per Share
The computation of earnings per share is based on the weighted average
number of outstanding common stock and common stock equivalents (stock options)
and warrants of 3,600,000 for all periods. The number of outstanding common
shares reflects a 4-for-1 stock split and the dilutive effects of 1,600,000
common stock equivalents (subsequent to the stock split) related to the
Company's stock option plan and stock purchase warrants using the modified
treasury stock method (see Notes 9, 10 and 12). The number of common shares
outstanding is applied retroactively to all periods presented for earnings per
share purposes to reflect earnings per share as if the common stock equivalent
shares were outstanding for all periods presented.
F-12
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
For the fifty-two weeks ended October 30, 1994 and October 29, 1995,
twenty-six weeks ended April 28, 1996 (unaudited), forty-eight weeks ended
September 27, 1996, four weeks ended October 27, 1996 and
for the twenty-six weeks ended April 27, 1997 (unaudited)
NOTE 1 - Summary of Significant Accounting Policies -- (Continued)
Accounts Receivable
Accounts receivable at October 29, 1995, October 27, 1996 and April 27,
1997 (unaudited) is shown net of allowance for doubtful accounts of $12,400.
NOTE 2 -- Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
Predecessor Company
------------- ----------------------------
October 29, October 27, April 27,
1995 1996 1997
------------- ------------- ------------
(Unaudited)
<S> <C> <C> <C>
Raw materials ........................... $1,944,202 $ 912,708 $1,291,472
Finished goods and work in-process ...... 1,352,601 980,960 1,699,865
----------- ----------- -----------
Total ................................ . $3,296,803 $1,893,668 $2,991,337
=========== =========== ===========
</TABLE>
NOTE 3 -- Prepaid Expenses
Prepaid expenses consist of the current portion of deferred financing
costs and various other prepaid expenses. Deferred financing costs are being
amortized over the life of the respective loan and other prepaid expenses are
being amortized over their useful lives.
NOTE 4 -- Equipment and Improvements
Equipment and improvements consist of the following:
<TABLE>
<CAPTION>
Predecessor Company
------------- ----------------------------
October 29, October 27, April 27,
1995 1996 1997
------------- ------------- ------------
(Unaudited)
<S> <C> <C> <C>
Equipment .............................. $15,520,169 $7,947,016 $7,954,306
Mobile equipment ..................... 131,669 29,979 30,177
Office furniture and equipment ......... 554,572 353,935 401,373
Leasehold improvements ............... 633,513 367,880 367,880
Construction in progress ............... -0- -0- 747,890
------------ ----------- -----------
16,839,923 8,698,810 9,501,626
Less: accumulated depreciation ..... . 8,040,836 75,883 612,901
------------ ----------- -----------
Equipment and Improvements, Net. $ 8,799,087 $8,622,927 $8,888,725
============ =========== ===========
</TABLE>
Depreciation expense charged to operations for the fifty-two weeks ended
October 30, 1994 and October 29,1995, twenty-six weeks ended April 28, 1996
(unaudited), forty-eight weeks ended September 27, 1996, four weeks ended
October 27, 1996 and for the twenty-six weeks ended April 27, 1997(unaudited)
amounted to $706,141, $808,984, $456,704, $822,103, $75,883 and $537,017,
respectively.
On September 27, 1996, equipment and improvements were revalued in
accordance with the purchase method of accounting.
F-13
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
For the fifty-two weeks ended October 30, 1994 and October 29, 1995,
twenty-six weeks ended April 28, 1996 (unaudited), forty-eight weeks ended
September 27, 1996, four weeks ended October 27, 1996 and
for the twenty-six weeks ended April 27, 1997 (unaudited)
NOTE 5 -- Other Assets
Other assets are stated at cost and consist of the following:
<TABLE>
<CAPTION>
Predecessor Company
------------- ----------------------------
October 29, October 27, April 27,
1995 1996 1997
------------- ------------- ------------
(Unaudited)
<S> <C> <C> <C>
Deferred financing costs, net ...... $ -0- $178,442 $160,558
Other asset ........................ 26,465 7,505 -0-
License fee, net .................. 130,833 17,500 -0-
--------- --------- ---------
$157,298 $203,447 $160,558
========= ========= =========
</TABLE>
Amortization expense charged to operations for the fifty-two weeks ended
October 30, 1994 and October 29,1995, twenty-six weeks ended April 28, 1996
(unaudited), forty-eight weeks ended September 27, 1996, four weeks ended
October 27, 1996 and for the twenty-six weeks ended April 27, 1997(unaudited)
amounted to $39,996, $66,667, $35,000, $4,135, $1,228 and $64,389,
respectively.
NOTE 6 -- Long-Term Debt
On October 29, 1995, AB Plastics had a note payable to Manufacturers Bank,
with an outstanding principal balance of $1,306,669, payable in monthly
principal installments of $40,833 plus interest at either the prime rate plus
.50% or the Libor rate plus 2.75%, with all unpaid principal and interest due
in May 1998. AB Plastics also had a revolving line of credit with Manufacturers
Bank of which $3,000,000 was outstanding under this line of credit on October
29, 1995, payable in monthly installments of interest only at either the prime
rate plus .25% or the bank's Libor rate plus 2.50%. Beginning in March 1996,
the line of credit was extended until March 15, 1997.
AB Plastics also had an additional line of credit from Manufacturers Bank
for the purchase of equipment which provided for monthly payments of interest
and principal of $37,161 beginning March 1996 through March 2000. At October
29, 1995, $1,500,000 was outstanding under the equipment line of credit. In
connection with the acquisition of the AB Plastics stock by Compass, all of the
outstanding debt payable to Manufacturers Bank was repaid on September 27,
1996.
On September 27, 1996, AB Plastics entered into a line of credit agreement
(the "Credit Agreement"), with a bank (the "Bank") to borrow up to the lesser
of $10,000,000 or the borrowing base, which consists of 85% of eligible
accounts receivable and 50% of eligible inventory (the "Borrowing Base") plus a
Borrowing Base supplemental amount under a revolving line of credit (the "Line
of Credit"). The Borrowing Base supplemental amount at October 27, 1996 was
$6,000,000 and commencing October 31, 1996 is to be reduced by $100,000
monthly. The Line of Credit matures on July 3, 2001, at which time the
outstanding principal balance will be due and payable. The interest rate under
the Line of Credit is 1/2% above the Bank's prime rate which was 81/4% on
October 27, 1996, unless AB Plastics elects an optional interest calculation
based on Eurodollars. At October 27, 1996, $6,000,000 was outstanding under the
Line of Credit.
In accordance with the Credit Agreement, AB Plastics also has an available
equipment Line of Credit for $2,000,000 for which there was no outstanding
balance at October 27, 1996. The interest rate on this line is 1/4% above the
Bank's prime rate which was 81/4% on October 27, 1996. Interest is payable
monthly and principal payments are to be repaid in 36 equal monthly
installments provided that the last payment shall be made no later than July
31, 2000. AB Plastics will also pay a commitment fee of .25% annually, payable
quarterly on the unused line.
F-14
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
For the fifty-two weeks ended October 30, 1994 and October 29, 1995,
twenty-six weeks ended April 28, 1996 (unaudited), forty-eight weeks ended
September 27, 1996, four weeks ended October 27, 1996 and
for the twenty-six weeks ended April 27, 1997 (unaudited)
NOTE 6 -- Long-Term Debt -- (Continued)
The Credit Agreement is collateralized by substantially all of the assets
of AB Plastics. Compass has guaranteed the Credit Agreement and the guaranty is
secured by a pledge of all of the capital stock of AB Plastics. The Bank
requires that AB Plastics maintain a stated net worth amount, and other
financial ratios requirements, which AB Plastics met at October 27, 1996.
On September 27, 1996, Compass and AB Plastics entered into a loan
agreement with a financial institution (the "Lender") in the amount of
$4,000,000, which is evidenced by a promissory note (the "Note") which bears
interest at 13.5% per annum with interest only payable monthly commencing on
November 1, 1996. Annual principal payments are required on April 1, 1999,
April 1, 2000 and April 1, 2001 equalling the lesser of excess cash flows as
defined in the Note or $1,000,000. The remaining unpaid principal balance will
be due and payable on September 27, 2001. The debt, which was recorded on
Compass's books, was utilized by Compass to purchase the stock of AB Plastics.
The Note, which has restrictions as to payment of dividends and issuance of
stock rights, is subordinated to the Credit Agreement and is secured by
substantially all the assets of AB Plastics.
In consideration of making the loan, the Lender was granted the right (the
"Warrant") to purchase up to 800,000 shares (after giving effect to the
Company's 4-for-1 stock split) of the Company's common stock at a total
exercise price of $2,000 (see Note 10). The Warrant is exercisable at any time
until October 31, 2001. The Warrant, which was valued at $800,000 on September
27, 1996, has been recorded as deferred loan fees and is being amortized over
the life of the loan. The Company's fair value determination was based on the
Company's actual contemporaneous sales of common stock at $1.00 per share and
contemporaneous grants of stock options having an exercise price of $1.00 per
share.
At April 27, 1997, the outstanding balance under the Credit Agreement and
the Line of Credit was $3,150,000. There was no outstanding balance under the
equipment line. At April 27, 1997, the outstanding balance with the Lender was
$4,000,000.
The following is a schedule of the future minimum principal payment
requirements on the Company's long-term debt:
Fifty-Two Weeks ending
last Sunday in October Amount
------------------------ ------------
1997 .................. $ -0-
1998 .................. -0-
1999 .................. 1,000,000
2000 .................. 1,000,000
2001 .................. 8,000,000
------------
Total ............... $10,000,000
============
NOTE 7 -- Capitalized Lease Obligations
The Company is the lessee of equipment under capital leases expiring
through the year 2000. The assets and liabilities are recorded at fair-market
value. The assets are being depreciated over their estimated useful lives.
Depreciation of assets under capital leases charged to expense for the
fifty-two weeks ended October 30, 1994 and October 29, 1995, twenty-six weeks
ended April 28, 1996 (unaudited), forty-eight weeks ended September 27, 1996,
four weeks ended October 27, 1996 and for the twenty-six weeks ended April 27,
1997(unaudited) amounted to $50,592, $62,072, $39,072, $72,132, $6,012 and
$39,072, respectively. The following is a summary of property held under
capital leases included in equipment:
F-15
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
For the fifty-two weeks ended October 30, 1994 and October 29, 1995,
twenty-six weeks ended April 28, 1996 (unaudited), forty-eight weeks ended
September 27, 1996, four weeks ended October 27, 1996 and
for the twenty-six weeks ended April 27, 1997 (unaudited)
NOTE 7 -- Capitalized Lease Obligations -- (Continued)
<TABLE>
<CAPTION>
Predecessor Company
------------- ------------------------------
October 29, October 27, April 27,
1995 1996 1997
------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C>
Equipment ........................... $1,980,334 $1,351,859 $1,735,644
Less: accumulated depreciation ...... (419,472) (6,012) (45,084)
---------- ---------- ----------
Total ........................... $1,560,862 $1,345,847 $1,690,560
========== ========== ==========
</TABLE>
Minimum future lease payments under capital leases as of October 27, 1996
for each of the next four years, and in the aggregate, are as follows:
Fifty-Two Weeks ending
last Sunday in October Amount
---------------------------------------------------- ------------
1997 ............................................. $ 331,208
1998 ............................................. 225,419
1999 ............................................. 124,620
2000 ............................................. 83,080
---------
Total minimum lease payments ..................... 764,327
Less: amount representing interest ............... (90,588)
---------
Present value of net minimum lease payments ...... $ 673,739
---------
Current portion ................................. $ 286,705
Long-term portion ................................. 387,034
---------
Total ............................................. $ 673,739
=========
Interest rates on capitalized leases vary from 7.5% to 8.35% and are
imputed based on the lessor's implicit rate of return.
NOTE 8 -- Income Tax Expense and Deferred Income Taxes
Prior to its acquisition by Compass, AB Plastics was taxed under the
provisions of subchapter "S" of the Internal Revenue Code. Under these
provisions, AB Plastics was not imposed Federal corporate income taxes and only
paid 1.5% of state income taxes. When AB Plastics was acquired by Compass, it
became a "C" corporation. The differences in depreciation methods and estimated
lives used by AB Plastics for book and tax purposes resulted in a deferred tax
liability upon AB Plastics becoming a "C" corporation. Accordingly, the
principal components of the deferred tax liability consist primarily of
temporary differences in depreciation expense. These same temporary differences
for depreciation methods and estimated lives create ongoing deferred tax
adjustments. Income taxes are allocated between the parent and subsidiary based
on the taxable income and loss of each entity. A summary of income tax expense
is as follows:
F-16
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
For the fifty-two weeks ended October 30, 1994 and October 29, 1995,
twenty-six weeks ended April 28, 1996 (unaudited), forty-eight weeks ended
September 27, 1996, four weeks ended October 27, 1996 and
for the twenty-six weeks ended April 27, 1997 (unaudited)
NOTE 8 -- Income Tax Expense and Deferred Income Taxes -- (Continued)
<TABLE>
<CAPTION>
Predecessor Company
------------------------------------------------------------- ----------------------------------
For the 26 For the 48 For the 4 For the 26
For the 52 Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
-------------------------- ---------------- ------------- ---------------- ---------------
October 30, October September October 27,
1994 29, 1995 April 28, 1996 27, 1996 1996 April 27,1997
------------- ---------- ---------------- ------------- ---------------- ---------------
(Unaudited) (Consolidated) (Consolidated)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Federal ............... $ -0- $ -0- $ -0- $ -0- $ 49,000 $474,915
State .................. 25,490 20,682 12,445 (7,939) 29,694 141,858
Deferred Income taxes 22,637 5,775 -0- (1,587) 38,142 146,997
-------- -------- -------- -------- --------- ---------
Total Income Taxes $48,127 $26,457 $12,445 $ (9,526) $116,836 $763,770
======== ======== ======== ======== ========= =========
</TABLE>
A reconciliation of income tax at the statutory rate to the Company's
effective rate is as follows:
<TABLE>
<CAPTION>
Predecessor Company
--------------------------------------------------------------- ---------------------------
For the 52 Weeks For the 26 For the 48 For the 4 For the 26
Ended Weeks Ended Weeks Ended Weeks Ended Week Ended
----------------------------- ------------- --------------- ------------- -----------
October 30, October 29, April 28, September 27, October 27, April 27,
1994 1995 1996 1996 1996 1997
------------- ------------- ------------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Computed at the
expected statutory
rate .................. 34.00% 34.00%
Surtax exemption ...... (0.41) (.70)
State income tax - net
of federal tax benefit 6.14 6.00
------ ------
Income tax expense -
effective rate ...... "S" Corp. "S" Corp. "S" Corp. "S" Corp. 39.73% 39.30%
====== ======
</TABLE>
Significant components of the Company's deferred income tax liabilities
and assets as of September 27, 1996 and October 27, 1996 as calculated in
accordance with FASB Statement No. 109 consist primarily of temporary
differences in depreciation relating to property and equipment.
