<PAGE>
As filed with the Securities and Exchange Commission on July 22, 1997
Registration No. 333-28741
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
Amendment No. 2
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. [ ]
---------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Maximum Aggregate
Title of Each Class of Amount to be Offering Price Offering Amount of
Securities to be Registered Registered(1) Per Share(2) Price(2) Registration Fee
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 per value ......... 1,533,333 $ 9.50 $14,566,664 $ 4,414.14
- -----------------------------------------------------------------------------------------------------------
Representative's Warrants to Purchase
Common Stock ........................ 133,333 $.001 $ 133 $ 0.04
- -----------------------------------------------------------------------------------------------------------
Common Stock issuable upon exercise of
Representative's Warrants ............ 133,333(3) $11.40 $ 1,519,996 $ 460.61
- -----------------------------------------------------------------------------------------------------------
Total .............................. $16,086,793 $ 4,874.79(4)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes 200,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457.
(3) Consists of shares of Common Stock issuable upon exercise of
Representative's Warrants issued to the Representative of the several
Underwriters.
(4) $4,002.46 of such registration fee has been previously paid.
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 JULY 22, 1997
PROSPECTUS
1,333,333 Shares
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."
---------------------
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>
<PAGE>
(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 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]
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
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 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
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(7) .................. -- -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The Company Predecessor The 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 2,113 1,021 1,456
--------- --------- --------- ---------
Operating income ............ 398 2,480 1,051 2,395
Net interest expense ......... 99 1,200 226 451
Other (income) expense ...... 19 83 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 $ 0.23 $ 0.33
Weighted average number of
shares outstanding(4) ...... 3,600,000 3,600,000 3,600,000 3,600,000
Supplemental pro forma net
income per share(5) ...... 0.05 0.47 -- 0.33
Other Data:
Depreciation and amortiza-
tion ........................ $ 82 $ 908 $ 492 $ 636
EBITDA (6) .................. 480 3,317 1,543 3,031
Cash flows from operating
activities .................. 103 3,166 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(7) .................. 0.05 0.20 -- 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 21,486
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 Statement 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 $598,000 (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 may from time to time 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 (other than Messrs. Gorman and Gibbs) will be selling 10% of the
shares of Common Stock offered hereby (approximately 22% if the Underwriters'
over-allotment option is exercised in full). 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 $6.51. 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 $2.49 per share.
This represents an immediate increase in net tangible book value of $2.00 per
share to existing stockholders and an immediate dilution of $6.51 per share to
new investors. The following table illustrates this per share dilution:
<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 ......................................................... 2.00
------
Pro forma net tangible book value per share after this offering ...... 2.49
---------
Dilution per share to new investors .................................... $ 6.51(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>
Shares Purchased Total Consideration Average
----------------------- ------------------------- 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(7) .................. -- -- -- -- --
</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 2,113 1,021 1,456
--------- --------- --------- ---------
Operating income ............ 398 2,480 1,051 2,395
Net interest expense ......... 99 1,200 226 451
Other (income) expense ...... 19 83 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 $ 0.23 $ 0.33
Weighted average number of
shares outstanding(4) ...... 3,600,000 3,600,000 3,600,000 3,600,000
Supplemental pro forma net
income per share(5) ...... 0.05 0.47 -- 0.33
Other Data:
Depreciation and amortiza-
tion ........................ $ 82 $ 908 $ 492 $ 636
EBITDA (6) .................. 480 3,317 1,543 3,031
Cash flows from operating
activities .................. 103 3,166 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(7) .................. 0.05 0.20 -- 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
<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 18,258 20,194 19,470 21,486
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 7,638 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 Statement 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."
<PAGE>
(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 $598,000 (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 STATEMENT OF OPERATIONS
(in thousands, except share and per share data)
The following pro forma statement of operations (unaudited) for the 52
weeks ended October 27, 1996 of AB Plastics (October 30, 1995 to September 27,
1996) and the Company (September 28, 1996 to October 27, 1996 ("Compass")), 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>
Compass AB Plastics Combined Adjustments As Adjusted(6)
--------- ------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Sales .................................... $39,345 39,345 $ 39,345
Cost of sales ........................... 34,752 34,752 34,752
------- --------- ---------
Gross profit ........................... 4,593 4,593 4,593
Operating expenses ..................... $ 6 2,107 2,113 2,113
------ ------- --------- ---------
Operating income ........................ (6) 2,486 2,480 2,480
Other expense ........................... (51) (448) (499) (1) $495 (1,283)
(2) 183
(3) 46
(4) 60
---------
Net income before income taxes ......... (57) 2,038 1,981 1,197
Income tax (expense) benefit ............ 25 (132) (107) (5) (419) (526)
------ ------- --------- ---------
Net income .............................. ($ 32) $ 1,900 $ 1,874 $ 671
====== ========= =========
Net income per share ..................... $ 0.52 $ 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, 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.
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 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.
23
<PAGE>
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.
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.
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.
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<PAGE>
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."
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
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<PAGE>
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 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
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
plastic injection
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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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.
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 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.
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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.
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.
33
<PAGE>
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.
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.
34
<PAGE>
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:
<PAGE>
<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
<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 68,019 189,743
President of the
Company and Chief
Executive Officer of AB
Plastics
James S. Adams ......... 0 15,687 43,759
President of AB Plastics
Jawed Ghias ............ 0 54,415 151,795
Vice President-
Manufacturing of AB
Plastics
</TABLE>
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 a
minimum of 66-2/3% of his business and professional time to the Company for a
period of 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 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. Both individuals have also agreed not to compete with the Company for
the period through September 2001 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 entitled to receive
an annual bonus, with Mr. Frink entitled to receive up to $80,000 for achieving
target performance levels based on sales and diversification of AB Plastics'
customer base, with a minimum of $20,000. Mr. Ghias is entitled to
41
<PAGE>
participate in AB Plastics' bonus pool 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 entitled to a bonus of $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.
42
<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 Prior to Owned After the
the Offering(2) Number of Offering(2)
---------------------------- Shares --------------------------
Name and Address of Beneficial Owner(1) Number Percent Offered(3) Number Percent
- ------------------------------------------------ ---------------- --------- ----------------- ---------------- --------
<S> <C> <C> <C> <C> <C>
North Atlantic Smaller Companies
Investment Trust plc ........................ 787,500 22.1% 0 787,500 16.5%
Private Equity Partners, L.P.(4) ............... 500,000 14.0 51,333 448,667 9.4
Sirrom Investments, Inc ........................ 800,000(5) 22.5 82,000 718,000 15.1
Geoffrey J.F. Gorman ........................... 700,808(6) 19.7 0 649,475(6) 13.6
Michael A. Gibbs .............................. 483,333(7) 13.6 0 474,778(7) 10.0
James S. Adams ................................. 46,124(8) 1.3 0 46,124 1.0
Stephen M. Adams .............................. 23,064(9) * 0 23,064 *
Christopher H.B. Mills ........................ 787,500(10) 22.1 0 787,500 16.5
All directors and executive officers as a group
(8 persons) ................................. 1,957,496 55.0 51,333(11) 1,906,163 40.0
</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. 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 prepay their
respective notes to the extent of $1.00 of principal for each full share sold,
transferred or disposed by them, plus accrued and unpaid interest thereon to
the date of sale, transfer or disposition.
In October 1996, the Company entered into a management agreement 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.
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."
45
<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), redemption price
or prices, conversion rights and liquidation preferences of the shares
constituting any series,
46
<PAGE>
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
66 2/3% 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.
47
<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.
48
<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.
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.
49
<PAGE>
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.
At the request of the Company, the Underwriters have reserved up to
130,000 shares of Common Stock from this offering for sale at the public
offering price to certain stockholders of the Company, other than the Selling
Stockholders. The number of shares available for sale to the general public
will be reduced to the extent that such reserved shares are purchased by any
such stockholders.