NOTE 9 -- Commitments and Contingencies
Lease Commitments
The Company is presently obligated under two noncancelable operating
leases for buildings which it occupies, expiring between December 31, 2000 and
August 20, 2004. The main building at 15730 South Figueroa Street in Gardena,
California is being leased from the prior stockholders of AB Plastics at an
annual rental of $422,400. In addition to minimum rental payments, the building
lease requires payment of real property taxes. A second building located at
1700 South Wilmington Street in Compton, California is being leased from an
outside party at an annual rental of $230,400. In addition to minimum rental
payments, the building lease requires payment of applicable operating expenses
(including property taxes and various maintenance costs).
F-17
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
For the fifty-two weeks ended October 30, 1994 and October 29, 1995,
twenty-six weeks ended April 28, 1996 (unaudited), forty-eight weeks ended
September 27, 1996, four weeks ended October 27, 1996 and
for the twenty-six weeks ended April 27, 1997 (unaudited)
NOTE 9 -- Commitments and Contingencies -- (Continued)
The following is a schedule of future minimum rental payments subject to
cost of living increases:
Fifty-Two Weeks ending
last Sunday in October Amount
------------------------ -----------
1997 .................. $ 652,800
1998 .................. 664,800
1999 .................. 676,800
2000 .................. 676,800
2001 .................. 464,800
Thereafter ............ 2,041,440
-----------
Total ............. $5,177,440
===========
The Company has an option to purchase the South Figueroa Street facility
from the prior stockholders at fair market value. The option is exercisable on
or before November 20, 2005. On March 10, 1997, the Company exercised its
option to purchase the South Figueroa Street facility for $3,100,000.
In addition, the Company leases mobile equipment and forklifts for monthly
payments of $1,900. Rent expense for the fifty-two weeks ended October 30,
1994, October 29, 1995, twenty-six weeks ended April 28, 1996 (unaudited),
forty-eight weeks ended September 27, 1996, four weeks ended October 27, 1996
and for the twenty-six weeks ended April 27, 1997 (unaudited) amounted to
$830,495, $900,623, $428,430, $834,584, $55,731 and $312,931 respectively.
Employment Agreements
The Company has employment agreements with certain key employees of the
Company, which expire at various dates through September 29, 2001. Some of the
agreements provide for incentive bonuses which are payable if specified
management goals are attained. The aggregate commitment for future salaries
under these agreements at October 27, 1996, excluding bonuses, was
approximately $1,300,000.
Management Agreements
The Company also entered into management agreements with two companies
individually owned by the Company's Chairman and President, respectively, to
provide consulting services over a five year period. The aggregate commitment
for future services under these agreements at October 27, 1996 was
approximately $1,000,000. In July 1997, the management agreement with the
Company's president was retroactively amended and restated as an employment
agreement with substantially identical terms and conditions.
Stock Option Plan and Stock Warrants
On September 29, 1996, Compass adopted a stock option plan providing for
both incentive and nonqualified stock options, pursuant to which the Company
reserved 200,000 shares of common stock of Compass ("Common Stock") for grant
under the Plan (the "1996 Plan"). The 1996 Plan required that all options be
granted at an exercise price not less than fair market value unless otherwise
determined by the option committee. On September 29, 1996, Compass granted
incentive options to various employees and officers of the Company to purchase
200,000 shares of common stock at an exercise price of $4.00 per share to be
exercised over a six year period (see Note 1). Such share amounts and exercise
price were subsequently adjusted on an arithmetic basis to reflect the 4-for-1
stock split described in Note 12.
F-18
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
For the fifty-two weeks ended October 30, 1994 and October 29, 1995,
twenty-six weeks ended April 28, 1996 (unaudited), forty-eight weeks ended
September 27, 1996, four weeks ended October 27, 1996 and
for the twenty-six weeks ended April 27, 1997 (unaudited)
NOTE 9 -- Commitments and Contingencies -- (Continued)
Effective on the date of the Initial Public Offering (see Note 12),
certain of such stock options will be exercised. Pursuant to such option
exercises, and the exercises of the warrants described below, the Company will
issue an aggregate of 1,560,000 post-split shares of common stock, and will
receive aggregate proceeds of $762,000 (of which $2,000 will be in cash and
$760,000 will be in the form of promissory notes).
Except for $2,000 to be received in cash from a financial institution upon
exercise of warrants for 800,000 shares, the purchase price for such shares
will be paid by delivering to the Company 8% non-recourse promissory notes by
two executive officers of the Company which are secured only by a pledge of
their respective shares and by 8% full-recourse promissory notes by the
remaining individual holders of the options and warrants, in each case payable
semi-annually as to interest, and as to principal, to occur on the earlier of
(a) the sale of the Company to any unaffiliated third party, whether through
merger, sale of assets or like consolidation or combination or (b) September
30, 2001. In addition, to the extent that such officers shall effect any public
or private sale, transfer or other disposition of any of their shares of common
stock, they will be obligated to apply all net after-tax proceeds to the
payment of their respective notes until such notes are paid in full. In
accordance with the terms of the full-recourse promissory notes, the Company
intends to exercise its rights with respect to payment of such notes. No new
measurement date will occur at the date of the notes for stock compensation
purposes.
Compass issued warrants to the Chairman and President of the Company to
purchase an aggregate of 100,000 shares of common stock at $4.00 per share,
exercisable at any time and from time to time in whole or in part from the date
of grant through December 31, 2002. The Company also issued a warrant to a
financial institution to purchase 200,000 shares of common stock at $.01 per
share, exercisable on the date of grant (see Note 6).
The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), and related interpretations in
accounting for its stock options. Under APB 25, when the exercise price of
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
The retroactive effect of the 4-for-1 stock split on the common stock,
stock options and stock warrants is as follows:
<TABLE>
<CAPTION>
Common Stock Stock
Stock Options Warrants Total
------------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Numbers of shares outstanding ...... 500,000 200,000 300,000 1,000,000
Purchase of treasury stock ......... (100,000) (100,000)
--------- ---------
(Using the modified treasury stock
method) ........................... 400,000 200,000 300,000 900,000
Stock split ........................ 4 4 4 4
--------- -------- ---------- ---------
Common stock and common stock
equivalents outstanding after the
retroactive effect of stock split . 1,600,000 800,000 1,200,000 3,600,000
========= ======== ========== =========
</TABLE>
Contingent Purchase Price
In connection with the acquisition of AB Plastics, on September 27, 1996,
the Company has a contingent liability up to $500,000. The Company cannot
determine the outcome of this matter as of the date of this report. Any amounts
to be paid in the future as a result of this contingency will be recorded as
goodwill and will be amortized in accordance with the Company's policy for
amortization of goodwill.
F-19
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
For the fifty-two weeks ended October 30, 1994 and October 29, 1995,
twenty-six weeks ended April 28, 1996 (unaudited), forty-eight weeks ended
September 27, 1996, four weeks ended October 27, 1996 and
for the twenty-six weeks ended April 27, 1997 (unaudited)
NOTE 10 -- Stock Option Plan and Stock Purchase Warrants
Summary information with respect to the stock option plan is as follows:
<TABLE>
<CAPTION>
Range of Outstanding Outstanding
Exercise Options Options
Incentives Granted Exercisable
------------ ------------- ------------
<S> <C> <C> <C>
Balance, September 29, 1996
(Inception)
Activity:
- ---------
Granted ................................................ $4.00 200,000 23,063
Exercised ................................................ -0- -0- -0-
Canceled ................................................ -0- -0- -0-
------ -------- -------
Balance, October 27, 1996 ................................. $4.00 200,000 23,063
Stock split ............................................. 4 4 4
------ -------- -------
Balance after the retroactive effect of stock split ...... $1.00 800,000 92,252
====== ======== =======
</TABLE>
NOTE 11 - Economic Dependency
Major Customers
The Company sells a substantial portion of its product to several major
customers. Sales to major customers which exceeded 10% of sales in the
aggregate and accounts receivable from such customers are as follows:
<TABLE>
<CAPTION>
Predecessor Company
---------------------------------------------------------- ---------------------------------
For the 52 Weeks For the 26 For the 48 For the 4 For the 26
Ended Weeks Weeks weeks Weeks
---------------------------- Ended Ended Ended Ended
October 30, October 29, April 28, September October 27, April 27,
1994 1995 1996 27, 1996 1996 1997
------------- ------------- ------------- ------------- ---------------- ---------------
(Unaudited) (Consolidated) (Consolidated)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Sales to major customers ...... $29,881,703 $38,614,539 $16,207,292 $30,293,400 $2,707,845 $14,708,211
============ ============ ============ ============ =========== ============
Accounts receivable from
major customers ............... $ 3,207,431 $ 5,083,781 $ 2,830,510 $ 5,781,803 $5,048,887 $ 2,021,428
============ ============ ============ ============ =========== ============
</TABLE>
Major Suppliers
The Company purchased a substantial portion of its raw material from its
largest customer under their supply agreements with major resin producers.
NOTE 12 -- Initial Public Offering and Subsequent Events
Stock Split
On May 29, 1997, the Board of Directors of the Company, in connection with
the IPO, approved a 5.4-for-1 stock split of the Company's common stock. On
July 18, 1997 the Board of Directors amended such resolution retroactive to May
29, 1997 to reduce such 5.4-for-1 stock split to a 4-for-1 stock split. The
Board
F-20
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
(Formerly AB Plastics Holding Corporation)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
For the fifty-two weeks ended October 30, 1994 and October 29, 1995,
twenty-six weeks ended April 28, 1996 (unaudited), forty-eight weeks ended
September 27, 1996, four weeks ended October 27, 1996 and
for the twenty-six weeks ended April 27, 1997 (unaudited)
NOTE 12 -- Initial Public Offering and Subsequent Events -- (Continued)
of Directors additionally authorized amending Compass' certificate of
incorporation in order to change the name of Compass from AB Plastics Holding
Corporation to Compass Plastics & Technologies, Inc. and increase the number of
authorized shares of Compass from 5 million shares to 20 million shares of
common stock and from 1 million shares to 5 million shares of preferred stock.
In connection with the amendment to the certificate of incorporation the par
value of common stock and preferred stock remains at $.0001 per share.
Accordingly, all shares and per share amounts have been retroactively restated
for this stock split (see Note 1).
Initial Public Offering (unaudited)
On June 6, 1997 the Company filed a registration statement on Form S-1
offering 1.3 million shares of common stock at an estimated offering price
between $7.00 and $8.00 per share as an Initial Public Offering ("IPO"). On
July 21, 1997, concurrent with the change in the stock split, the Company
amended the terms of its proposed IPO to offer 1.2 million shares at an
estimated offering price of between $8.50 and $9.50 per share. In accordance
with the letter of intent between the Company and the underwriter (the "letter
of intent"), the underwriter has received an option (the "Over-Allotment
Option") to purchase an additional number of shares from the Company or selling
shareholders equal to 15 percent (15%) of the number of shares sold to the
public for the purpose of covering over-allotments in the sale of firm
commitment shares. The letter of intent also provides that the managing
underwriter or its designees shall be entitled to receive, at the closing of
the IPO, purchase warrants (the "Underwriter's Warrants") for the purchase of a
number of shares equal to ten percent (10%) of the number of shares sold to the
public. The underwriter's warrants will be exercisable at a price per share
equal to one hundred twenty percent (120%) of the public offering price.
Loan Amendment (Unaudited)
On June 4, 1997, AB Plastics amended its Loan Agreement with the Bank to,
among other things, extend the availability period under the Equipment Line to
October 31, 1997 and to extend the repayment terms to 48 months.
1997 Stock Option Plan (unaudited)
In June 1997, the stockholders of Compass approved Compass's 1997 Stock
Option Plan, as previously adopted by the Compass's Board of Directors (the
"1997 Plan"), pursuant to which officers, directors, key employees and
consultants of the Company are eligible to receive incentive stock options and
non-qualified stock options to purchase up to an aggregate of 800,000 shares of
Common Stock. There are 222,222 shares currently outstanding stock options
under the 1997 Plan which expire on October 31, 2002. The options are
exercisable at the IPO price only during the period of the employment of the
holder of the options and are exercisable only to the extent of (a) 74,074
shares only if the average of the closing prices of the Company's common stock,
as reported on Nasdaq or any national securities exchange for any 30
consecutive trading days (the "Average Closing Price"), equals or exceeds
$17.00 per share, (b) 148,148 shares only if the Average Closing Price equals
or exceeds $25.50 per share, or (c) 222,222 shares only if the Average Closing
Price equals or exceeds $34.00 per share. (See Note 1).
F-21
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to give
any information or to make any representation other than those contained in
this Prospectus, and, if given or made, such information or representations
must not be relied upon as having been authorized by the Company or any
Underwriter. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any date subsequent to the date
hereof. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities offered hereby by anyone in any jurisdiction
in which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to any person to
whom it is unlawful to make such offer or solicitation.
--------------------------------------------
TABLE OF CONTENTS
Page
---------
Prospectus Summary ..................... 3
Risk Factors ........................... 8
The Company .............................. 14
Use of Proceeds ........................ 15
Dividend Policy ........................ 16
Capitalization ........................... 16
Dilution ................................. 17
Selected Financial Data .................. 18
Pro Forma Statements of Operations ...... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................... 21
Business ................................. 27
Management .............................. 36
Principal and Selling Stockholders ...... 43
Certain Transactions ..................... 45
Description of Securities ............... 47
Shares Eligible for Future Sale ......... 49
Underwriting ........................... 50
Legal Matters ........................... 51
Experts ................................. 51
Additional Information .................. 51
Index to Financial Statements ............ F-1
--------------------------------------------
Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligations of dealers to
deliver a Prospectus when acting as Underwriters and with respect to their
unsold allotments or subscriptions.
================================================================================
<PAGE>
================================================================================
1,333,333 Shares
Compass Plastics &
Technologies, Inc.
Common Stock
------------
PROSPECTUS
------------
CRUTTENDEN ROTH
INCORPORATED
JOSEPHTHAL LYON & ROSS
INCORPORATED
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all costs and expenses payable by the
Registrant in connection with the sale and distribution of the securities being
registered, other than underwriting discounts and commissions. All amounts
shown are estimates except the Securities and Exchange Commission registration
fee and the NASD filing fee.