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 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
50
<PAGE>
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.
51
<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 INF
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 ........................... $ 2,480,065 $ 2,034,526
Other expense ................................. $ 1,229,059 $ 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.
<PAGE>
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 to
purchase up to 200,000 shares (the "Warrant") of the Company's common stock at
an exercise price of $.01 per share (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.
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 October 31, 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 October 27, 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, September October
1994 1995 April 28, 1996 27, 1996 27, 1996 April 27,1997
------------- ------------- ---------------- ------------------ ------------- --------------
<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>
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 October 27, 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).
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 the stock options and warrants granted to such executive officers
will be exercised.
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 prepay their respective notes to the extent of $1.00 of principal
for each full share sold, transferred or disposed by them, plus accrued and
unpaid interest thereon to the date of sale, transfer or disposition.
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 on the date of grant. 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 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>
<PAGE>
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 vested over a three-year period at 72,072 shares
per year (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 Statement 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 ............... 46
Shares Eligible for Future Sale ......... 48
Underwriting ........................... 49
Legal Matters ........................... 50
Experts ................................. 50
Additional Information .................. 50
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.
<TABLE>
<S> <C>
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
============
</TABLE>
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:
<TABLE>
<CAPTION>
Name of Purchaser Number of Shares
----------------- -----------------
<S> <C>
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
</TABLE>
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.
** To be filed by amendment.
(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. 2 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 21st day of July 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 July 21, 1997
- ------------------------
Geoffrey J.F. Gorman
/s/Michael A. Gibbs President and Director (Principal Executive July 21, 1997
- ------------------------
Michael A. Gibbs Officer)
/s/Paul J. Iacono* Vice President-Finance (Principal Financial July 21, 1997
- ------------------------
Paul J. Iacono or Accounting Officer)
/s/Christopher H.B. Mills* Director July 21, 1997
- ------------------------
Christopher H.B. Mills
/s/Jay M. Swanson* Director July 21, 1997
- ------------------------
Jay M. Swanson
</TABLE>
*By: /s/Michael A. Gibbs
- ------------------------
Michael A. Gibbs
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<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.
** To be filed by amendment.
<PAGE>
C- Incorporated Under the Laws of the State of Delaware
COMPASS PLASTICS & TECHNOLOGIES, INC.
Total Authorized Issue 25,000,000 Shares
20,000,000 Shares $.0001 Par Value 5,000,000 Shares $.0001 Par Value
Common Stock Preferred Stock
This is to certify that ___________________________________ is the
owner of
_________________________________________________________________________
Fully Paid and Non-Assessable Shares of the Common Stock of
COMPASS PLASTICS & TECHNOLOGIES, INC.
transferable only on the books of the Corporation by the holder hereof, in
person or by duly authorized Attorney upon surrender of this Certificate
properly endorsed.
Witness, the seal of the Corporation and the signatures of its duly authorized
officers.
Dated
__________________________________ __________________________________
President
<PAGE>
Compass Plastics & Technologies, Inc.
1997 Stock Option and Performance Award Plan
INTRODUCTION
Compass Plastics & Technologies, Inc., a Delaware corporation
(hereinafter referred to as the "Corporation"), hereby establishes an incentive
compensation plan to be known as the "Compass Plastics & Technologies, Inc. 1997
Stock Option and Performance Award Plan" (hereinafter referred to as the
"Plan"), as set forth in this document. The Plan permits the grant of
Non-Qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights,
Restricted Stock, Performance Units and Performance Shares.
The Plan shall become effective on [DATE]. However, it shall
be rendered null and void and have no effect, and all Plan Awards granted
hereunder shall be canceled, if the Plan is not approved by a majority vote of
the Corporation's stockholders within twelve (12) months of the date the Plan is
adopted by the Corporation's Board of Directors.
The purpose of the Plan is to promote the success and enhance
the value of the Corporation by linking the personal interests of Participants
to those of the Corporation's stockholders by providing Participants with an
incentive for outstanding performance. The Plan is further intended to assist
the Corporation in its ability to motivate, and retain the services of,
Participants upon whose judgment, interest and special effort the successful
conduct of its operations is largely dependent.
The Plan also provides pay systems that support the
Corporation's business strategy and emphasizes pay-for-performance by tying
reward opportunities to carefully determined and articulated performance goals
at corporate, operating unit, business unit and/or individual levels.
<PAGE>
DEFINITIONS
For purposes of this Plan, the following terms shall be
defined as follows unless the context clearly indicates otherwise:
(a) "Award Agreement" shall mean the written agreement,
executed by an appropriate officer of the Corporation, pursuant to which a Plan
Award is granted.
(b) "Board of Directors" shall mean the Board of Directors of
the Corporation.
(c) "Code" shall mean the Internal Revenue Code of 1986, as
amended, and the rules and regulations thereunder.
(d) "Committee" shall mean the Board of Directors of the
Corporation or any committee of two or more persons designated by the Board of
Directors to serve as the Committee.
(e) "Common Stock" shall mean the common stock, par value
$0.01 per share, of the Corporation.
(f) "Consultant" shall mean an individual who is in a
Consulting Relationship with the Corporation or any Parent of Subsidiary.
(g) "Consulting Relationship" shall mean the relationship that
exists between an individual and the Corporation (or any Parent or Subsidiary)
if (i) such individual or (ii) any entity of which such individual is an
executive officer or owns a substantial equity interest has entered into a
written consulting contract with the Corporation or any Parent or Subsidiary.
(h) "Corporation" shall mean Compass Plastics & Technologies,
Inc., a Delaware corporation.
(i) "Disability" shall have the same meaning as the term
"permanent and total disability" under Section 22(e)(3) of the Code.
(j) "Employee" shall mean a common-law employee of the Company
or of any Parent or Subsidiary.
(k) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder.
(l) "Executive" means an employee of the Corporation or of any
Parent or Subsidiary whose compensation is subject to the deduction limitations
set forth under Code Section 162(m).
(m) "Fair Market Value" of the Corporation's Common Stock on a
Trading Day
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shall mean the last reported sale price for Common Stock or, in case no such
reported sale takes place on such Trading Day, the average of the closing bid
and asked prices for the Common Stock for such Trading Day, in either case on
the principal national securities exchange on which the Common Stock is listed
or admitted to trading, or if the Common Stock is not listed or admitted to
trading on any national securities exchange, but is traded in the
over-the-counter market, the closing sale price of the Common Stock or, if no
sale is publicly reported, the average of the closing bid and asked quotations
for the Common Stock, as reported by the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") or any comparable system or, if
the Common Stock is not listed on NASDAQ or a comparable system, the closing
sale price of the Common Stock or, if no sale is publicly reported, the average
of the closing bid and asked prices, as furnished by two members of the National
Association of Securities Dealers, Inc. who make a market in the Common Stock
selected from time to time by the Corporation for that purpose. In addition, for
purposes of this definition, a "Trading Day" shall mean, if the Common Stock is
listed on any national securities exchange, a business day during which such
exchange was open for trading and at least one trade of Common Stock was
effected on such exchange on such business day, or, if the Common Stock is not
listed on any national securities exchange but is traded in the over-the-counter
market, a business day during which the over-the-counter market was open for
trading and at least one "eligible dealer" quoted both a bid and asked price for
the Common Stock. An "eligible dealer" for any day shall include any
broker-dealer who quoted both a bid and asked price for such day, but shall not
include any broker-dealer who quoted only a bid or only an asked price for such
day. In the event the Corporation's Common Stock is not publicly traded, the
Fair Market Value of such Common Stock shall be determined by the Committee in
good faith.
(n) "Freestanding SAR" shall mean an SAR that is granted
independently of any Option.
(o) "Good Cause" shall have the equivalent meaning set forth
in the employment agreement between the Participant and the Corporation or
Parent or Subsidiary or, in the absence of such agreement, such term shall mean
(i) a Participant's willful or gross misconduct or willful or gross negligence
in the performance of his duties for the Corporation or for any Parent or
Subsidiary after prior written notice of such misconduct or negligence and the
continuance thereof for a period of 30 days after receipt by such Participant of
such notice, (ii) a Participant's intentional or habitual neglect of his duties
for the Corporation or for any Parent or Subsidiary after prior written notice
of such neglect, (iii) a Participant's theft or misappropriation of funds of the
Corporation or of any Parent or Subsidiary or commission of a felony or (iv) the
direct or indirect breach by the Participant of the terms of a related
consulting contract with the Corporation or any Parent or Subsidiary.
(p) "Incentive Stock Option" shall mean a stock option
satisfying the requirements for tax-favored treatment under Section 422 of the
Code.
(q) "Non-Qualified Option" shall mean a stock option which
does not satisfy the requirements for, or which is not intended to be eligible
for, tax-favored treatment under Section 422 of the Code.
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(r) "Option" shall mean an Incentive Stock Option or a
Non-Qualified Stock Option granted pursuant to the provisions of Section V
hereof.
(s) "Optionee" shall mean a Participant who is granted an
Option under the terms of this Plan.
(t) "Outside Directors" shall mean members of the Board of
Directors of the Corporation who are classified as "outside directors" under
Section 162(m) of the Code.
(u) "Parent" shall mean a parent corporation of the
Corporation within the meaning of Section 424(e) of the Code.
(v) "Participant" shall mean any Employee or other person
participating under the Plan.
(w) "Performance Share" shall mean a Plan Award granted
pursuant to the provisions of Section VII hereof, with each such Award being
denominated in terms of one share of Common Stock and nominally being based upon
the performance of the Corporation's Common Stock, or any other factor as
determined by the Committee.
(x) "Performance Unit" shall mean a Plan Award granted
pursuant to the provisions of Section VII hereof, which Award may be based upon
any performance factor established by the Committee, as set forth under such
Section.
(y) "Plan Award" shall mean an Option, Performance Share,
Performance Unit, share of Restricted Stock or Stock Appreciation Right granted
pursuant to the terms of this Plan.
(z) "Restricted Stock" shall mean a grant of one or more
shares of Common Stock subject to certain restrictions as provided under Section
VII hereof.
(aa) "Securities Act" shall mean the Securities Act of 1933,
as amended, and the rules and regulations thereunder.
(bb) "Stock Appreciation Right" or "SAR" shall mean a right,
granted alone or in connection with a related Option, designated as a SAR, to
receive a payment on the day the right is exercised, pursuant to the terms of
Section VI hereof. Each SAR shall be denominated in terms of one share of Common
Stock.
(cc) "Subsidiary" shall mean a subsidiary corporation of the
Corporation within the meaning of Section 424(f) of the Code.
(dd) "Tandem SAR" shall mean an SAR that is granted in
connection with a related Option, the exercise of which shall require forfeiture
of the right to purchase a share of Common Stock under the related Option (and
when a share of
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Common Stock is purchased under such Option, the Tandem SAR being similarly
canceled).
(ee)"Termination of Consulting Relationship" shall mean the
cessation, abridgment or termination of a Consultant's Consulting Relationship
with the Corporation or any Parent or Subsidiary as a result of (i) the
Consultant's death or Disability (ii) the cancellation, annulment, expiration,
termination or breach of the written consulting contract between the Corporation
(or any Parent or Subsidiary) and the Consultant (or any other entity) giving
rise to the Consulting Relationship or (iii) if the written consulting contract
is not directly between the Corporation (or any Parent or Subsidiary) and the
Consultant, the Consultant's termination of service with, or sale of all or
substantially all of his equity interest in, the entity which has entered into
the written consulting contract with the Corporation, Parent or Subsidiary.
II
ADMINISTRATION
The Plan shall be administered by the Committee, which shall
be composed solely of at least two Non-Employee Directors, as defined in Rule
16b-3(b)(3) promulgated under the Exchange Act and who also qualify as "Outside
Directors". Subject to the provisions of the Plan, the Committee may establish
from time to time such regulations, provisions, proceedings and conditions of
awards which, in its sole opinion, may be advisable in the administration of the
Plan. A majority of the Committee shall constitute a quorum, and, subject to the
provisions of Section IV of the Plan, the acts of a majority of the members
present at any meeting at which a quorum is present, or acts approved in writing
by a majority of the Committee, shall be the acts of the Committee as a whole.
III
SHARES AVAILABLE
Subject to the adjustments provided in Section IX of the Plan,
the aggregate number of shares of the Common Stock which may be granted for all
purposes under the Plan shall be eight hundred thousand (800,000) shares. Shares
of Common Stock underlying awards of securities (derivative or not) and shares
of Common Stock awarded hereunder (whether or not on a restricted basis) shall
be counted against the limitation set forth in the immediately preceding
sentence and may be reused to the extent that the related Plan Award to any
individual is settled in cash, expires, is terminated unexercised, or is
forfeited. To the extent that a Stock Appreciation Right related to an Option is
exercised, such Option shall be deemed to have been exercised. Common Stock
granted to satisfy Plan Awards under the Plan may be authorized and unissued
shares of the Common Stock, issued shares of such Common Stock held in the
Corporation's treasury or shares of Common Stock acquired on the open market.
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IV
ELIGIBILITY
Officers and key employees of the Corporation, or of any
Parent or Subsidiary, who are regularly employed on a salaried basis as common
law employees Consultants, and directors of the Corporation or of any Parent or
Subsidiary who are not Employees, shall be eligible to participate in the Plan.
Where appropriate under this Plan, directors who are not Employees shall be
referred to as "employees" and their service as directors as "employment".
V
AUTHORITY OF COMMITTEE
The Plan shall be administered by, or under the direction of,
the Committee, which shall administer the Plan so as to comply at all times with
Section 16 of the Exchange Act and the rules and regulations promulgated
thereunder, to the extent such compliance is required, and shall otherwise have
plenary authority to interpret the Plan and to make all determinations specified
in or permitted by the Plan or deemed necessary or desirable for its
administration or for the conduct of the Committee's business. Subject to the
provisions of Section XIII hereof, all interpretations and determinations of the
Committee may be made on an individual or group basis and shall be final,
conclusive and binding on all interested parties. Subject to the express
provisions of the Plan, the Committee shall have authority, in its discretion,
to determine the persons to whom Plan Awards shall be granted, the times when
such Plan Awards shall be granted, the number of Plan Awards, the purchase price
or exercise price of each Plan Award (if applicable), the period(s) during which
a Plan Award shall be exercisable (whether in whole or in part), the
restrictions to be applicable to Plan Awards and the other terms and provisions
thereof (which need not be identical). In addition, the authority of the
Committee shall include, without limitation, the following:
(a) Financing. The arrangement of temporary financing for an
Optionee by registered broker-dealers, under the rules and regulations of the
Federal Reserve Board, for the purpose of assisting an Optionee in the exercise
of an Option, such authority to include the payment by the Corporation of the
commissions of the broker-dealer;
(b) Procedures for Exercise of Option. The establishment of
procedures for an Optionee (i) to exercise an Option by payment of cash, (ii) to
have withheld from the total number of shares of Common Stock to be acquired
upon the exercise of an Option that number of shares having a Fair Market Value,
which, together with such cash as shall be paid in respect of fractional shares,
shall equal the Option exercise price of the total number of shares of Common
Stock to be acquired, (iii) to exercise all or a portion of an Option by
delivering that number of shares of Common Stock already owned by him having a
Fair Market Value which shall equal the Option exercise price for the portion
exercised and, in cases where an Option is not exercised in its entirety, and
subject to the requirements of the Code, to permit the Optionee to deliver the
shares of Common Stock thus acquired by him in payment of shares of Common Stock
to be received pursuant to the exercise of additional portions of such Option,
the effect of which shall be that an Optionee can in sequence utilize such newly
acquired shares of Common Stock in payment of the exercise price of the entire
Option, together with such cash as shall be paid in respect of fractional shares
and (iv) to engage in any form of "cashless" exercise.