Securities and Exchange Commission registration fee ...... $ 4,874.79
NASD filing fee .......................................... 2,108.68
Nasdaq National Market fee .............................. 20,800.00
Accounting fees and expenses .............................. 100,000.00
Legal fees and expenses ................................. 200,000.00
Printing and engraving expenses ........................... 75,000.00
Transfer agent and registrar fees ........................ 5,000.00
Blue Sky fees and expenses .............................. 5,000.00
Representative's non-accountable expense allowance ...... 324,000.00
Directors' and Officers' Insurance ........................ 50,000.00
Miscellaneous expenses .................................... 5,216.53
------------
Total ................................................ $792,000.00
============
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits
indemnification of officers, directors and other corporate agents under certain
circumstances and subject to certain limitations. The Registrant's Restated
Certificate of Incorporation and By-laws provide that the Registrant shall
indemnify its directors, officers, employees and agents to the full extent
permitted by Delaware General Corporation Law, including the circumstances in
which indemnification is otherwise discretionary under Delaware law. In
addition, the Registrant intends to enter into separate indemnity agreements
with its directors and executive officers that require the Registrant, among
other things, to indemnify then against certain liabilities which may arise by
reason of their status or service (other than liabilities arising from willful
misconduct of a culpable nature) and to maintain directors' and officers'
liability insurance, if available on reasonable terms.
These indemnification provisions and the indemnity agreements to be
entered into between the Registrant and its directors and executive officers
may be sufficiently broad to permit indemnification of the Registrant's
directors and executive officers for liabilities (including reimbursement of
expenses incurred) arising under the Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act, or otherwise.
Item 15. Recent Sales of Unregistered Securities.
The Registrant has issued or sold the following unregistered securities:
(a), (c) On September 27, 1996, in connection with the acquisition of AB
Plastics, the Company sold an aggregate of 500,000 shares of its Common Stock,
in each case for $4.00 per share, as follows:
Name of Purchaser Number of Shares
----------------- ----------------
North Atlantic Smaller Companies Investment Trust plc 196,875
Foreign and Colonial Enterprise Trust 37,500
The Equitable Life Assurance Society of the United Kingdom 37,500
Bank of Bermuda 37,500
Chase Nominees Ltd. 37,500
Bank of Scotland (Isle of Man) Limited 28,125
Private Equity Partners, L.P. 125,000
II-1
<PAGE>
The Company also sold on such date, for nominal consideration, warrants to
purchase Common Stock, as follows:
Name of Purchaser Number of Shares
----------------- ----------------
Sirrom Investments, Inc. 200,000
Michael A. Gibbs 50,000
Geoffrey J.F. Gorman and group 50,000
In addition, the Company granted stock options to purchase Common Stock,
each at an exercise price of $4.00 per share, to Michael A. Gibbs (50,000
options), Geoffrey J.F. Gorman and group (16,937 options), James S. Adams
(11,531 options), Stephen M. Adams (5,766 options), Robin Adams Tompkins (5,766
options) and other officers in the aggregate (110,000 options). Further stock
options to purchase 222,222 shares of Common Stock (post-split) were granted to
Mr. Gibbs under the Company's 1997 Stock Option Plan in June 1997, at an
exercise price equal to the initial public offering price per share in this
offering. No consideration was paid to the Company by any recipient of any of
the foregoing options for the grant of any such options.
In July 1997, the Company's stockholders authorized a 4-for-1 stock split
to be consummated prior to the effectiveness of this offering. Pursuant to such
stock split, each stockholder, for no additional consideration, is entitled to
receive 4.0 shares of common stock for each share of common stock previously
held or to which it has the right to receive.
(b) There were no underwriters employed in connection with any of the
transactions set forth in Item 15(a).
(d) The issuances described in Item 15(a) were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering. In
addition, certain of the issuances described in the third paragraph of Item
15(a) were deemed exempt from registration under the Securities Act in reliance
on Rule 701 promulgated thereunder as transactions pursuant to compensatory
benefit plans and contracts relating to compensation. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about the Registrant or had access,
through employment or other relationships, to such information.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
1.1* Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of the Company.
3.2 By-Laws of the Company.
4.1 Specimen Common Stock Certificate.
4.2 Form of Representative's Warrant Agreement between the Company and the Representative,
including form of Representative's Warrant therein.
5.1 Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel.
10.1 Form of Indemnification Agreement.
10.2 1996 Stock Option Plan.
10.3 1997 Stock Option Plan.
10.4 Management Agreement, dated as of October 1, 1996 but effective as of August 1, 1996, between
AB Plastics, the Company and Private Equity Partners, L.L.C.
10.5 Form of Employment Agreement, dated July 1997, between the Company and Michael A. Gibbs.
10.6 Employment Agreement, dated September 27, 1996, between AB Plastics and James S. Adams.
10.7 Employment Agreement, dated January 31, 1997, between AB Plastics and G. Michael Frink.
10.8 Employment Agreement, dated September 27, 1996, between AB Plastics and Stephen M. Adams.
10.9 Employment Agreement, dated as of September 27, 1996, between AB Plastics and Jawed Ghias.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.10 Employment Agreement, dated as of September 27, 1996, between AB Plastics and Paul J.
Iacono.
10.11 Commercial Loan Agreement, dated as of September 27, 1996, between Sumitomo Bank of
California and AB Plastics, as amended on June 5, 1997.
10.12 Facility License Agreement, dated May 1, 1994, between Melea Limited and AB Plastics.
10.13 Loan Agreement, dated as of September 27, 1996, between Sirrom Investments, Inc. and
AB Plastics.
11.1 Statement re: Computation of Per Share Earnings.
16.1* Letter re: Change in Certifying Accountant.
21.1 Subsidiaries of the Company.
23.1* Consent of Marcum & Kliegman LLP.
23.2* Consent of Block, Plant, Eisner, Fiorito & Belak-Berger.
23.3 Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel (included in the opinion filed
as Exhibit 5.1).
24.1 Power of Attorney (set forth on signature page of the Registration Statement).
27.1 Financial Data Schedule.
99.1 Letter, dated July 10, 1997, from Marcum & Kliegman LLP to the Commission with respect to
licensing in California.
</TABLE>
- ------------
Unless otherwise indicated, exhibits were previously filed.
* Filed herewith.
(b) Financial Statement Schedules.
None.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Gardena, State of California, on the 11th day of August, 1997.
COMPASS PLASTICS & TECHNOLOGIES, INC.
By:/s/ Michael A. Gibbs
----------------------------------------
Michael A. Gibbs
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/Geoffrey J.F. Gorman* Chairman of the Board and Director August 11, 1997
Geoffrey J.F. Gorman
/s/Michael A. Gibbs President and Director (Principal Executive August 11, 1997
Michael A. Gibbs Officer)
/s/Paul J. Iacono* Vice President-Finance (Principal Financial August 11, 1997
Paul J. Iacono or Accounting Officer)
/s/Christopher H.B. Mills* Director August 11, 1997
Christopher H.B. Mills
/s/Jay M. Swanson* Director August 11, 1997
Jay M. Swanson
</TABLE>
*By: /s/Michael A. Gibbs
-------------------------------
Michael A. Gibbs
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
Exhibit No. Description
- ----------- -----------
1.1* Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Company.
3.2 By-Laws of the Company.
4.1 Specimen Common Stock Certificate.
4.2 Form of Representative's Warrant Agreement between the Company and the Representative,
including form of Representative's Warrant therein.
5.1 Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel.
10.1 Form of Indemnification Agreement.
10.2 1996 Stock Option Plan.
10.3 1997 Stock Option Plan.
10.4 Management Agreement, dated as of October 1, 1996 but effective as of August 1, 1996,
between AB Plastics, the Company and Private Equity Partners, L.L.C.
10.5 Form of Employment Agreement, dated July 1997, between the Company and Michael A.
Gibbs.
10.6 Employment Agreement, dated September 27, 1996, between AB Plastics and James S.
Adams.
10.7 Employment Agreement, dated January 31, 1997, between AB Plastics and G. Michael
Frink.
10.8 Employment Agreement, dated September 27, 1996, between AB Plastics and Stephen M.
Adams.
10.9 Employment Agreement, dated as of September 27, 1996, between AB Plastics and Jawed
Ghias.
10.10 Employment Agreement, dated as of September 27, 1996, between AB Plastics and Paul J.
Iacono.
10.11 Commercial Loan Agreement, dated as of September 27, 1996, between Sumitomo Bank of
California and AB Plastics, as amended on June 5, 1997.
10.12 Facility License Agreement, dated May 1, 1994, between Melea Limited and AB Plastics.
10.13 Loan Agreement, dated as of September 27, 1996, between Sirrom Investments, Inc. and AB
Plastics.
11.1 Statement re: Computation of Per Share Earnings.
16.1* Letter re: Change in Certifying Accountant.
21.1 Subsidiaries of the Registrant.
23.1* Consent of Marcum & Kliegman LLP.
23.2* Consent of Block, Plant, Eisner, Fiorito & Belak-Berger.
23.3 Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel (included in the opinion
filed as Exhibit 5.1).
24.1 Power of Attorney (set forth on signature page of the Registration Statement).
27.1 Financial Data Schedule.
99.1 Letter, dated July 10, 1997, from Marcum & Kliegman LLP to the Commission with respect
to licensing in California.
</TABLE>
- ------------
Unless otherwise indicated, exhibits were previously filed.
* Filed herewith.
<PAGE>
1,333,333 Shares(1)
COMPASS PLASTICS AND TECHNOLOGIES, INC.
Common Stock
FORM OF UNDERWRITING AGREEMENT
____________, 1997
CRUTTENDEN ROTH INCORPORATED
JOSEPHTHAL LYON & ROSS INCORPORATED
As Representative of the Several Underwriters
18301 Von Karman, Suite 100
Irvine, California 92715
Ladies and Gentlemen:
COMPASS PLASTICS AND TECHNOLOGIES, INC., a Delaware corporation (the
"Company"), and certain stockholders of the Company named in Schedule B hereto
(hereinafter called the "Selling Stockholders") address you as the
Representative of each of the persons, firms and corporations listed in Schedule
A hereto (herein collectively called the "Underwriters") and hereby confirms its
agreement with the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell
1,200,000 shares of its authorized and unissued Common Stock, $.001 par value
per share, to the several Underwriters. The Selling Stockholders, acting
severally and not jointly, purpose to sell an aggregate of 133,333 shares of the
Company's Common Stock, $.001 par value per share, to the several underwriters.
The 1,200,000 share of Common Stock, $.001 par value per share, of the Company
to be sold by the Company are hereinafter referred to as the "Company Shares"
and the 133,333 shares of Common Stock, $.001 per value per share, of the
Company to be sold by the Selling Stockholders are hereinafter collectively
referred to as the "Selling Stockholder Shares." The Company Shares" and the
Selling Stockholder Shares are hereinafter collectively referred to as the "Firm
Shares." The Selling Stockholders also proposes to grant to the Underwriters an
option to purchase up to 200,000 additional shares of the Company's Common
Stock, $.001 par value per share (the "Option Shares"), as
- --------
1 Plus an option to purchase up to 200,000 additional shares from the Selling
Stockholders to cover over-allotments, if any.
<PAGE>
provided in Section 7 hereof. In addition, the Company proposes to sell to you,
individually and not in your capacity as Representative, five-year warrants (the
"Representative's Warrants") to purchase up to 133,333 shares of Common Stock,
$.001 par value per share, of the Company (the "Representative's Warrant
Stock"), which sale will be consummated in accordance with the terms and
conditions of the Representative's Warrant Agreement (the "Representative's
Warrant Agreement"), the form of which is filed as an exhibit to the
Registration Statement described below. As used in this Agreement, the term
"Shares" shall include the Firm Shares and the Option Shares. The
Representative's Warrants shall be exercisable at a price per Share equal to one
hundred twenty percent (120%) of the initial public offering price. All shares
of Common Stock, $.001 par value per share, of the Company to be outstanding
after giving effect to the sales contemplated hereby, including the sale of the
Shares, are hereinafter referred to as "Common Stock." Unless the context
otherwise requires, references herein to the "Company" include Compass Plastics
and Technologies, Inc. together with its subsidiaries described in the
Prospectus (defined in Section 2(a) below.).
2. Representations, Warranties and Agreements of the Company and the
Selling Stockholders.
I. The Company represents and warrants to and agrees with each
Underwriter that:
(a) A registration statement on Form S-1 (File No.
333-28741) with respect to the Shares, the Representative's Warrants and the
Representative's Warrant Stock, including a prospectus subject to completion,
has been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement and such amended
prospectuses subject to completion as may have been required prior to the date
hereof have been similarly prepared and filed with the Commission; and the
Company will file such additional amendments to such registration statement and
such amended prospectuses subject to completion as may hereafter be required.
Copies of such registration statement and amendments and of each related
prospectus subject to completion (the "Preliminary Prospectuses") have been
delivered to you.
If the registration statement relating to the Shares
has been declared effective under the Act by the Commission, the Company will
prepare and promptly file with the Commission the information previously omitted
from the registration statement pursuant to Rule 430A(a) of the Rules and
Regulations pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
2
<PAGE>
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus. The term
"Registration Statement" as used in this Agreement shall mean such registration
statement, including financial statements, schedules and exhibits, in the form
in which it became or becomes, as the case may be, effective (including, if the
Company omitted information from the registration statement pursuant to Rule
430A(a) of the Rules and Regulations, the information deemed to be a part of the
registration statement at the time it became effective pursuant to Rule 430A(b)
of the Rules and Regulations) and, in the event of any amendment thereto after
the effective date of such registration statement, shall also mean (from and
after the effectiveness of such amendment) such registration statement as so
amended. The term "Prospectus" as used in this Agreement shall mean the
prospectus relating to the Shares as included in such Registration Statement at
the time it becomes effective (including, if the Company omitted information
from the Registration Statement pursuant to Rule 430A(a) of the Rules and
Regulations, the information deemed to be a part of the Registration Statement
at the time it became effective pursuant to Rule 430A(b) of the Rules and
Regulations), except that if any revised prospectus shall be provided to the
Underwriters by the Company for use in connection with the offering of the
Shares that differs from the prospectus on file with the Commission at the time
the Registration Statement became or becomes, as the case may be, effective
(whether or not such revised prospectus is required to be filed with the
Commission pursuant to Rule 424(b)(3) of the Rules and Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time it
is first provided to the Underwriters for such use.
(b) The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus or instituted
proceedings for that purpose, and each such Preliminary Prospectus, at the time
of filing thereof, has conformed in all material respects to the requirements of
the Act and the Rules and Regulations and, as of its date, has not included any
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and at the time the Registration
Statement became or becomes, as the case may be, effective and at all times
subsequent thereto up to and on the Closing Date (hereinafter defined) and on
any later date on which Option Shares are to be purchased, (i) the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
contained and will contain all material information required to be included
therein by the Act and the Rules and Regulations and will in all material
respects conform to the requirements of the Act and the Rules and Regulations,
(ii) the Registration Statement, and any amendments or supplements thereto, did
not and will not include any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and (iii) neither the Registration Statement
nor the Prospectus, or any amendments or supplements thereto, will include any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made,
3
<PAGE>
not misleading; provided, however, that none of the representations and
warranties contained in this subparagraph (b) shall apply to information
contained in or omitted from the Registration Statement or Prospectus, or any
amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.
(c) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation with full power and authority (corporate and
other) to own, lease and operate its properties and conduct its business as
described in the Prospectus; the Company is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
ownership or leasing of its properties or the conduct of its business requires
such qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
taken as a whole; no proceeding has been instituted in any such jurisdiction,
revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such
power and authority or qualification; the Company is in possession of and
operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from state, federal and other regulatory
authorities that are material to the conduct of its business, all of which are
valid and in full force and effect; the Company is not in material violation of
its charter or bylaws or in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in any material
bond, debenture, note or other evidence of indebtedness, or in any material
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company is a party or by
which it or its properties or assets may be bound; and the Company is not in
material violation of any law, order, rule, regulation, writ, injunction,
judgment or decree of any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or over its properties
or assets. The Prospectus accurately describes any corporation, association or
other entity owned or controlled, directly or indirectly, by the Company.
(d) The Company has full legal right, power and
authority to enter into this Agreement and the Representative's Warrant
Agreement and to perform the transactions contemplated hereby and thereby. Each
of this Agreement and the Representative's Warrant Agreement has been duly
authorized, executed and delivered by the Company and is a valid and binding
agreement on the part of the Company, enforceable in accordance with its terms,
except as rights to indemnification under this Agreement or the Representative's
Warrant Agreement may be limited by applicable law and except as such
enforcement may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles; the performance of this Agreement
and the Representative's Warrant Agreement and the consummation of the
transactions herein or therein contemplated
4
<PAGE>
will not result in a material breach or violation of any of the terms and
provisions of, or constitute a default under, (i) any bond, debenture, note or
other evidence of indebtedness, or under any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other agreement or
instrument to which the Company is a party or by which its properties or assets
may be bound, (ii) the charter or bylaws of the Company, or (iii) any law,
order, rule, regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or over its properties or assets. No consent,
approval, authorization or order of or qualification with any court, government
or governmental agency or body, domestic or foreign, having jurisdiction over
the Company or over its properties or assets is required for the execution and
delivery of this Agreement or the Representative's Warrant Agreement and the
consummation by the Company of the transactions herein and therein contemplated,
except such as may be required under the Act or under state or other securities
or Blue Sky laws, all of which requirements have been satisfied in all material
respects.
(e) There is not any pending or, to the best of the
Company's knowledge, threatened, action, suit, claim or proceeding against the
Company, or any of its officers or any of its properties, assets or rights,
before any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or over its officers or properties
or otherwise that (i) is reasonably likely to result in any material adverse
change in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company or might materially and adversely affect
its properties, assets or rights, (ii) might prevent consummation of the
transactions contemplated hereby, or (iii) is required to be disclosed in the
Registration Statement or Prospectus and is not so disclosed; and there are no
agreements, contracts, leases or documents of the Company of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement by the Act
or the Rules and Regulations or by the Securities Exchange Act of 1934 (the
"Exchange Act") or the rules and regulations of the Commission thereunder that
have not been accurately described in all material respects in the Registration
Statement or Prospectus or filed as exhibits to the Registration Statement.
(f) All outstanding shares of capital stock of the
Company (including the Selling Stockholder Shares) have been duly authorized and
validly issued and are fully paid and nonassessable, have been issued in
compliance with all federal and state securities laws, were not issued in
violation of or subject to any preemptive rights or other rights to subscribe
for or purchase securities, and the authorized and outstanding capital stock of
the Company is as set forth in the Prospectus under the caption "Capitalization"
and conforms in all material respects to the statements relating thereto
contained in the Registration Statement and the Prospectus (and such statements
correctly state the substance of the instruments defining the capitalization of
the Company); the Firm Shares and the Option Shares have been duly authorized
for issuance and sale to the Underwriters pursuant
5
<PAGE>
to this Agreement and, when issued and delivered by the Company against payment
therefor in accordance with the terms of this Agreement, will be duly and
validly issued and fully paid and nonassessable, and will be sold free and clear
of any pledge, lien, security interest, encumbrance, claim or equitable
interest; and no preemptive right, co-sale right, registration right, right of
first refusal or other similar right of stockholders exists with respect to any
of the Firm Shares or Option Shares or the issuance and sale thereof other than
those that have been expressly waived prior to the date hereof and those that
will automatically expire upon the consummation of the transactions contemplated
on the Closing Date. No further approval or authorization of any stockholder,
the Board of Directors of the Company or others is required for the issuance and
sale or transfer of the Shares except as may be required under the Act, the
Rules and Regulations or under state or other securities or Blue Sky laws.
Except as disclosed in or contemplated by the Prospectus and the financial
statements of the Company, and the related notes thereto, included in the
Prospectus, the Company has no outstanding options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights under the Act and the Rules and
Regulations.
(g) Marcum & Kliegman LLP, which has examined the
financial statements of the Company, together with the related schedules and
notes, as of October 27, 1996 and October 29, 1995 and for each of the years
ended October 27, 1996, October 29, 1995 and October 30, 1994, respectively,
filed with the Commission as a part of the Registration Statement, which are
included in the Prospectus, are independent accountants within the meaning of
the Act and the Rules and Regulations; the audited financial statements of the
Company, together with the related schedules and notes, and the unaudited
financial information, forming part of the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
of the Company at the respective dates and for the respective periods to which
they apply; and all audited financial statements of the Company, together with
the related schedules and notes, and the unaudited financial information, filed
with the Commission as part of the Registration Statement, have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved except as may be otherwise stated therein. The
selected and summary financial and statistical data included in the Registration
Statement present fairly the information shown therein and have been compiled on
a basis consistent with the audited financial statements presented therein. No
other financial statements or schedules are required to be included in the
Registration Statement.
6
<PAGE>
(h) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (i) any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company, (ii) any
transaction that is material to the Company, (iii) any obligation, direct or
contingent, that is material to the Company, incurred by the Company, except
obligations incurred in the ordinary course of business, (iv) any change in the
capital stock or outstanding indebtedness of the Company that is material to the
Company, (v) any dividend or distribution of any kind declared, paid or made on
the capital stock of the Company, or (vi) any loss or damage (whether or not
insured) to the property of the Company which has a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company.
(i) Except as set forth in the Registration Statement
and Prospectus, (i) the Company has good and marketable title to all properties
and assets described in the Registration Statement and Prospectus as owned by
it, free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest, other than such as would not have a material adverse effect
on the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company, (ii) the agreements to which the Company is a
party described in the Registration Statement are valid agreements, enforceable
by the Company in accordance with their terms, except as the enforcement thereof
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors' rights generally or by
general equitable principles and, to the best of the Company's knowledge, the
other contracting party or parties thereto are not in material breach or
material default under any of such agreements, and (iii) the Company has valid
and enforceable leases for all properties described in the Registration
Statement and Prospectus as leased by it, except as the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles. Except as set forth in the Registration Statement
and Prospectus, the Company owns or leases all such properties as are necessary
to its operations as now conducted and as described in the Registration
Statement and the Prospectus.
(j) The Company has timely filed all federal, state,
local and foreign tax returns required to be filed by it and has paid all taxes
shown thereon as due, and there is no tax deficiency that has been or, to the
best of the Company's knowledge, is reasonably likely to be asserted against the
Company, which might have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company, and all tax liabilities are adequately provided for on the books of the
Company.
(k) The Company maintains insurance with insurers of
recognized financial responsibility of the types and in the amounts generally
deemed adequate
7
<PAGE>
for its business including, but not limited to, insurance covering real and
personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect; the Company has not been
refused any insurance coverage sought or applied for; and the Company does have
any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company.
(l) No labor disturbance by the employees of the
Company exists or, to the best of the Company's knowledge, is imminent. The
Company is not aware of any existing or imminent labor disturbance by the
employees of any principal suppliers or customers that might be expected to
result in any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company. No
collective bargaining agreement exists with any of the Company's employees and,
to the best of the Company's knowledge, no such agreement is imminent.
(m) The Company owns or possesses adequate rights to
use all patents, patent rights, inventions, trade secrets, know-how, trademarks,
service marks, trade names and copyrights described or referred to in the
Prospectus as owned by or used by it or that are necessary to conduct its
businesses as described in the Registration Statement and Prospectus; the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company by others with
respect to any patents, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights described or referred to in
the Prospectus as owned by or used by it; and the Company has not received any
notice of, and has no knowledge of, any infringement of or conflict with
asserted rights of others with respect to any patents, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights described or referred to in the Prospectus as owned by or used by it
or which, singly or in the aggregate, in the event of an unfavorable decision,
ruling or finding, would have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company.
(n) The Common Stock is registered pursuant to
Section 12(g) of the Exchange Act and is approved for quotation on the Nasdaq
National Market, and the Company has taken no action designed to, or likely to
have the effect of, terminating the registration of the Common Stock under the
Exchange Act or delisting the Common Stock from the Nasdaq National Market, nor
has the Company received any notification that the Commission or the National
Association of Securities Dealers, Inc. ("NASD") is contemplating terminating
such registration or listing.
8
<PAGE>
(o) The Company has been advised concerning the
Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and
regulations thereunder, and has in the past conducted, and intends in the future
to conduct, its affairs in such a manner as to ensure that it is not and will
not become an "investment company" or a company "controlled" by an "investment
company" within the meaning of the 1940 Act and such rules and regulations.
(p) The Company has not distributed and will not
distribute prior to the later of (i) the Closing Date, or any date on which
Option Shares are to be purchased, as the case may be, and (ii) completion of
the distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than any Preliminary Prospectuses, the
Prospectus, the Registration Statement and other materials, if any, permitted by
the Act.
(q) The Company has not at any time during the last
five (5) years (i) made any unlawful contribution to any candidate for foreign
office or failed to disclose fully any contribution in violation of law, or (ii)
made any payment to any federal or state governmental officer or official, or
other person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof.
(r) The Company has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization in violation of law or manipulation
of the price of the Common Stock to facilitate the sale or resale of the Shares.
(s) Each officer, director and director-nominee of
the Company and each beneficial owner of five (5) percent or more of the
Company's Common Stock (including each Selling Stockholder) has agreed in
writing that such person will not, for a period of 365 days from the date that
the Registration Statement is declared effective by the Commission (the "Lock-up
Period"), offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to (collectively, a "Disposition") any
shares of Common Stock, any options or warrants to purchase any shares of Common
Stock or any securities convertible into or exchangeable for shares of Common
Stock (collectively, "Securities") now owned or hereafter acquired directly by
such person or with respect to which such person has or hereafter acquires the
power of disposition, otherwise than (i) as a bona fide gift or gifts, provided
the donee or donees thereof agree in writing to be bound by this restriction,
and (ii) with the prior written consent of Cruttenden Roth Incorporated. The
foregoing restriction is expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction that is designed to
or reasonably expected to lead to or result in a Disposition of Securities
during the Lock-up Period, even if such Securities would be disposed of by
someone other than such holder. Such prohibited hedging
9
<PAGE>
or other transactions would include, without limitation, any short sale (whether
or not against the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or index)
that includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person will also agree and consent to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by such person except in compliance with this
restriction. The Company has provided to counsel for the Underwriters a complete
and accurate list of all securityholders of the Company and the number and type
of securities held by each securityholder. The Company has provided to counsel
for the Underwriters true, accurate and complete copies of all of the agreements
pursuant to which its officers, directors, director-nominees and stockholders
have agreed to such restrictions (the "Lock-up Agreements"). The Company hereby
represents and warrants that it will not release any of its officers, directors
or director-nominees or other stockholders from any Lock-up Agreements currently
existing or hereafter effected without the prior written consent of Cruttenden
Roth Incorporated.
(t) Except as set forth in the Registration Statement
and Prospectus, (i) the Company is in material compliance with all rules, laws
and regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
that are applicable to its business, (ii) the Company has received no notice
from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) to its best knowledge, the Company is not
likely to be required to make future material capital expenditures to comply
with Environmental Laws (iv) no property which is owned, leased or occupied by
the Company has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. ss. 9601, et seq.), or otherwise designated as a contaminated site under
applicable state or local law, and (v) the Company is not in violation of any
federal or state law or regulation relating to occupational safety or health.
(u) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, including
without limitation cash receipts, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
10
<PAGE>
(v) There are no outstanding loans, advances (except
normal advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any of the
officers, directors or director-nominees of the Company or any of the members of
the families of any of them, except as disclosed in the Registration Statement
and the Prospectus.
(w) The Company has not incurred any liability,
direct or indirect, for finders' or similar fees on behalf of or payable by the
Company or the Underwriters in connection with this or any other transaction
involving the Company and the Underwriters.
(x) The Representative's Warrants have been duly and
validly authorized by the Company and upon delivery to you in accordance with
the Representative's Warrant Agreement will be duly issued and legal, valid and
binding obligations of the Company.
(y) The Representative's Warrant Stock has been duly
authorized and reserved for issuance upon the exercise of the Representative's
Warrants and when issued upon payment of the exercise price therefor will be
validly issued, fully paid and nonassessable shares of Common Stock of the
Company.
II. Each Selling Stockholder, severally for itself only and
not jointly, represents and warrants to and agrees with each Underwriter and the
Company that:
(a) Such Selling Stockholder now has and on the
Closing Date will have valid marketable title to the Shares to be sold by such
Selling Stockholder, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest other than pursuant to this Agreement;
and upon delivery of such Shares hereunder and payment of the purchase price as
herein contemplated, each of the Underwriters will obtain valid marketable title
to the Shares purchased by it from such Selling Stockholder, free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable interest
pertaining to such Selling Stockholder or such Selling Stockholder's property,
including any liability for estate or inheritance taxes, or any liability to or
claims of any creditor, devisee, legatee or beneficiary of such Selling
Stockholder.