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(c) Withholding. The establishment of a procedure whereby a
number of shares of Common Stock or other securities may be withheld from the
total number of shares of Common Stock or other securities to be issued upon
exercise of an Option, Stock Appreciation Right or other grant or award, as
applicable, or for the tender of shares of Common Stock owned by any Participant
to meet any obligation of withholding for taxes incurred by the Participant upon
such exercise.
VI
STOCK OPTIONS
The Committee shall have the authority, in its discretion, to
grant Incentive Stock Options or to grant Non-Qualified Stock Options or to
grant both types of Options. Notwithstanding anything contained herein to the
contrary, an Incentive Stock Option may be granted only to common law employees
of the Corporation or of any Parent or Subsidiary now existing or hereafter
formed or acquired, and not to any director or officer who is not also such a
common law employee. In order for an Option grant to satisfy the
"performance-based compensation" exemption to the deduction limitation under
Code Section 162(m), the maximum number of shares of Common Stock subject to
Options which may be granted to any single Executive during any one calendar
year, beginning with the year grants under this Plan first become subject to
such deduction limitations, is 300,000. The terms and conditions of the Options
shall be determined from time to time by the Committee; provided, however, that
the Options granted under the Plan shall be subject to the following:
(a) Exercise Price. The Committee shall establish the exercise
price at the time any Option is granted at such amount as the Committee shall
determine; provided, however, that the exercise price for each share of Common
Stock purchasable under any Option which is intended to satisfy the
performance-based compensation exemption to the deduction limitation under
Section 162(m) of the Code or any Incentive Stock Option granted hereunder shall
be such amount as the Committee shall, in its best judgment, determine to be not
less than one hundred percent (100%) of the Fair Market Value per share of
Common Stock at the date the Option is granted; and provided, further, that in
the case of an Incentive Stock Option granted to a person who, at the time such
Incentive Stock Option is granted, owns shares of stock of the Corporation or of
any Parent or Subsidiary which possess more than ten percent (10%) of the total
combined voting power of all classes of shares of stock of the Corporation or of
any Parent or Subsidiary, the exercise price for each share of Common Stock
shall be such amount as the Committee, in its best judgment, shall determine to
be not less than one hundred ten percent (110%) of the Fair Market Value per
share of Common Stock at the date the Option is granted. The exercise price will
be subject to adjustment in accordance with the provisions of Section IX of the
Plan.
(b) Payment of Exercise Price. The price per share of Common
Stock with respect to each Option shall be payable at the time the Option is
exercised. Such price shall be payable in cash or pursuant to any of the methods
set forth in Sections IV(a) or (b) hereof, as determined by the Participant.
Shares of Common Stock delivered to the Corporation in payment of the exercise
price shall be valued at the Fair Market Value of the Common Stock on the date
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preceding the date of the exercise of the Option.
(c) Exercisability of Options. Except as provided in Section
V(e) hereof, each Option shall be exercisable in whole or in installments, and
at such time(s), and subject to the fulfillment of any conditions on, and to any
limitations on, exercisability as may be determined by the Committee at the time
of the grant of such Options. The right to purchase shares of Common Stock shall
be cumulative so that when the right to purchase any shares of Common Stock has
accrued such shares of Common Stock or any part thereof may be purchased at any
time thereafter until the expiration or termination of the Option.
(d) Expiration of Options. No Incentive Stock Option by its
terms shall be exercisable after the expiration of ten (10) years from the date
of grant of the Option; provided, however, in the case of an Incentive Stock
Option granted to a person who, at the time such Option is granted, owns shares
of stock of the Corporation or of any Parent or Subsidiary possessing more than
ten percent (10%) of the total combined voting power of all classes of shares of
stock of the Corporation or of any Parent or Subsidiary, such Option shall not
be exercisable after the expiration of five (5) years from the date such Option
is granted.
(e) Exercise Upon Optionee's Termination of Employment or
Termination of Consulting Relationship. If the employment of an Optionee by the
Corporation or by any Parent or Subsidiary is terminated for any reason other
than death, any Incentive Stock Option granted to such Optionee may not be
exercised later than three (3) months (one (1) year in the case of termination
due to Disability) after the date of such termination of employment. For
purposes of determining whether any Optionee has incurred a termination of
employment (or a Termination of Consulting Relationship), an Optionee who is
both an employee (or a Consultant) and a director of the Corporation and/or any
Parent or Subsidiary shall (with respect to any Non-Qualified Option that may
have been granted to him) be considered to have incurred a termination of
employment (or a Termination of Consulting Relationship) only upon his
termination of service both as an employee (or as a Consultant) and as a
director. Furthermore, (i) if an Optionee's employment (or Consulting
Relationship) is terminated by the Corporation or by any Parent or Subsidiary
for Good Cause or (ii) if an Optionee voluntarily terminates his employment
other than for Disability (or incurs a voluntary Termination of Consulting
Relationship other than for Disability) with the Corporation or with any Parent
or Subsidiary without the written consent of the Committee, regardless of
whether such Optionee continues to serve as a director of the Corporation or of
any Parent or Subsidiary, then the Optionee shall, at the time of such
termination of employment (or Termination of Consulting Relationship), forfeit
his rights to exercise any and all of the outstanding Option(s) theretofore
granted to him.
(f) Maximum Amount of Incentive Stock Options. Each Plan Award
under which Incentive Stock Options are granted shall provide that to the extent
the aggregate of the (i) Fair Market Value of the shares of Common Stock
(determined as of the time of the grant of the Option) subject to such Incentive
Stock Option and (ii) the fair market values (determined as of the date(s) of
grant of the option(s) of all other shares of Common Stock subject to incentive
stock options granted to an Optionee by the Corporation or any Parent or
Subsidiary, which are
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exercisable for the first time by any person during any calendar year, exceed(s)
one hundred thousand dollars ($100,000), such excess shares of Common Stock
shall not be deemed to be purchased pursuant to Incentive Stock Options. The
terms of the immediately preceding sentence shall be applied by taking all
options, whether or not granted under this Plan, into account in the order in
which they are granted.
(g) Dividend Equivalents for Outstanding Options. The
Committee may, in its sole discretion, provide that amounts equivalent to
dividends shall be payable with respect to one or more shares of Common Stock
subject to vested but unexercised Option(s) granted to a Participant. Such
amounts shall be credited to a suspense account, and shall be payable to the
Participant in cash or in Common Stock, as set forth under the terms of the Plan
Award, at such time as the related Option(s) are exercised.
VII
STOCK APPRECIATION RIGHTS
(a) Tandem Stock Appreciation Rights. The Committee shall have
the authority to grant Stock Appreciation Rights in tandem with an Option,
either at the time of grant of the Option or by amendment. Each such Stock
Appreciation Right shall be subject to the same terms and conditions as the
related Option, if any, and shall be exercisable only at such times and to such
extent as the related Option is exercisable; provided, however, that a Stock
Appreciation Right may be exercised only when the Fair Market Value of the
Common Stock exceeds the exercise price of the related Option. A Stock
Appreciation Right shall entitle the Optionee to surrender to the Corporation
unexercised the related Option, or any portion thereof, and, except as provided
below, to receive from the Corporation in exchange therefor that number of
shares of Common Stock equal in value to the excess of the Fair Market Value of
one share of the Common Stock of the Corporation on the day preceding the
surrender of such Option over the exercise price per share of Common Stock
multiplied by the number of shares of Common Stock provided for under the
Option, or portion thereof, which is surrendered; provided, however, that no
fractional shares shall be issued of Common Stock (cash being delivered to the
Participant in lieu of such fractional shares). The number of shares of Common
Stock which may be received pursuant to the exercise of a Stock Appreciation
Right may not exceed the number of shares of Common Stock provided for under the
Option, or portion thereof, which is surrendered. The Committee shall have the
right, in its sole discretion, to approve an election by a Participant to
receive cash in whole or in part in settlement of the Stock Appreciation Right.
Within thirty (30) days following the receipt by the Committee of a request to
receive cash in whole or in part in settlement of a Stock Appreciation Right,
the Committee shall, in its sole discretion, either consent to or disapprove, in
whole or in part, such a request. A request to receive cash in whole or in part
in settlement of a Stock Appreciation Right may provide that, in the event the
Committee shall disapprove such request, such request shall be deemed to be an
exercise of such Stock Appreciation Right for shares of Common Stock.
(b) Freestanding Stock Appreciation Rights. The Committee also
shall have the
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authority to grant Stock Appreciation Rights unrelated to any Option that may be
granted hereunder. Each such Stock Appreciation Right shall be subject to the
terms and conditions as determined by the Committee. Freestanding Stock
Appreciation Rights shall entitle the Optionee to surrender to the Corporation a
portion or all of such rights and, except as provided below, to receive from the
Corporation in exchange therefor that number of shares of Common Stock (or cash,
as provided below) equal in value to the excess of the Fair Market Value of one
share of the Common Stock of the Corporation on the day preceding the surrender
of such Rights over the Fair Market Value per share of Common Stock (determined
as of the date the Stock Appreciation Right was granted) multiplied by the
number of Stock Appreciation Rights which are surrendered; provided, however,
that no fractional shares of Common Stock shall be issued (cash being delivered
to the Participant in lieu of such fractional shares). The Committee shall have
the right, in its sole discretion, to approve an election by a Participant to
receive cash in whole or in part in settlement of a Stock Appreciation Right.
Within thirty (30) days following the receipt by the Committee of a request to
receive cash in whole or in part in settlement of a Stock Appreciation Right,
the Committee shall, in its sole discretion, either consent to or disapprove, in
whole or in part, such a request. A request to receive cash in whole or in part
in settlement of a Stock Appreciation Right may provide that, in the event the
Committee shall disapprove such request, such request shall be deemed to be an
exercise of such Stock Appreciation Right for shares of Common Stock.
(c) Exercise of Stock Appreciation Rights. The exercisability
of a Plan Award earned under Section VI(b) shall be determined as set forth in
any agreement executed by the Corporation and such Participant hereunder. For
purposes of determining whether a Participant has incurred a termination of
employment or a Termination of Consulting Relationship (in the context of
determining the non-forfeitability of his Stock Appreciation Rights), a
Participant who is both an employee (or a Consultant) and a director of the
Corporation and/or any Parent or Subsidiary shall be considered to have incurred
a termination of employment (or a Termination of Consulting Relationship) only
upon his termination of service both as an employee (or as a Consultant) and as
a director. Notwithstanding the terms of the immediately preceding sentence,
however, if the Participant ceases to be an employee (or a Consultant) of the
Corporation or of any Parent or Subsidiary for Good Cause or terminates his
employment other than for Disability (or incurs a voluntary Termination of
Consulting Relationship other than for Disability) without the written consent
of the Committee (regardless of whether such Participant continues to serve as a
director of the Corporation or of any Parent or Subsidiary), all Plan Awards
granted under Section VI(b) shall be immediately forfeited.
(d) Limitation on Number of Stock Appreciation Rights. In
order for a grant of Stock Appreciation Rights to satisfy the "performance-based
compensation" exemption under Code Section 162(m), the maximum number of Stock
Appreciation Rights that may be granted to any single Executive during one
calendar year, beginning with the year grants under this Plan first become
subject to such deduction limitations, is 300,000.
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VIII
Performance Shares, Restricted Stock and Performance Units
The Committee shall have the authority to grant Performance
Shares, Restricted Stock or Performance Units either separately or in
combination with other Plan Awards. The terms and conditions of Performance
Shares, Restricted Stock or Performance Units shall be determined from time to
time by the Committee, without limitation, except as otherwise provided in the
Plan, provided, that in order for a grant of Restricted Stock, Performance Units
or Performance Shares to satisfy the "performance-based compensation" exemption
under Code Section 162(m), beginning with the year the deduction limitations
under such Code Section first become applicable to grants of Plan Awards under
this Plan, (i) the maximum number of shares of Restricted Stock which may be
granted to any single Executive during any one calendar year is 300,000 and (ii)
the maximum payment to any single Executive with respect to Performance Units or
Performance Shares granted in any one calendar year shall be [$500,000].
Furthermore:
(a) Services Rendered. Each such Plan Award shall be granted
for services rendered; provided, however, that the value of the services
performed must equal or exceed the par value of such shares of Common Stock to
be granted to the Participant.
(b) Performance Account. The Corporation shall establish a
performance account for each Participant to whom Performance Shares or
Performance Units are granted, and the Performance Shares or Performance Units
granted shall be credited to such account.
(c) Duration of Performance or Restriction Period. The
duration of the performance or restriction period shall be determined by the
Committee at the time each such grant is made and will be set forth under the
Award Agreement. More than one grant may be outstanding at any one time, and
performance or restriction periods may be of different lengths.
(d) Restricted Stock. Shares of Common Stock granted in the
form of Restricted Stock shall be registered in the name of the Participant and,
together with a stock power endorsed in blank, deposited with the Corporation at
the time the account is credited. With respect to such Restricted Stock, the
Participant shall generally have the rights and privileges of a stockholder of
the Corporation as to such shares, including the right to vote such Restricted
Stock, except that the following restrictions shall apply: (i) the Participant
shall not be entitled to delivery of a certificate until the expiration or
termination of the restriction period, (ii) none of the shares of Restricted
Stock may be sold, transferred, assigned, pledged, or otherwise encumbered or
disposed of during the restriction period and (iii) all of the shares of
Restricted Stock shall be forfeited by the Participant without further
obligation on the part of the Corporation as set forth in Section VII(i) hereof.
No cash and/or stock dividends will be paid with respect to the Restricted Stock
prior to the lapse of the related restrictions. Upon the forfeiture of any
Restricted Stock, such forfeited shares of Common Stock shall be transferred to
the Corporation without further action by the Participant. Upon the expiration
or termination of the restriction period, the restrictions imposed on the
appropriate Restricted Stock shall lapse and a stock certificate for the number
of shares of Restricted Stock with respect to which the restrictions have lapsed
shall be delivered, free of all such restrictions, except any that may be
imposed by law or by any applicable stockholders' agreement, to the Participant.
A Participant who files an election with the Internal Revenue Service
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to include the fair market value of any Restricted Stock in gross income while
they are still subject to restrictions shall promptly furnish the Corporation
with a copy of such election together with the amount of any federal, state,
local or other taxes that may be required to be withheld to enable the
Corporation to claim an income tax deduction with respect to such election.
(e) Payments of Performance Shares/Performance Units. Any
Performance Shares or Performance Units earned during a performance period shall
be paid in cash or in shares of Common Stock (as set forth under the Award
Agreement, or as otherwise determined by the Committee) as soon as is
practicable after the end of the performance period to which such Plan Award
relates.