(b) Such Selling Stockholder has duly executed and
delivered, in the form heretofore furnished to the Representatives, an
irrevocable Power of Attorney (the "Power of Attorney") appointing Michael A.
Gibbs and Paul J. Iacono, and each of them, as attorneys-in-fact (collectively,
the "Attorneys" and individually, an "Attorney") and a Custody Agreement (the
"Custody Agreement") with American Stock Transfer & Trust Company as custodian
(the "Custodian"); each of the Power of Attorney and the Custody Agreement
constitutes a valid and binding agreement on the part of such Selling
Stockholder,
11
<PAGE>
enforceable in accordance with its terms, except as the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles; and each of such Selling Stockholder's Attorneys,
acting alone, is authorized to execute and deliver this Agreement and the
certificate referred to in Section 6(h) hereof on behalf of such Selling
Stockholder, to determine the purchase price to be paid by the several
Underwriters to such Selling Stockholder as provided in Section 3 hereof, to
authorize the delivery of the Selling Stockholder Shares under this Agreement
and to duly endorse (in blank or otherwise) the certificate or certificates
representing such Shares or a stock power or powers with respect thereto, to
accept payment therefor, and otherwise to act on behalf of such Selling
Stockholder in connection with this Agreement.
(c) All consents, approvals, authorizations and
orders required for the execution and delivery by such Selling Stockholder of
the Power of Attorney and the Custody Agreement, the execution and delivery by
or on behalf of such Selling Stockholder of this Agreement and the sale and
delivery of the Selling Stockholder Shares under this Agreement (other than, at
the time of the execution hereof (if the Registration Statement has not yet been
declared effective by the Commission), the issuance of the order of the
Commission declaring the Registration Statement effective and such consents,
approvals, authorizations or orders as may be necessary under state or other
securities or Blue Sky laws) have been obtained and are in full force and
effect; and such Selling Stockholder has full legal right, power and authority
to enter into and perform its obligations under this Agreement and such Power of
Attorney and Custody Agreement, and to sell, assign, transfer and deliver the
Shares to be sold by such Selling Stockholder under this Agreement.
(d) Such Selling Stockholder will not, during the
Lock-up Period, effect the Disposition of any Securities now owned or hereafter
acquired directly by such Selling Stockholder or with respect to which such
Selling Stockholder has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree in writing to be bound by this restriction, (ii) as a distribution
to limited partners or stockholders of such Selling Stockholder, provided that
the distributees thereof agree in writing to be bound by the terms of this
restriction, or (iii) with the prior written consent of Cruttenden Roth
Incorporated. The foregoing restriction is expressly agreed to preclude the
holder of the Securities from engaging in any hedging or other transaction which
is designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-up Period, even if such Securities would be disposed
of by someone other than the Selling Stockholder. Such prohibited hedging or
other transactions would include, without limitation, any short sale (whether or
not against the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or index)
that includes, relates to or derives any significant part of its value from
Securities. Such Selling Stockholder also agrees and consents to the entry of
stop
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transfer instructions with the Company's transfer agent against the transfer of
the securities held by such Selling Stockholder except in compliance with this
restriction.
(e) Certificates in negotiable form for all Shares to
be sold by such Selling Stockholder under this Agreement, together with a stock
power or powers duly endorsed in blank by such Selling Stockholder, have been
placed in custody with the Custodian for the purpose of effecting delivery
hereunder.
(f) This Agreement has been duly authorized by such
Selling Stockholder (if such Selling Stockholder is not a natural person) and
has been duly executed and delivered by or on behalf of such Selling Stockholder
and is a valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles; and the performance of this Agreement and the consummation of the
transactions herein contemplated will not result in a breach or violation of any
of the terms and provisions of or constitute a default under any bond,
debenture, note or other evidence of indebtedness, or under any lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which such Selling Stockholder is a party or by which
such Selling Stockholder, or any Selling Stockholder Shares hereunder, may be
bound or, to the best of such Selling Stockholders' knowledge, result in any
violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over such Selling Stockholder or over the
properties of such Selling Stockholder, or, if such Selling Stockholder is other
than a natural person, result in any violation of any provisions of the charter,
bylaws or other organizational documents of such Selling Stockholder.
(g) Such Selling Stockholder has not taken and will
not take, directly or indirectly, any action designed to or that might
reasonably be expected to cause or result in stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Stockholder has not distributed and
will not distribute any prospectus or other offering material in connection with
the offering and sale of the Shares.
(i) All information furnished by or on behalf of such
Selling Stockholder relating to such Selling Stockholder and the Selling
Stockholder Shares that is contained in the representations and warranties of
such Selling Stockholder in such Selling Stockholder's Power of Attorney or set
forth in the Registration Statement and the Prospectus is, and at the time the
Registration Statement became or becomes, as the case may be,
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effective and at all times subsequent thereto up to and on the Closing Date, was
or will be, true, correct and complete, and does not, and at the time the
Registration Statement became or becomes, as the case may be, effective and at
all times subsequent thereto up to and on the Closing Date (hereinafter defined)
will not, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make such
information not misleading.
(j) Such Selling Stockholder will review the
Prospectus and will comply with all agreements and satisfy all conditions on its
part to be complied with or satisfied pursuant to this Agreement on or prior to
the Closing Date and will advise one of its Attorneys and Cruttenden Roth
Incorporated prior to the Closing Date if any statement to be made on behalf of
such Selling Stockholder in the certificate contemplated by Section 6(h) would
be inaccurate if made as of the Closing Date.
(k) Such Selling Stockholder does not have, or has
waived prior to the date hereof, any preemptive right, co-sale right or right of
first refusal or other similar right to purchase any of the Shares that are to
be sold by the Company or any of the other Selling Stockholders to the
Underwriters pursuant to this Agreement; such Selling Stockholder does not have,
or has waived prior to the date hereof, any registration right or other similar
right to participate in the offering made by the Prospectus, other than such
rights of participation as have been satisfied by the participation of such
Selling Stockholder in the transactions to which this Agreement relates in
accordance with the terms of this Agreement; and such Selling Stockholder does
not own any warrants, options or similar rights to acquire, and does not have
any right or arrangement to acquire, any capital stock, rights, warrants,
options or other securities from the Company, other than those described in the
Registration Statement and the Prospectus.
(l) Such Selling Stockholder is not aware (without
having conducted any investigation or inquiry) that any of the representations
and warranties of the Company set forth in Section 2.I. above is untrue or
inaccurate in any material respect.
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and the Selling Stockholders
agree, severally and not jointly, to sell to the Underwriters, and each
Underwriter agrees, severally and not jointly, to purchase from the Company and
the Selling Stockholders, respectively, at a purchase price of __________ per
share, the respective number of Company Shares and Selling Stockholder Shares
set forth opposite the names of the Company and the Selling Stockholders in
Schedule B hereto. The obligation of each Underwriter to the Company and to each
Selling Stockholder shall be to purchase from the Company or such Selling
Stockholder that number of Company Shares or Selling Stockholder Shares, as the
case may be, which (as nearly as practicable, as determined by you) is in the
same proportion to the
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number of Company Shares or Selling Stockholder Shares, as the case may be, set
forth opposite the name of the Company or such Selling Stockholder in Schedule B
hereto as the number of Firm Shares which is set forth opposite the name of such
Underwriter in Schedule A hereto (subject to adjustment as provided in Section
10) is to the total number of Firm Shares to be purchased by all the
Underwriters under this Agreement. In the event that any Selling Stockholder
shall have failed, refused or been unable to perform any agreement on his, her
or its part to be performed hereunder, the Company and not such Selling
Stockholder shall sell to the Underwriters, and each Underwriter agrees,
severally and not jointly, to purchase from the Company and not from such
Selling Stockholder, at the same price per share as set forth in this Section 3,
the number of Selling Stockholder Shares which were otherwise to be sold by such
Selling Stockholder but for such Selling Stockholder's failure, refusal or
inability to perform any agreement on his, her or its part to be performed
hereunder. The additional shares of Common Stock so sold by the Company as a
result of the provisions of the preceding sentence shall added to, and included
within, "Company Shares," and shall be subtracted and excluded from "Selling
Stockholder Shares" as may be applicable in the context of this Agreement.
The certificates in negotiable form for the Selling
Stockholder Shares have been placed in custody (for delivery under this
Agreement) under the Custody Agreement. Each Selling Stockholder agrees that the
certificates for the Selling Stockholder Shares of such Selling Stockholder so
held in custody are subject to the interests of the Underwriters hereunder, that
the arrangements made by such Selling Stockholder for such custody, including
the Power of Attorney is to that extent irrevocable and that the obligations of
such Selling Stockholder hereunder shall not be terminated by the act of such
Selling Stockholder or by operation of law, whether by the death or incapacity
of such Selling Stockholder or the occurrence of any other event, except as
specifically provided herein or in the Custody Agreement. If any Selling
Stockholder should die or be incapacitated, or if any other such event should
occur, before the delivery of the certificates for the Selling Stockholder
Shares hereunder, the Selling Stockholder Shares to be sold by such Selling
Stockholder shall, except as specifically provided herein or in the Custody
Agreement, be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such death, incapacity or other event had not
occurred, regardless of whether the Custodian shall have received notice of such
death or other event.
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in next-day funds, payable to the order
of the Company with regard to the Shares being purchased from such Selling
Stockholders (and the Company and such Selling Stockholders agree not to deposit
and to cause the Custodian not to deposit any such check in the bank on which it
is drawn until the day following the date of its delivery to the Company or the
Custodian, as the case may be), at the offices of the Representative or such
other place as
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may be agreed upon among the Representative and the Company, at ____ A.M., Los
Angeles time, on the third (3rd) full business day following the first day that
Shares are traded (or at such time and date to which payment and delivery shall
have been postponed pursuant to Section 10 hereof), such time and date of
payment and delivery being herein called the "Closing Date." The certificates
for the Firm Shares to be so delivered will be made available to you at such
office or such other location as you may reasonably request for checking at
least one (1) full business day prior to the Closing Date and will be in such
names and denominations as you may request, such request to be made at least two
(2) full business days prior to the Closing Date. If the Representative so
elects, delivery of the Firm Shares may be made by credit through full fast
transfer to the accounts at The Depository Trust Company designated by the
Representative.
It is understood that you, individually, and not as the
Representative of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the
several Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public offering
price of $______ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters), in the
first paragraph on page 2, concerning stabilization and over-allotment by the
Underwriters, in the third paragraph under the caption "Underwriting,"
concerning the manner of offering the Firm Shares and the Option Shares, and in
the seventh paragraph under the caption "Underwriting," concerning the
discretionary accounts controlled by the Underwriters, in each case, in any
Preliminary Prospectus and in the final form of Prospectus filed pursuant to
Rule 424(b) constitutes the only information furnished by the Underwriters to
the Company for inclusion in any Preliminary Prospectus, the Prospectus or the
Registration Statement, and you, on behalf of the respective Underwriters,
represent and warrant to the Company and the Selling Stockholders that the
statements made therein do not include any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
4. Further Agreements of the Company. The Company agrees with the
several Underwriters that:
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(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; it will notify you, promptly after it
shall receive notice thereof, of the time when the Registration Statement or any
subsequent amendment to the Registration Statement has become effective or any
supplement to the Prospectus has been filed; if the Company omitted information
from the Registration Statement at the time it was originally declared effective
in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to such Registration
Statement as originally declared effective which is declared effective by the
Commission; if for any reason the filing of the final form of Prospectus is
required under Rule 424(b)(3) of the Rules and Regulations, it will provide
evidence satisfactory to you that the Prospectus contains such information and
has been filed with the Commission within the time period prescribed; it will
notify you promptly of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for additional
information; promptly upon your request, it will prepare and file with the
Commission any amendments or supplements to the Registration Statement or
Prospectus which, in the opinion of Troop, Meisinger, Steuber & Pasich, LLP,
counsel for the several Underwriters ("Underwriters' Counsel"), may be necessary
or advisable in connection with the distribution of the Shares by the
Underwriters; it will promptly prepare and file with the Commission, and
promptly notify you of the filing of, any amendments or supplements to the
Registration Statement or Prospectus which may be necessary to correct any
statements or omissions, if, at any time when a prospectus relating to the
Shares is required to be delivered under the Act, any event shall have occurred
as a result of which the Prospectus or any other prospectus relating to the
Shares as then in effect would include any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading; in
case any Underwriter is required to deliver a prospectus nine (9) months or more
after the effective date of the Registration Statement in connection with the
sale of the Shares, it will prepare promptly upon request, but at the expense of
such Underwriter, such amendment or amendments to the Registration Statement and
such prospectus or prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act; and it will file no amendment
or supplement to the Registration Statement or Prospectus which shall not
previously have been submitted to you a reasonable time prior to the proposed
filing thereof or to which you shall reasonably object in writing, subject,
however, to compliance with the Act and the Rules and Regulations and the rules
and regulations of the Commission thereunder and the provisions of this
Agreement.
(b) The Company will advise you, promptly after it shall
receive notice or obtain knowledge, of the issuance of any stop order by the
Commission suspending
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the effectiveness of the Registration Statement or of the initiation or threat
of any proceeding for that purpose; and it will promptly use its best efforts to
prevent the issuance of any stop order or to obtain its withdrawal at the
earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, except that the
Company shall not be required in connection therewith or as a condition thereof
to qualify as a foreign corporation or to execute a general consent to service
of process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be reasonably required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available,
copies of the Registration Statement (three of which will be signed and which
will include all exhibits), each Preliminary Prospectus, the Prospectus and any
amendments or supplements to such documents, including any prospectus prepared
to permit compliance with Section 10(a)(3) of the Act (three of which will
include all exhibits) all in such quantities as you may from time to time
reasonably request.
(e) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration Statement,
an earnings statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a) of the Act and covering
a twelve (12) month period beginning after the effective date of the
Registration Statement.
(f) During a period of five (5) years after the date hereof
and for so long as the Company is subject to Section 13 or 15 of the Exchange
Act, the Company will furnish to its stockholders as soon as practicable after
the end of each respective period, annual reports (including financial
statements audited by independent certified public accountants) and unaudited
quarterly reports of operations for each of the first three quarters of the
fiscal year, and will furnish to you and the other several Underwriters
hereunder, upon request (i) concurrently with furnishing such reports to its
stockholders, statements of operations of the Company for each of the first
three (3) quarters in the form furnished to the Company's stockholders, (ii)
concurrently with furnishing to its stockholders, a balance sheet of the Company
as of the end of such fiscal year, together with statements of operations, of
stockholders' equity, and of cash flows of the Company for such fiscal year,
accompanied by
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a copy of the certificate or report thereon of independent certified public
accountants, (iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders, (iv) as soon as they are available,
copies of all reports and financial statements furnished to or filed with the
Commission, any securities exchange or the NASD, (v) every material press
release and every material news item or article in respect of the Company or its
affairs which was generally released to stockholders or prepared by the Company,
and (vi) any additional information of a public nature concerning the Company or
its business which you may reasonably request. During such five (5) year period,
if the Company shall have active subsidiaries, the foregoing financial
statements shall be on a consolidated basis to the extent that the accounts of
the Company and its subsidiaries are consolidated, and shall be accompanied by
similar financial statements for any significant subsidiary that is not so
consolidated.
(g) The Company will apply the net proceeds from the sale of
the Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(i) The Company will file Form SR in conformity with the
requirements of the Act and the Rules and Regulations.
(j) If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part of the
Company or the Selling Stockholders to perform any agreement on its part to be
performed hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, or if the Company shall terminate this Agreement pursuant to Section
11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to
Section 11(b)(i), the Company will pay the several Underwriters for all
out-of-pocket expenses (including fees and disbursements of Underwriters'
Counsel) incurred by the Underwriters in investigating or preparing to market or
marketing the Shares.
(k) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
if reasonably requested by you, forthwith prepare, and, if permitted by law,
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
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(l) During the Lock-up Period, the Company will not, without
the prior written consent of Cruttenden Roth Incorporated, effect the
Disposition of, directly or indirectly, any Securities other than (i) the sale
of the Firm Shares and the Option Shares hereunder, and (ii) the Company's
issuance of options or Common Stock under the Company's presently authorized
stock option plans or restricted stock plans (collectively, the "Option Plans").
(l) During the period commencing on the date of this Agreement
and ending on the date which is nine (9) months after the effective date of the
Registration Statement, or such earlier date as of which the Company or the
Underwriters are no longer required to deliver a Prospectus in connection with
the sale of the Shares, the Company will not issue, release or disseminate any
press release or other material news item or article in respect of the Company
or its affairs without the prior written consent of Cruttenden Roth
Incorporated, which consent shall not be unreasonably withheld.
5. Expenses.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and
expenses in connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and exhibits),
Preliminary Prospectuses and the Prospectus and any amendments or supplements
thereto; the printing of this Agreement, the Agreement Among Underwriters, the
Selected Dealer Agreement, the Preliminary Blue Sky Survey and any supplemental
Blue Sky Survey, the Underwriters' Questionnaire and Power of Attorney, and any
instruments related to any of the foregoing; the issuance and delivery of the
Shares hereunder to the several Underwriters, including transfer taxes, if any,
the cost of all certificates representing the Shares and transfer agents' and
registrars' fees; the fees and disbursements of counsel and accountants for the
Company; all fees and other charges of the Company's independent certified
public accountants; the cost of furnishing to the several Underwriters copies of
the Registration Statement (including appropriate exhibits), Preliminary
Prospectuses and the Prospectus, and any amendments or supplements to any of the
foregoing; NASD filing fees and the cost of qualifying the Shares under the laws
of such jurisdictions as you may designate (including filing fees and fees and
disbursements of counsel for the Underwriters related to such qualification up
to $15,000); the Company's road show costs and expenses, the cost of preparing
bound volumes of the documents relating to the public offering of Common Stock
contemplated hereby; and all other expenses directly incurred by the Company or
the Selling Stockholders in connection with the performance of its obligations
hereunder. Any additional expenses incurred as a result of the sale of the
Shares by the Selling Stockholders will be borne by the Company. The provisions
of this Section 5(a)(i) are intended to relieve the Underwriters from the
payment of the expenses and costs which the Selling Stockholders and the
Company, as the case may be, have agreed to
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pay, but shall not affect any agreement which the Selling Stockholders and the
Company may make, or may have made, for the sharing of any of such expenses and
costs. Such agreements shall not impair the obligations of the Company and the
Selling Stockholders hereunder to the several Underwriters.
(ii) In addition to its other obligations under
Section 5(a)(i) hereof, the Company will pay to you a nonaccountable expense
allowance equal to 3.0% of the gross sales price of the Shares to the public.
This nonaccountable expense allowance with respect to the Firm Shares (including
the Selling Stockholder Shares) shall be paid to you on the Closing Date and the
nonaccountable expenses with respect to the Option Shares shall be paid to you
on the closing of the sale to you of such Option Shares. The Company has
previously paid to you a fee of $50,000 which shall be credited towards the
nonaccountable expense allowance at Closing.
(iii) In addition to its other obligations under
Section 8(a) hereof, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(a) hereof, it will reimburse the Underwriters on a
monthly basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Company's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriters shall promptly return such payment to the Company
together with interest, compounded daily, determined on the basis of the prime
rate (or other commercial lending rate for borrowers of the highest credit
standing) listed from time to time in The Wall Street Journal which represents
the base rate on corporate loans posted by a substantial majority of the
nation's five (5) largest banks (the "Prime Rate"). Any such interim
reimbursement payments which are not made to the Underwriters within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request.
(iv) In addition to their other obligations under
Section 8(b) hereof, each Selling Stockholder agrees that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(b) hereof relating to such Selling
Stockholder, it will reimburse the Underwriters on a monthly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of such Selling Stockholder's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have
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been improper, the Underwriters shall promptly return such payment to the
Selling Stockholders, together with interest, compounded daily, determined on
the basis of the Prime Rate. Any such interim reimbursement payments which are
not made to the Underwriters within thirty (30) days of a request for
reimbursement shall bear interest at the Prime Rate from the date of such
request.
(b) In addition to their other obligations under Section 8(b)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(b) hereof, they will reimburse the
Company and each Selling Stockholder on a monthly basis for all reasonable legal
or other expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and enforceability
of the Underwriters' obligation to reimburse the Company and each Selling
Stockholder for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company and each Selling Stockholder shall promptly return such
payment to the Underwriters together with interest, compounded daily, determined
on the basis of the Prime Rate. Any such interim reimbursement payments which
are not made to the Company and each Selling Stockholder within thirty (30) days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
5(a)(iii) and 5(b) hereof, including the amounts of any requested reimbursement
payments, the method of determining such amounts and the basis on which such
amounts shall be apportioned among the reimbursing parties, shall be settled by
arbitration conducted pursuant to the Code of Arbitration Procedure of the NASD
in Orange County, California (or as close geographically to Orange County,
California as is reasonably practical). Any such arbitration must be commenced
by service of a written demand for arbitration or a written notice of intention
to arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a)(iii) and 5(b)
hereof and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for expenses which is created by the provisions of
Sections 8(a) and 8(b) hereof or the obligation to contribute to expenses which
is created by the provisions of Section 8(d) hereof.
6. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the
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accuracy, as of the date hereof and the Closing Date and any later date on which
Option Shares are to be purchased, as the case may be, of the representations
and warranties of the Company and the Selling Stockholders to the performance by
the Company and each Selling Stockholder of its respective obligations hereunder
and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 2:00 P.M., Los Angeles time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company, and any of the Selling Stockholders or any Underwriter, threatened
by the Commission, and any request of the Commission for additional information
(to be included in the Registration Statement or the Prospectus or otherwise)
shall have been complied with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issuance, sale and delivery of
the Shares, shall have been reasonably satisfactory to Underwriters' Counsel,
and such counsel shall have been furnished with such documents and information
as they may reasonably have requested to enable them to pass upon the matters
referred to in this Section.
(c) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased, as the case may be, the
following opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel,
counsel for the Company and the Selling Stockholders, dated the Closing Date or
such later date on which Option Shares are purchased, addressed to the
Underwriters (and stating that it may be relied upon by Troop, Meisinger,
Steuber & Pasich, LLP, Underwriters' Counsel, in rendering its opinion pursuant
to Section 6(e) of this Agreement) and with reproduced copies or signed
counterparts thereof for each of the Underwriters, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation;
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(ii) The Company has the corporate power and
authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus;
(iii) The Company is duly qualified to do
business as a foreign corporation and is in good standing in
each jurisdiction, if any, in which the ownership or leasing
of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified or
be in good standing would not have a material adverse effect
on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company
taken as a whole. The Prospectus accurately describes any
corporation, association or other entity owned or controlled,
directly or indirectly, by the Company;
(iv) The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus
under the caption "Capitalization" as of the dates stated
therein, the issued and outstanding shares of capital stock of
the Company (including the Selling Stockholder Shares) have
been duly and validly authorized and issued and are fully paid
and nonassessable, and, have not been issued in violation of
or subject to any preemptive right under the Delaware General
Corporation Law ("DGCL"), or to such counsel's knowledge, any
co-sale right, registration right, right of first refusal or
other similar right;
(v) All issued and outstanding shares of capital
stock of AB Plastics Corporation have been duly authorized and
validly issued and are fully paid and nonassessable, and have
not been issued in violation of or subject to any preemptive
right under the [DGCL], or to such counsel's knowledge, any
co-sale right, registration right, right of first refusal or
other similar right and, to such counsel's knowledge, except
as otherwise disclosed in the Prospectus, are owned by the
Company free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest (other than
restrictions on transfer imposed under state and federal
securities laws).
(v) The Firm Shares and the Option Shares,
as the case may be, to be issued by the Company pursuant to
the terms of this Agreement each have been duly authorized
and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly
issued and fully paid and nonassessable, and, will not have
been issued in violation of or subject to any preemptive right
under the DGCL, or to such counsel's knowledge, any co-sale
right, registration right, right of first refusal or other
similar right of stockholders;
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(vi) The Company has the corporate power and
authority to enter into this Agreement and to issue, sell and
deliver to the Underwriters the Shares to be issued and sold
by it hereunder;
(vii) The Company has the corporate power
and authority to enter into the Representative's Warrant
Agreement and to issue, sell and deliver to the Representative
the Representative's Warrants to be issued and sold by it
thereunder;
(viii) Each of this Agreement and the
Representative's Warrant Agreement has been duly authorized by
all necessary corporate action on the part of the Company and
has been duly executed and delivered by the Company and,
assuming due authorization, execution and delivery by you, is
a valid and binding agreement of the Company, enforceable in
accordance with its terms, except insofar as indemnification
provisions may be limited by applicable law and to which
counsel need not express any opinion and except as
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or
affecting creditors rights generally or by general equitable
principles;
(ix) The Registration Statement has become
effective under the Act and, to such counsel's knowledge, no
stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose
have been instituted or are pending or threatened under the
Act;
(x) The Registration Statement and the
Prospectus, and each amendment or supplement thereto (other
than the financial statements (including supporting schedules)
and financial and statistical data included in the
Registration Statement as to which such counsel need express
no opinion), as of the effective date of the Registration
Statement, complied as to form in all material respects with
the requirements of the Act and the applicable Rules and
Regulations;
(xi) The information in the Prospectus under
the caption (a) "Description of Capital Stock" and "Shares
Eligible For Future Sale," to the extent that it constitutes
matters of law or legal conclusions, has been reviewed by such
counsel and complies with all applicable disclosure
requirements of Regulation S-K and is true and correct in all
material respects;
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<PAGE>
(xii) The forms of certificates evidencing
the Common Stock and filed as exhibits to the Registration
Statement comply with Delaware law;
(xiii) The description in the Registration
Statement and the Prospectus of the charter and bylaws of the
Company and of statutes are accurate and fairly present the
information required to be presented by the Act and the
applicable Rules and Regulations;
(xiv) To such counsel's knowledge, there are
no agreements, contracts, leases or documents to which the
Company is a party of a character required to be described or
referred to in the Registration Statement or Prospectus or to
be filed as an exhibit to the Registration Statement that are
not described or referred to therein or filed as required;
(xv) The performance of this Agreement and
the Representative's Warrant Agreement and the consummation of
the transactions herein and therein contemplated will not (a)
result in any violation of the Company's charter or bylaws or
(b) result in a material breach or violation of any of the
terms and provisions of, or constitute a material default
under, any material bond, debenture, note or other evidence of
indebtedness, or under any material lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel
to which the Company is a party or by which its properties are
bound, or any applicable statute, rule or regulation known to
such counsel or, to such counsel's knowledge, any order, writ
or decree of any court, government or governmental agency or
body having jurisdiction over the Company or over any of its
properties or operations;
(xvi) No consent, approval, authorization or
order of or qualification with any court, government or
governmental agency or body having jurisdiction over the
Company or over any of its properties or operations is
necessary in connection with the consummation by the Company
of the transactions herein contemplated, except such as have
been obtained under the Act or such as may be required under
state or other securities or Blue Sky laws in connection with
the purchase and the distribution of the Shares by the
Underwriters;
(xvii) To such counsel's knowledge, there
are no legal or governmental proceedings pending or threatened
against the Company of a character required to be disclosed in
the Registration Statement or the Prospectus by the Act or the
Rules and Regulations or by the Exchange Act or
26
<PAGE>
the applicable rules and regulations of the Commission
thereunder, other than those described therein;
(xvii) The Company is in possession of all
material permits from all governmental agencies or other
authorities having jurisdiction over the Company or AB
Plastics Corporation, or over any of their properties or
operations, and to such counsel's knowledge, neither the
Company nor AB Plastics Corporation is presently (a) in
material violation of its respective charter or bylaws, (b) in
material breach of any applicable permit, statute, rule or
regulation known by us to be applicable to the Company and AB
Plastics Corporation, or (c) to such counsel's knowledge, any
order, writ or decree of any California or federal court or
governmental agency or body having jurisdiction over the
Company or AB Plastics Corporation, or over any of their
properties or operations.
(xviii) The Representative's Warrants have
been duly and validly authorized by the Company and upon
delivery to you in accordance with the Representative's
Warrant Agreement will be duly issued and legal, valid and
binding obligations of the Company;
(xix) The Representative's Warrant Stock to
be issued by the Company pursuant to the terms of the
Representative's Warrant has been duly authorized and, upon
issuance and delivery against payment therefor in accordance
with the terms of the Representative's Warrant Agreement, will
be duly and validly issued and fully paid and nonassessable,
and to such counsel's knowledge, will not have been issued in
violation of or subject to any preemptive right under the
DGCL, or to such counsel's knowledge, any co-sale right,
registration right, right of first refusal or other similar
right of stockholders;
(xx) To such counsel's knowledge, no holders
of Common Stock or other securities of the Company have
registration rights with respect to securities of the Company;
and
(xxi) The offer and sale of all securities
of the Company made within the last three years as set forth
in Item 15 of the Registration Statement were exempt from the
registration requirements of the Securities Act, pursuant to
the provisions set forth in such Item, and from the
registration or qualification requirements of all relevant
state securities laws.