(f) Performance Targets. At the time of each grant, the
Committee shall establish (subject to the provisions of Section VII(g) hereof)
performance targets (to be satisfied during the performance period) and/or
periods of service to which the vesting of Performance Shares, Performance Units
and/or Restricted Stock shall be conditioned. The Committee may also establish a
relationship between performance targets and the number of Performance Shares or
the number or value of Performance Units which shall be earned. The Committee
also may establish a relationship between performance results other than the
targets and the number of Performance Shares or Restricted Stock and the number
or value of Performance Units, if any, which shall be earned. The Committee
shall determine the measures of performance to be used in determining the extent
to which Performance Shares or Performance Units are earned or to which
restrictions on Restricted Stock or units shall lapse. Performance measures and
targets may vary among grants, but once established for a grant may not be
modified with respect to that grant except as provided in Section IX and
provided that, with respect to Performance Shares and Performance Units, the
Committee may, in its sole discretion, make such adjustments to performance
targets, the number of Performance Shares or the number or value of Performance
Units which shall be earned, or such other changes as it may deem necessary or
advisable in the event of material changes in the criteria used for establishing
performance targets which would result in the dilution or enlargement of a
Participant's award outside the goals intended by the Committee at the time of
the grant of the Plan Award.
(g) Performance Measures. Unless and until the Committee
proposes for stockholder vote a change in the general performance measures set
forth below, the attainment of which shall determine the number of Performance
Shares, Performance Units or shares of Restricted Stock that become vested under
the Plan, the performance measure(s) to be used for purposes of grants to
Executives shall be as follows; provided, however, that the utilization of only
such performance measure(s) shall be required only with respect to those years
beginning with the year in which the deduction limitations set forth under Code
Section 162(m) apply with respect to Plan Awards granted hereunder:
(i) Total stockholder return (measured as the sum of
Common Stock appreciation and dividends declared) in relation to the
Dow Jones Industrial Average.
(ii) Return on invested capital in relation to target
objectives.
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(iii) Share earnings/earnings growth in relation to
target objectives.
(iv) Cash flow/cash flow growth in relation to target
objectives.
(v) Cost of services to consumers in relation to
target objectives.
In the event that applicable tax and/or securities laws change to permit
Committee discretion to alter the governing performance measures without
obtaining stockholder approval of such changes, the Committee shall have sole
discretion to make such changes without obtaining stockholder approval.
(h) Dividend or Interest Equivalents for Performance Shares
and Performance Units. The Committee may provide that amounts equivalent to
dividends or interest shall be payable with respect to Performance Shares or
Performance Units held in the Participant's performance account. Such amounts
shall be credited to the performance account, and shall be payable to the
Participant in cash or in Common Stock, as set forth under the terms of the Plan
Award, at such time as the Performance Shares or Performance Units are earned.
The Committee further may provide that amounts equivalent to interest or
dividends held in the performance accounts shall be credited to such accounts on
a periodic or other basis.
(i) Termination of Employment. If the Participant (i)
voluntarily ceases to be an employee of the Corporation, or of any Parent or
Subsidiary, (or incurs a voluntary Termination of Consulting Relationship) with
the written consent of the Committee, (ii) dies or becomes Disabled or (iii)
suffers an involuntary termination of his employment (or incurs an involuntary
Termination of Consulting Relationship) with the Corporation or with any Parent
or Subsidiary for reasons other than Good Cause the Plan Award earned under this
Section with respect to any outstanding Performance Shares, Restricted Stock,
Performance Units or interest or dividend equivalents shall be determined as
otherwise provided herein or in any agreement executed by such Participant
hereunder. For purposes of the immediately preceding sentence, any Participant
who is both an employee (or a Consultant) and a director of the Corporation
and/or any Parent or Subsidiary will be considered to have incurred a
termination of employment (or a Termination of Consulting Relationship) only
upon his termination of service both as an employee (or as a Consultant) and as
a director. If the Participant ceases to be an employee (or a Consultant) of the
Corporation or of any Parent or Subsidiary for any other reason, regardless of
whether such Participant continues to serve as a director of the Corporation or
of any Parent or Subsidiary, all Plan Awards granted under this Section VII and
subject to restrictions shall be immediately forfeited. In such case, the
Corporation shall have the right to complete the blank stock power with respect
to Restricted Stock and transfer the same to its treasury.
IX
DEFERRAL OF PAYMENTS
The Committee may establish procedures by which a Participant
may elect to defer
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<PAGE>
payment of a Performance Share or Performance Unit. The Committee shall
determine the terms and conditions of such deferral. Any such deferral shall be
subject to the following:
(a) Contingent Nature of Allocation. Every allocation under
the Plan to a performance account shall be considered "contingent" and unfunded
until any forfeiture restrictions under the terms of the Plan Award expire or
lapse, until all conditions contained in the Plan Award are satisfied, and until
any elective deferral period expires. Such contingent allocations shall be
considered bookkeeping entries only, notwithstanding the crediting of deemed
"dividends" or "interest." Nothing contained herein shall be construed as
creating a trust or fiduciary relationship between the Participant and the
Corporation or the Committee.
(b) Participant's Rights to Awards. Until the Plan Award
vests, the elective deferral period expires, and any restrictions are lifted,
the related amounts held in the Participant's performance account cannot be
sold, conveyed, transferred, pledged, hypothecated, or assigned. Until the Plan
Award vests and becomes payable, such account balances shall be the property of
the Corporation. The Participant's right to such account balances shall be
subject to the claims of the general creditors of the Corporation. Receipt of
the Plan Award is conditioned upon satisfactory compliance with the terms and
conditions of the such Plan Award and other requirements of the Plan.
(c) Election to Defer Payment. If a Participant desires to
defer the normal receipt of Common Stock or cash due him under a Plan Award, he
must make an irrevocable election in a calendar year prior to the calendar year
or years in which he is to perform services that will entitle him to the Plan
Award. Such election shall provide a fixed date or dates for the termination of
the deferral period. The Participant shall not be permitted to receive his Plan
Award prior to the end of the elected deferral period, except in the event of
his death, Disability or termination of employment with the Corporation or any
Parent or Subsidiary.
X
ADJUSTMENT OF SHARES; MERGER OR
CONSOLIDATION, ETC. OF THE CORPORATION
(a) Recapitalization, Etc. In the event there is any change in
the Common Stock of the Corporation by reason of any reorganization,
recapitalization, stock split, stock dividend or otherwise, there shall be
substituted for or added to each share of Common Stock theretofore appropriated
or thereafter subject, or which may become subject, to any Option, Stock
Appreciation Right, grant of Restricted Stock, Performance Share or Performance
Unit award, the number and kind of shares of stock or other securities into
which each outstanding share of Common Stock shall be so changed or for which
each such share shall be exchanged, or to which each such share be entitled, as
the case may be, and the per share price thereof also shall be appropriately
adjusted. Notwithstanding the foregoing, (i) each such adjustment with respect
to an Incentive Stock Option shall comply with the rules of Section 424(a) of
the Code and (ii) in no event shall any adjustment be made which would render
any Incentive Stock Option granted hereunder to be other than an incentive stock
option for purposes of Section 422 of the Code.
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<PAGE>
(b) Merger, Consolidation or Change in Control of Corporation.