(xxii) Each Selling Stockholder which is not
a natural person has full right, power and authority to enter
into and to perform its
27
<PAGE>
obligations under the Power of Attorney and Custody Agreement
to be executed and delivered by it in connection with the
transactions contemplated herein; the Power of Attorney and
Custody Agreement of each Selling Stockholder that is not a
natural person has been duly authorized by such Selling
Stockholder; the Power of Attorney and Custody Agreement of
each Selling Stockholder has been duly executed and delivered
by or on behalf of such Selling Stockholder; and the Power of
Attorney and Custody Agreement of each Selling Stockholder
constitutes the valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except
as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by
general equitable principles;
(xxiii) Each of the Selling Stockholders has
full right, power and authority to enter into and to perform
its obligations under this Agreement and to sell, transfer,
assign and deliver the Shares to be sold by such Selling
Stockholder hereunder;
(xxiv) This Agreement has been duly
authorized by each Selling Stockholder that is not a natural
person and has been duly executed and delivered by or on
behalf of each Selling Stockholder; and
(xxv) Upon the delivery of and payment for
the Shares as contemplated in this Agreement, each of the
Underwriters will receive valid marketable title to the Shares
purchased by it from such Selling Stockholder, free and clear
of any pledge, lien, security interest, encumbrance, claim or
equitable interest. In rendering such opinion, such counsel
may assume that the Underwriters are without notice of any
defect in the title of the Shares being purchased from the
Selling Stockholders.
In addition, such counsel shall state that such
counsel has participated in conferences with officials and other representatives
of the Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although (except as specifically set forth in paragraphs (xi) and (xiii) above)
they have not verified the accuracy or completeness of the statements contained
in the Registration Statement or the Prospectus, nothing has come to the
attention of such counsel that leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the Closing Date and on any later date on which Option Shares are to
be purchased, the Registration Statement and any amendment or supplement, when
such documents became effective or were filed with the Commission (other than
the financial statements including supporting schedules and other financial and
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<PAGE>
statistical data included in the Registration Statement as to which such counsel
need express no comment) contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or at the Closing Date or any later
date on which the Option Shares are to be purchased, as the case may be, the
Registration Statement, the Prospectus and any amendment or supplement thereto
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as
to questions of law not involving the laws of the United States or the State of
Delaware upon opinions of local counsel, and as to questions of fact upon
representations or certificates of officers of the Company, the Selling
Stockholders, or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person), and of government officials, in which case
its opinion is to state that they are so relying and that they have no knowledge
of any material misstatement or inaccuracy in any such opinion, representation
or certificate. Copies of any opinion, representation or certificate so relied
upon shall be delivered to you, as Representatives of the Underwriters, and to
Underwriters' Counsel.
(e) You shall have received on the Closing
Date and on any later date on which Option Shares are to be purchased, as the
case may be, an opinion of Troop, Meisinger, Steuber & Pasich, LLP in form and
substance satisfactory to you, with respect to the sufficiency of all such
corporate proceedings and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, and the Company
shall have furnished to such counsel such documents as they may have requested
for the purpose of enabling them to pass upon such matters.
(f) You shall have received on the Closing
Date and on any later date on which Option Shares are to be purchased, as the
case may be, a letter from Marcum & Kliegman, LLP, addressed to the Company and
the Underwriters, dated the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, confirming that they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations and based
upon the procedures described in such letter delivered to you concurrently with
the execution of this Agreement (herein called the "Original Letter"), but
carried out to a date not more than five (5) business days prior to the Closing
Date or such later date on which Option Shares are to be purchased, as the case
may be, (i) confirming, to the extent true, that the statements and conclusions
set forth in the Original Letter are accurate as of the Closing Date or such
later date on which Option Shares are to be purchased, as the case may be, and
(ii) setting forth any revisions and additions to the statements and conclusions
set forth in the Original Letter which are necessary to reflect any changes in
the facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent
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<PAGE>
financial statements, data or information. The letter shall not disclose any
change in the condition (financial or otherwise), earnings, operations or
business of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. The Original
Letter from Marcum & Kliegman LLP shall be addressed to or for the use of the
Underwriters in form and substance satisfactory to the Underwriters and shall
(i) represent, to the extent true, that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations, (ii) set forth its opinion with
respect to its examination of the balance sheet of the Company as of April 27,
1997 and related statements of operations, stockholders' equity, and cash flows
for the years ended October 27, 1996, October 29, 1995 and October 30, 1994,
respectively, and (iii) address other matters agreed upon by Marcum & Kliegman,
LLP and you. In addition, you shall have received from Marcum & Kliegman, LLP a
letter addressed to the Company and made available to you for the use of the
Underwriters stating that its review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of its examination of the Company's financial statements as of
_________________, did not disclose any weaknesses in internal controls that
they considered to be material weaknesses.
(g) You shall have received on the Closing
Date and on any later date on which Option Shares are to be purchased, as the
case may be, a certificate of the Company, dated the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be, signed by
the President and Chief Financial Officer of the Company, to the effect that,
and you shall be satisfied that:
(i) The representations and warranties of
the Company in this Agreement are true and correct, as if made
on and as of the Closing Date or any later date on which
Option Shares are to be purchased, as the case may be, and the
Company has complied, in all material aspects, with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied, at or prior to the Closing Date or any
later date on which Option Shares are to be purchased, as the
case may be;
(ii) No stop order suspending the
effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been instituted or,
are pending or threatened under the Act;
(iii) When the Registration Statement became
effective and at all times subsequent thereto up to the
delivery of such certificate, the Registration Statement and
the Prospectus, and any amendments or supplements thereto,
contained all information required to be included therein
30
<PAGE>
by the Act and the Rules and Regulations or the Exchange Act
and the applicable rules and regulations of the Commission
thereunder, as the case may be, and in all respects conformed
to the requirements of the Act and the Rules and Regulations
or the Exchange Act and the applicable rules and regulations
of the Commission thereunder, as the case may be, the
Registration Statement, and any amendment or supplement
thereto, did not and does not include any untrue statement of
a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein
not misleading, the Prospectus, and any amendment or
supplement thereto, did not and does not include any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and,
since the effective date of the Registration Statement, there
has occurred no event required to be set forth in an amended
or supplemented Prospectus that has not been so set forth; and
(iv) Subsequent to the respective dates as
of which information is given in the Registration Statement
and Prospectus, there has not been (a) any material adverse
change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company, (b)
any transaction that is material to the Company, except
transactions entered into in the ordinary course of business,
(c) any obligation, direct or contingent, that is material to
the Company, incurred by the Company, except obligations
incurred in the ordinary course of business, (d) any change in
the capital stock or outstanding indebtedness of the Company
that is material to the Company, (e) any dividend or
distribution of any kind declared, paid or made on the capital
stock of the Company (other than dividends paid in respect of
the Company's preferred stock outstanding on the date of the
Prospectus in amounts not in excess of those described in the
Prospectus), or (f) any loss or damage (whether or not
insured) to the property of the Company which has a material
adverse effect on the condition (financial or otherwise),
earnings, operations or business of the Company.
(h) You shall be satisfied that, and you
shall have received a certificate, dated the Closing Date from the Attorneys for
each Selling Stockholder to the effect that, as of the Closing Date, they have
not been informed that:
(i) The representations and warranties made
by such Selling Stockholder herein are not true or correct in
any material respect on the Closing Date; or
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(ii) Such Selling Stockholder has not
complied with any obligation or satisfied any condition which
is required to be performed or satisfied on the part of such
Selling Stockholder at or prior to the Closing Date.
(i) The Company shall have obtained and
delivered to you an agreement from each officer, director and director-nominee
of the Company, and each beneficial owner of five percent or more of the Common
Stock immediately after the offering contemplated hereby (including each Selling
Stockholder), in writing prior to the date hereof that such person will not,
during the Lock-up Period, effect the Disposition of any Securities now owned or
hereafter acquired directly by such person or with respect to which such person
has or hereafter acquires the power of disposition, otherwise than (i) as a bona
fide gift or gifts, provided the donee or donees thereof agree in writing to be
bound by this restriction, or (ii) with the prior written consent of Cruttenden
Roth Incorporated. The foregoing restriction is expressly agreed to preclude the
holder of the Securities from engaging in any hedging or other transaction which
is designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-up Period, even if such Securities would be disposed
of by someone other than the such holder. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person will have also agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of the Securities held by such person except in compliance with
this restriction.
(j) The Company and the Selling Stockholders
shall have furnished to you such further certificates and documents as you shall
reasonably request, including certificates of officers of the Company and the
Selling Stockholders, or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person), as to the accuracy of the representations
and warranties of the Company and the Selling Stockholders, as to the
performance by the Company each of the Selling Stockholders of its respective
obligations hereunder and as to the other conditions concurrent and precedent to
the obligations of the Underwriters hereunder.
(k) The Representative's Warrant Agreement
shall have been entered into by the Company and you, and the Representative's
Warrants shall have been issued and sold to you pursuant thereto.
All such opinions, certificates, letters and
documents will be in compliance with the provisions hereof only if they are
reasonably satisfactory to Underwriters' Counsel. The Company and the Selling
Stockholders will furnish you with
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such number of conformed copies of such opinions, certificates, letters and
documents as you shall reasonably request.
7. Option Shares.
-----------------
(a) On the basis of the representations,
warranties and agreements herein contained, but subject to the terms and
conditions herein set forth, the Selling Stockholders, severally and not
jointly, in the amounts set forth opposite their names on Schedule B, hereby
grants to the several Underwriters, for the purpose of covering over-allotments
in connection with the distribution and sale of the Firm Shares only, a
nontransferable option to purchase up to an aggregate of 200,000 Option Shares
at the purchase price per share for the Firm Shares set forth in Section 3
hereof. Such option may be exercised by the Representative on behalf of the
several Underwriters on one (1) or more occasions in whole or in part during the
period of forty-five (45) days after the date on which the Firm Shares are
initially offered to the public, by giving written notice to the Selling
Stockholders. The number of Option Shares to be purchased by each Underwriter
upon the exercise of such option shall be the same proportion of the total
number of Option Shares to be purchased by the several Underwriters pursuant to
the exercise of such option as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of Firm
Shares purchased by the several Underwriters (set forth in Schedule A hereto),
adjusted by the Representative in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option
Shares to be purchased by the several Underwriters pursuant to the exercise of
the option granted by this Section 7 shall be made against payment of the
purchase price therefor by the several Underwriters by certified or official
bank check or checks drawn in next-day funds, payable to the order of the
Selling Stockholders (and the Selling Stockholders agree not to deposit any such
check in the bank on which it is drawn until the day following the date of its
delivery to the Company). Such delivery and payment shall take place at the
offices of the Representative, or at such other place as may be agreed upon by
the Representative and the Selling Stockholders (i) on the Closing Date, if
written notice of the exercise of such option is received by the Selling
Stockholders at least three (3) full business days prior to the Closing Date, or
(ii) on a date which shall not be later than the fifth (5th) full business day
following the date the Selling Stockholders receives written notice of the
exercise of such option, if such notice is received by the Selling Stockholders
less than three (3) full business days prior to the Closing Date.
The certificates for the Option Shares to be so
delivered will be made available to you at such office or such other location as
you may reasonably request for inspection at least two (2) full business days
prior to the date of payment and delivery and will be in such names and
denominations as you may request, such request to be made at
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least three (3) full business days prior to such date of payment and delivery.
If the Representative so elects, delivery of the Option Shares may be made by
credit through full fast transfer to the accounts at The Depository Trust
Company designated by the Representatives.
It is understood that you, individually, and not as
the Representative of the several Underwriters, may (but shall not be obligated
to) make payment of the purchase price on behalf of any Underwriter or
Underwriters whose check or checks shall not have been received by you prior to
the date of payment and delivery for the Option Shares to be purchased by such
Underwriter or Underwriters. Any such payment by you shall not relieve any such
Underwriter or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for
in Section 7(a) hereof, the obligations of the several Underwriters to purchase
such Option Shares will be subject (as of the date hereof and as of the date of
payment and delivery for such Option Shares) to the accuracy of and compliance
with the representations, warranties and agreements of the Company and the
Selling Stockholders herein, to the accuracy of the statements of the Company
and officers of the Company and the Selling Stockholders made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Stockholders of their respective obligations hereunder, and to the condition
that all proceedings taken at or prior to the payment date in connection with
the sale and transfer of such Option Shares shall be reasonably satisfactory in
form and substance to you and to Underwriters' Counsel, and you shall have been
furnished with all such documents, certificates and opinions as you may
reasonably request in order to evidence the accuracy and completeness of any of
the representations, warranties or statements, the performance of any of the
covenants or agreements of the Company and the Selling Stockholders or the
compliance with any of the conditions herein contained.
8. Indemnification and Contribution.
------------------------------------
(a) The Company agrees to indemnify and hold harmless
each Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon (i) any breach of any representation, warranty, agreement or covenant of
the Company herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not
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misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and agrees to reimburse each Underwriter for any legal or other
expenses reasonably incurred by it in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage, liability or action arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, such Preliminary Prospectus or the Prospectus, or
any such amendment or supplement thereto, in reliance upon, and in conformity
with, written information relating to any Underwriter furnished to the Company
by such Underwriter, directly or through you, specifically for use in the
preparation thereof and, provided further, that the indemnity agreement provided
in this Section 8(a) with respect to any Preliminary Prospectus shall not inure
to the benefit of any Underwriter from whom the person asserting any losses,
claims, damages, liabilities or actions based upon any untrue statement or
alleged untrue statement of material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall
extend upon the same terms and conditions to, and shall inure to the benefit of,
each person, if any, who controls any Underwriter within the meaning of the Act
or the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Selling Stockholder, severally and not
jointly, agrees to indemnify and hold harmless each Underwriter against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject (including, without limitation, in its capacity
as an Underwriter or as a "qualified independent underwriter" within the meaning
of Schedule E or the Bylaws of the NASD) under the Act, the Exchange Act or
otherwise, specifically including, but not limited to, losses, claims, damages
or liabilities, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any breach of any
representation, warranty, agreement or covenant of such Selling Stockholder
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) any untrue statement or alleged untrue
statement of any material fact contained in any Preliminary Prospectus or the
Prospectus or any amendment or supplement
35
<PAGE>
thereto, or the omission or alleged omission to state therein a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, in the case of subparagraphs (ii)
and (iii) of this Section 8(b) to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company or such Underwriter by such Selling Stockholder, directly or through
such Selling Stockholder's representatives, specifically for use in the
preparation thereof, and agrees to reimburse each Underwriter for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement provided in this Section 8(b) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, damages, liabilities or actions
based upon any untrue statement or alleged untrue statement of a material fact
or omission or alleged omission to state therein a material fact purchased
Shares, if a copy of the Prospectus in which such untrue statement or alleged
untrue statement or omission or alleged omission was corrected had not been sent
or given to such person within the time required by the Act and the Rules and
Regulations, unless such failure is the result of noncompliance by the Company
with Section 4(d) hereof.