Upon (i) the merger or consolidation of the Corporation with or into another
corporation (pursuant to which the stockholders of the Corporation immediately
prior to such merger or consolidation will not, as of the date of such merger or
consolidation, own a beneficial interest in shares of voting securities of the
corporation surviving such merger or consolidation having at least a majority of
the combined voting power of such corporation's then outstanding securities), if
the agreement of merger or consolidation does not provide for (1) the
continuance of the Options, Stock Appreciation Rights and shares of Restricted
Stock granted hereunder or (2) the substitution of new options, stock
appreciation rights or shares of restricted stock for Options, Stock
Appreciation Rights and shares of Restricted Stock granted hereunder, or for the
assumption of such Options, Stock Appreciation Rights and shares of Restricted
Stock by the surviving corporation, (ii) the dissolution, liquidation, or sale
of all or substantially all the assets of the Corporation to a person unrelated
to the Corporation or to a direct or indirect owner of a majority of the voting
power of the Corporation's then outstanding voting securities (such sale of
assets being referred to as an "Asset Sale") or (iii) the Change in Control of
the Corporation, (1) the holder of any such Option or Stock Appreciation Right
theretofore granted and still outstanding (and not otherwise expired) shall have
the right immediately prior to the effective date of such merger, consolidation,
dissolution, liquidation, Asset Sale or Change in Control of the Corporation to
exercise such Option(s) or Stock Appreciation Right(s) in whole or in part
without regard to any installment provision that may have been made part of the
terms and conditions of such Option(s) or Stock Appreciation Right(s) and (2)
all restrictions regarding transferability and forfeiture on shares of
Restricted Stock shall be removed immediately prior to the effective date of
such merger, consolidation, dissolution, liquidation, Asset Sale or Change in
Control of the Corporation; provided that any conditions precedent to the
exercise of such Option(s) or Stock Appreciation Right(s) and the transfer of
such shares of Restricted Stock other than the passage of time, have occurred.
The Corporation, to the extent practicable, shall give advance notice to
affected Optionees and holders of Stock Appreciation Rights or shares of
Restricted Stock of such merger, consolidation, dissolution, liquidation, Asset
Sale or Change in Control of the Corporation. All such Options and Stock
Appreciation Rights which are not so exercised shall be forfeited as of the
effective time of such merger, consolidation, dissolution, liquidation or Asset
Sale (but not in the case of a Change in Control of the Corporation).
(c) Effect of Merger or Consolidation. As of the effective
date of the merger, consolidation, dissolution, liquidation or Asset Sale, no
Participant shall earn any additional Performance Share or Performance Unit or
dividend or interest equivalent under this Plan. Furthermore, if the value of
any Performance Share or Performance Unit cannot be determined as of such date
because such Plan Award is conditioned upon the future financial performance of
the Corporation, such Performance Share or Performance Unit (including any
applicable dividend or interest equivalents) shall be pro rated based upon the
assumption that such performance criteria have been satisfied at the target
level. Any Performance Share or Performance Unit payable after the date of the
merger, consolidation, dissolution, liquidation or Asset Sale shall be paid in
cash (unless the appropriate merger or consolidation agreement provides
otherwise) as of the date such Performance Share or Performance Unit originally
was to have been paid, or as of such earlier date
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<PAGE>
as may be determined by the Corporation or its successor.
(d) Definition of Change in Control of the Corporation. As
used herein, a "Change in Control of the Corporation" shall be deemed to have
occurred if any person (including any individual, firm, partnership or other
entity) together with all Affiliates and Associates (as defined under Rule 12b-2
of the General Rules and Regulations promulgated under the Exchange Act) of such
person (but excluding (i) a trustee or other fiduciary holding securities under
an employee benefit plan of the Corporation or any subsidiary of the
Corporation, (ii) a corporation owned, directly or indirectly, by the
stockholders of the Corporation in substantially the same proportions as their
ownership of the Corporation, (iii) the Corporation or any subsidiary of the
Corporation or (iv) only as provided in the immediately following sentence, a
Participant together with all Affiliates and Associates of the Participant) is
or becomes the Beneficial Owner (as defined in Rule 13d-3 promulgated under the
Exchange Act), directly or indirectly, of securities of the Corporation
representing 40% of more of the combined voting power of the Corporation's then
outstanding securities. The provisions of clause(iv) of the immediately
preceding sentence shall apply only with respect to the Option(s) held by the
Participant who, together with his Affiliates or Associates, if any, is or
becomes the direct or indirect Beneficial Owner of the percentage of securities
set forth in such clause.
XI
MISCELLANEOUS PROVISIONS
(a) Administrative Procedures. The Committee may establish any
procedures determined by it to be appropriate in discharging its
responsibilities under the Plan. Subject to the provisions of Section XIII
hereof, all actions and decisions of the Committee shall be final.
(b) Assignment or Transfer. No grant or award of any Plan
Award (other than a Non-Qualified Option) or any rights or interests therein
shall be assignable or transferable by a Participant except by will or the laws
of descent and distribution or pursuant to a domestic relations order. During
the lifetime of a Participant, Incentive Stock Options granted hereunder shall
be exercisable only by the Participant. Performance Shares, Restricted Stock and
Performance Units may not be sold, assigned, transferred, redeemed, pledged or
otherwise encumbered during the restriction period, except as may be provided in
Section VIII(b) hereof.
(c) Investment Representation. In the case of Plan Awards paid
in shares of Common Stock or other securities, or, with respect to shares of
Common Stock received pursuant to the exercise of an Option or a Stock
Appreciation Right, or upon the payment upon any Plan Award, the Committee may
require, as a condition of receiving such securities, that the Participant
furnish to the Corporation such written representations and information as the
Committee deems appropriate to permit the Corporation, in light of the existence
or nonexistence of an effective registration statement under the Securities Act
to deliver such securities in compliance with the provisions of the Securities
Act.
(d) Withholding Taxes. The Corporation shall have the right to
deduct from all
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<PAGE>
cash payments hereunder any federal, state, local or foreign taxes required by
law to be withheld with respect to such payments. In the case of the issuance or
distribution of Common Stock or other securities hereunder, either directly or
upon the exercise of or payment upon any Plan Award, the Corporation, as a
condition of such issuance or distribution, may require the payment (through
withholding from the Participant's salary, reduction of the number of shares of
Common Stock or other securities to be issued, or otherwise) of any such taxes.
Each Participant may satisfy the withholding obligations by paying to the
Corporation a cash amount equal to the amount required to be withheld or by
tendering to the Corporation a number of shares of Common Stock having a value
equivalent to such cash amount, or by use of any available procedure as
described under Section IV(c) hereof.
(e) Costs and Expenses. The costs and expenses of
administering the Plan shall be borne by the Corporation and shall not be
charged against any award nor to any employee receiving a Plan Award.
(f) Funding of Plan. Except in the case of awards of
Restricted Stock, the Plan shall be unfunded. The Corporation shall not be
required to segregate any of its assets to assure the payment of any Plan Award
under the Plan. Neither the Participants nor any other persons shall have any
interest in any fund or in any specific asset or assets of the Corporation or
any other entity by reason of any Plan Award, except to the extent expressly
provided hereunder. The interests of each Participant and former Participant
hereunder are unsecured and shall be subject to the general creditors of the
Corporation.
(g) Other Incentive Plans. The adoption of the Plan does not
preclude the adoption by appropriate means of any other incentive plan for
employees.
(h) Plurals and Gender. Where appearing in the Plan, masculine
gender shall include the feminine and neuter genders, and the singular shall
include the plural, and vice versa, unless the context clearly indicates a
different meaning.
(i) Headings. The headings and sub-headings in this Plan are
inserted for the convenience of reference only and are to be ignored in any
construction of the provisions hereof.
(j) Severability. In case any provision of this Plan shall be
held illegal or void, such illegality or invalidity shall not affect the
remaining provisions of this Plan, but shall be fully severable, and the Plan
shall be construed and enforced as if said illegal or invalid provisions had
never been inserted herein.
(k) Payments Due Missing Persons. The Corporation shall make a
reasonable effort to locate all persons entitled to benefits under the Plan;
however, notwithstanding any provisions of this Plan to the contrary, if, after
a period of one (1) year from the date such benefits shall be due, any such
persons entitled to benefits have not been located, their rights under the Plan
shall stand suspended. Before this provision becomes operative, the Corporation
shall send a certified letter to all such persons at their last known addresses
advising them that their rights under
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<PAGE>
the Plan shall be suspended. Subject to all applicable state laws, any such
suspended amounts shall be held by the Corporation for a period of one (1)
additional year and thereafter such amounts shall be forfeited and thereafter
remain the property of the Corporation.