The indemnity agreement in this Section 8(b) shall
extend upon the same terms and conditions to, and shall inure to the benefit of,
each person, if any, who controls any Underwriter within the meaning of the Act
or the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which such Selling Stockholder may otherwise have.
(c) Each Underwriter, severally and not jointly,
agrees to indemnify and hold harmless the Company and each Selling Stockholder
against any losses, claims, damages or liabilities, joint or several, to which
the Company or such Selling Stockholder may become subject under the Act, the
Exchange Act or otherwise, specifically including, but not limited to, losses,
claims, damages or liabilities (or actions in respect thereof) insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon (i) any breach of any representation, warranty, agreement
or covenant of such Underwriter herein contained, (ii) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(c)
to the extent, but only to the extent, that such untrue statement or alleged
untrue
36
<PAGE>
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof, and agrees to reimburse the Company and each Selling Stockholder for
any legal or other expenses reasonably incurred by the Company or such Selling
Stockholder in connection with investigating or defending any such loss, claim,
damage, liability or action.
The indemnity agreement in this Section 8(c) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed the Registration Statement and each director
of the Company, each Selling Stockholder, and each person, if any, who controls
the Company or any Selling Stockholder within the meaning of the Act or the
Exchange Act. This indemnity agreement shall be in addition to any liabilities
which each Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified
party under this Section 8 of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 8, notify the indemnifying party in
writing of the commencement thereof but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 8. In case any such
action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it shall elect by
written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party; provided,
however, that if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party which pose a conflict of interest for such counsel, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of the indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with appropriate local counsel)
approved by the indemnifying party representing all the indemnified parties
under Section 8(a), 8(b) or 8(c) hereof who are parties to such action), (ii)
the indemnifying party shall not have employed counsel satisfactory to the
indemnified
37
<PAGE>
party to represent the indemnified party within a reasonable time after notice
of commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
consent shall not be unreasonably withheld. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnification could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such indemnification.
(e) In order to provide for just and
equitable contribution in any action in which a claim for indemnification is
made pursuant to this Section 8 but it is judicially determined (by the entry of
a final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 8 provides for indemnification in such case, all the parties
hereto shall contribute to the aggregate losses, claims, damages or liabilities
to which they may be subject (after contribution from others) in such proportion
so that the Underwriters severally and not jointly are responsible pro rata for
the portion represented by the percentage that the underwriting discount bears
to the initial public offering price, and the Company and the Selling
Stockholders are responsible for the remaining portion, provided, however, that
(i) no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter and
(ii) no person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
is not guilty of such fraudulent misrepresentation. The contribution agreement
in this Section 8(e) shall extend upon the same terms and conditions to, and
shall inure to the benefit of, each person, if any, who controls the
Underwriters or the Company or any of the Selling Stockholders within the
meaning of the Act or the Exchange Act and each officer of the Company and each
Selling Stockholder or officer of any corporate Selling Stockholder who signed
the Registration Statement and each director of the Company.
(f) The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 8, and are fully informed
regarding said provisions. They further acknowledge that the provisions of this
Section 8 fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Act and the Exchange Act. The parties are advised that federal or state
public policy, as
38
<PAGE>
interpreted by the courts in certain jurisdictions, may be contrary to certain
of the provisions of this Section 8, and the parties hereto hereby expressly
waive and relinquish any right or ability to assert such public policy as a
defense to a claim under this Section 8 and further agree not to attempt to
assert any such defense.
(g) The liability of each Selling
Stockholder under the representations, warranties and agreements contained
herein and under the indemnity agreements contained in the provisions of this
Section 8 shall be limited to an amount equal to the initial public offering
price of the Selling Stockholder Shares sold by such Selling Stockholder to the
Underwriters minus the amount of the underwriting discount paid thereon to the
Underwriters by such Selling Stockholder. The Company and such Selling
Stockholders may agree, as among themselves and without limiting the rights of
the Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
(h) The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 8, and are fully informed
regarding said provisions. They further acknowledge that the provisions of this
Section 8 fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Act and the Exchange Act. The parties are advised that federal or state
public policy, as interpreted by the courts in certain jurisdictions, may be
contrary to certain of the provisions of this Section 8, and the parties hereto
hereby expressly waive and relinquish any right or ability to assert such public
policy as a defense to a claim under this Section 8 and further agree not to
attempt to assert any such defense.
9. Representations, Warranties, Covenants and Agreements to Survive
Delivery. All representations, warranties, covenants and agreements of the
Company, the Selling Stockholders and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 8 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any controlling person within the meaning of the Act or the Exchange Act, or
by or on behalf of the Company or any of its officers, directors or controlling
persons, or any Selling Stockholder, within the meaning of the Act or the
Exchange Act, and shall survive the delivery of the Shares to the several
Underwriters hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with
39
<PAGE>
the terms hereof, and if the aggregate number of Firm Shares which such
defaulting Underwriter or Underwriters so agreed but failed to purchase does not
exceed 10% of the Firm Shares, the remaining Underwriters shall be obligated,
severally in proportion to their respective commitments hereunder, to take up
and pay for the Firm Shares of such defaulting Underwriter or Underwriters.
If any Underwriter or Underwriters so default and the
aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm
Shares, the remaining Underwriters shall have the right, but shall not be
obligated, to take up and pay for (in such proportions as may be agreed upon
among them) the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase, the Closing Date
shall be postponed for twenty-four (24) hours to allow the several Underwriters
the privilege of substituting within twenty-four (24) hours (including
non-business hours) another underwriter or underwriters (which may include any
nondefaulting Underwriter) satisfactory to the Company. If no such underwriter
or underwriters shall have been substituted as aforesaid by such postponed
Closing Date, the Closing Date may, at the option of the Company, be postponed
for a further twenty-four (24) hours, if necessary, to allow the Company the
privilege of finding another underwriter or underwriters, satisfactory to you,
to purchase the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If it shall be arranged for the remaining
Underwriters or substituted underwriter or underwriters to take up the Firm
Shares of the defaulting Underwriter or Underwriters as provided in this Section
10, (i) the Company shall have the right to postpone the time of delivery for a
period of not more than seven (7) full business days, in order to effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other documents or arrangements, and the Company
agrees promptly to file any amendments to the Registration Statement or
supplements to the Prospectus which may thereby be made necessary, and (ii) the
respective number of Firm Shares to be purchased by the remaining Underwriters
and substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and pay
for all such Firm Shares so agreed to be purchased by the defaulting Underwriter
or Underwriters or substitute another underwriter or underwriters as aforesaid
and the Company shall not find or shall not elect to seek another underwriter or
underwriters for such Firm Shares as aforesaid, then this Agreement shall
terminate.
In the event of any termination of this Agreement pursuant to
the preceding paragraph of this Section 10, the Company and the Selling
Stockholders shall not be liable to any Underwriter (except as provided in
Sections 4(j), 5 and 8 hereof) nor shall any Underwriter (other than an
Underwriter who shall have failed, otherwise than for some reason permitted
under this Agreement, to purchase the number of Firm Shares agreed by
40
<PAGE>
such Underwriter to be purchased hereunder, which Underwriter shall remain
liable to the Company, the Selling Stockholders and the other Underwriters for
damages, if any, resulting from such default) be liable to the Company or any
Selling Stockholder (except to the extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any
person substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
-----------------------------------------------------
(a) This Agreement shall become effective at the earlier of
(i) 6:30 A.M., Los Angeles time, on the first full business day following the
effective date of the Registration Statement, or (ii) the time of the initial
public offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set forth
in Section 12 before the time this Agreement becomes effective, you, as
Representative of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(j), 5 and 8 hereof.
(b) You, as Representative of the several
Underwriters, shall have the right to terminate this Agreement by giving notice
as hereinafter specified at any time at or prior to the Closing Date or on or
prior to any later date on which Option Shares are to be purchased, as the case
may be, (i) if the Company shall have failed, refused or been unable to perform
any agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled is not fulfilled,
including, without limitation, any change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
from that set forth in the Registration Statement or Prospectus, which, in your
sole judgment, is material and adverse, or (ii) if additional material
governmental restrictions, not in force and effect on the date hereof, shall
have been imposed upon trading in securities generally or minimum or maximum
prices shall have been generally established on the New York Stock Exchange or
on the American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
exchange or in the over the counter market by the NASD, or if a banking
moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial
41
<PAGE>
markets as in your reasonable judgment makes it inadvisable or impracticable to
proceed with the offering, sale and delivery of the Shares, or (v) if there
shall have been an outbreak or escalation of hostilities or of any other
insurrection or armed conflict or the declaration by the United States of a
national emergency which, in the reasonable opinion of the Representatives,
makes it impracticable or inadvisable to proceed with the public offering of the
Shares as contemplated by the Prospectus. Any termination pursuant to any of
subparagraphs (ii) through (v) above shall be without liability of any party to
any other party except as provided in Sections 4(j), 5 and 8 hereof. In the
event of termination pursuant to subparagraph (i) above, the Company shall also
remain obligated to pay costs and expenses pursuant to Sections 4(i), 5 and 8
hereof.
If you elect to prevent this Agreement from becoming effective
or to terminate this Agreement as provided in this Section 11, you shall
promptly notify the Company by telephone, telecopy or telegram, in each case
confirmed by letter. If the Company shall elect to prevent this Agreement from
becoming effective, the Company shall promptly notify you by telephone, telecopy
or telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o Cruttenden Roth Incorporated, 18301 Von Karman,
Suite 100, Irvine, California 92715, telecopier number (714) 852-9603,
Attention: James M. Stearns, if sent to the Company or one or more of the
Selling Stockholders, such notice shall be mailed, delivered, telegraphed (and
confirmed by letter) or telecopied (and confirmed by letter) to 15730 S.
Figueroa Street, Gardena, California 90248, (310) 324-8287, Attention: Michael
A. Gibbs.
13. Parties. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters, the Company and the Selling Stockholders
and their respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or corporation, other than the parties hereto and their
respective executors, administrators, successors and assigns, and their
controlling persons within the meaning of the Act or the Exchange Act, officers
and directors referred to in Section 8 hereof, any legal or equitable right,
remedy or claim in respect of this Agreement or any provisions herein contained,
this Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of the parties hereto and their
respective executors, administrators, successors and assigns and said
controlling persons and said officers and directors, and for the benefit of no
other person or corporation. No purchaser of any of the Shares from any
Underwriter shall be construed a successor or assign by reason merely of such
purchase. The Agreement constitutes the entire agreement and understanding of
the parties with respect to the subject matter hereof.
42
<PAGE>
In all dealings with the Company and the Selling Stockholders
under this Agreement, you shall act on behalf of each of the several
Underwriters, and the Company and the Selling Stockholders shall be entitled to
act and rely upon any statement, request, notice or agreement made or given by
you on behalf of each of the several Underwriters.
14. Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California.
15. Counterparts. This Agreement may be signed in several counterparts,
each of which will constitute an original.
If the foregoing correctly sets forth the understanding among
the Company, the Selling Stockholders and the several Underwriters, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the Selling Stockholders
and the several Underwriters.
Very truly yours,
COMPASS PLASTICS AND TECHNOLOGIES, INC.
By:
------------------------------------------
Name:
------------------------------------
Title:
------------------------------------
SELLING STOCKHOLDERS
By:
--------------------------------------------
Attorney in Fact for the Selling Stockholders
named in Schedule B hereto
Accepted as of the date first above written:
CRUTTENDEN ROTH INCORPORATED
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By: CRUTTENDEN ROTH INCORPORATED
43
<PAGE>
By:
------------------------------------------
Name:
------------------------------------
Title:
------------------------------------
44
<PAGE>
SCHEDULE A
Number of Firm
Shares
Underwriters To be Purchased
- ------------ ---------------
- -
Cruttenden Roth Incorporated
--------
Total ========
45
<PAGE>
SCHEDULE B
Number of
Selling
Stockholder
Shares
Name of Selling Stockholder
---------------------------
To Be Sold
- ----------
Private Equity Partners, LP...................................................
Sirrom Investments............................................................
Total....................................................................
<PAGE>
Exhibit 16.1
BLOCK, PLANT, EISNER, FIORITO & BELAK-BERGER
August 11, 1997
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Compass Plastics & Technologies, Inc. -- Registration Statement on
Form S-1, as amended (No. 333-28741)
-------------------------------------------------------------------
Dear Sirs:
We have read the third paragraph under the caption "Experts" in the above
referenced Registration Statement filed with the Securities and Exchange
Commission and are in agreement with the statements contained therein.
BLOCK, PLANT, EISNER, FIORITO & BELAK-BERGER
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors of
Compass Plastics & Technologies, Inc.
(formerly AB Plastics Holding Corporation)
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-1), and related prospectus of Compass Plastics &
Technologies, Inc. (formerly AB Plastics Holding Corporation) and to the
incorporation by reference therein of our report dated December 31, 1996
(except for Note 12, as to which the date is July 18, 1997) with respect to the
consolidated financial statements as of October 27, 1996 and for the
forty-eight weeks ended September 27, 1996 ("Predecessor") and for the four
weeks ended October 27, 1996 ("Company").
/s/ Marcum & Kliegman LLP
- -------------------------------
Marcum & Kliegman LLP
Woodbury, New York
August 11, 1997
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
Board of Directors
AB Plastics Corporation
Gardena, California
We consent to the incorporation by reference in this registration statement on
Form S-1 of our report dated June 19, 1997, relating to the balance sheet of AB
Plastics Corporation (an S Corporation) as of October 29, 1995 and the related
statements of operations, shareholders' equity and cash flows for the fifty-two
weeks ended October 29, 1995 and October 30, 1994 and to the reference to our
firm under the heading "Experts" in the Prospectus.
/s/ Block, Plant, Eisner, Fiorito & Belak-Berger
------------------------------------------------
BLOCK, PLANT, EISNER, FIORITO & BELAK-BERGER
Encino, California
August 11, 1997