(l) Liability and Indemnification. (i) Neither the Corporation
nor any Parent or Subsidiary shall be responsible in any way for any action or
omission of the Committee, or any other fiduciaries in the performance of their
duties and obligations as set forth in this Plan. Furthermore, neither the
Corporation nor any Parent or Subsidiary shall be responsible for any act or
omission of any of their agents, or with respect to reliance upon advice of
their counsel provided that the Corporation and/or the appropriate Parent or
Subsidiary relied in good faith upon the action of such agent or the advice of
such counsel.
(i) Except for their own gross negligence or willful
misconduct regarding the performance of the duties specifically assigned to them
under, or their willful breach of the terms of, this Plan, the Corporation, each
Parent and Subsidiary and the Committee shall be held harmless by the
Participants, former Participants, beneficiaries and their representatives
against liability or losses occurring by reason of any act or omission. Neither
the Corporation, any Parent or Subsidiary, the Committee, nor any agents,
employees, officers, directors or shareholders of any of them, nor any other
person shall have any liability or responsibility with respect to this Plan,
except as expressly provided herein.
(m) Incapacity. If the Committee shall receive evidence
satisfactory to it that a person entitled to receive payment of any Plan Award
is, at the time when such benefit becomes payable, a minor, or is physically or
mentally incompetent to receive such Plan Award and to give a valid release
thereof, and that another person or an institution is then maintaining or has
custody of such person and that no guardian, committee or other representative
of the estate of such person shall have been duly appointed, the Committee may
make payment of such Plan Award otherwise payable to such person to such other
person or institution, including a custodian under a Uniform Gifts to Minors
Act, or corresponding legislation (who shall be an adult, a guardian of the
minor or a trust company), and the release by such other person or institution
shall be a valid and complete discharge for the payment of such Plan Award.
(n) Cooperation of Parties. All parties to this Plan and any
person claiming any interest hereunder agree to perform any and all acts and
execute any and all documents and papers which are necessary or desirable for
carrying out this Plan or any of its provisions.
(o) Governing Law. All questions pertaining to the validity,
construction and administration of the Plan shall be determined in accordance
with the laws of the State of Delaware.
(p) Nonguarantee of Employment or Consulting Relationship.
Nothing contained in this Plan shall be construed as a contract of employment
(or as a consulting contract) between the Corporation (or any Parent or
Subsidiary), and any employee or Participant, as a right of any employee or
Participant to be continued in the employment of (or in a Consulting
Relationship with) the Corporation (or any Parent or Subsidiary), or as a
limitation on the right of
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<PAGE>
the Corporation or any Parent or Subsidiary to discharge any of its employees
(or Consultants), at any time, with or without cause.
(q) Notices. Each notice relating to this Plan shall be in
writing and delivered in person or by certified mail to the proper address. All
notices to the Corporation or the Committee shall be addressed to it at 15730
South Figueroa Street, Gardena, California 90248, Attn: Chief Financial Officer
All notices to Participants, former Participants, beneficiaries or other persons
acting for or on behalf of such persons shall be addressed to such person at the
last address for such person maintained in the Committee's records.
(r) Written Agreements. Each Plan Award shall be evidenced by
a signed written agreement (the "Award Agreements") between the Corporation and
the Participant containing the terms and conditions of the award.
XII
AMENDMENT OR TERMINATION OF PLAN
The Board of Directors of the Corporation shall have the right
to amend, suspend or terminate the Plan at any time, provided that no amendment
shall be made which shall increase the total number of shares of the Common
Stock of the Corporation which may be issued and sold pursuant to Incentive
Stock Options, reduce the minimum exercise price in the case of an Incentive
Stock Option or modify the provisions of the Plan relating to eligibility with
respect to Incentive Stock Options unless such amendment is made by or with the
approval of the stockholders within 12 months of the effective date of such
amendment, but only if such approval is required by any applicable provision of
law. Furthermore, no amendment to this Plan may change (i) the maximum amount of
Plan Awards that may be granted or paid on an annual basis or (ii) the exercise
price of any options granted hereunder without the prior approval of the
Corporation's stockholders in the manner required under Section 162(m) of the
Code; provided, however, that such stockholder consent is required only during
such period that the deduction limitations under Code Section 162(m) apply to
Plan Awards granted under the Plan. The Board of Directors of the Corporation
shall also be authorized to amend the Plan and the Options granted thereunder to
maintain qualification as "incentive stock options" within the meaning of
Section 422 of the Code, if applicable. Except as otherwise provided herein, no
amendment, suspension or termination of the Plan shall alter or impair any Plan
Awards previously granted under the Plan without the consent of the holder
thereof.
XIII
TERM OF PLAN
The Plan shall automatically terminate on the day immediately
preceding the tenth (10th) anniversary of the date the Plan was adopted by the
Board of Directors of the Corporation, unless sooner terminated by such Board of
Directors. No Plan Awards may be granted under the Plan subsequent to the
termination of the Plan.
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XIV
CLAIMS PROCEDURES
(a) Denial. If any Participant, former Participant or
beneficiary is denied any vested benefit to which he is, or reasonably believes
he is, entitled under this Plan, either in total or in an amount less than the
full vested benefit to which he would normally be entitled, the Committee shall
advise such person in writing the specific reasons for the denial. The Committee
shall also furnish such person at the time with a written notice containing (i)
a specific reference to pertinent Plan provisions, (ii) a description of any
additional material or information necessary for such person to perfect his
claim, if possible, and an explanation of why such material or information is
needed and (iii) an explanation of the Plan's claim review procedure.
(b) Written Request for Review. Within 60 days of receipt of
the information stated in subsection (a) above, such person shall, if he desires
further review, file a written request for reconsideration with the Committee.
(c) Review of Document. So long as such person's request for
review is pending (including the 60 day period in subsection (b) above), such
person or his duly authorized representative may review pertinent Plan documents
and may submit issues and comments in writing to the Committee.
(d) Committee's Final and Binding Decision. A final and
binding decision shall be made by the Committee within 60 days of the filing by
such person of this request for reconsideration; provided, however, that if the
Committee, in its discretion, feels that a hearing with such person or his
representative is necessary or desirable, this period shall be extended for an
additional 60 days.
(e) Transmittal of Decision. The Committee's decision shall be
conveyed to such person in writing and shall (i) include specific reasons for
the decision, (ii) be written in a manner calculated to be understood by such
person and (iii) set forth the specific references to the pertinent Plan
provisions on which the decision is based.
(f) Limitation on Claims. Notwithstanding any provisions of
this Plan to the contrary, no Participant (nor the estate or other beneficiary
of a Participant) shall be entitled to assert a claim against the Corporation
(or against any Parent or Subsidiary) more than three years after the date the
Participant (or his estate or other beneficiary) initially is entitled to
receive benefits hereunder.
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[DRAFT 7/9/97]
COMPASS PLASTICS & TECHNOLOGIES, INC.
1997 STOCK OPTION AND PERFORMANCE AWARD PLAN
---------------
Effective as of [ ], 1997
<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), entered into as of this _____
day of July, 1997 by and between COMPASS PLASTICS & TECHNOLOGIES, INC., a
Delaware corporation (the "Company"), having its principal offices at 15730
South Figueroa Street, Gardena, California 90248, AB PLASTICS CORPORATION, a
California corporation ("AB Plastics"), having its principal offices at 15730
South Figueroa Street, Gardena, California 90248, and MICHAEL A. GIBBS, an
individual residing at 15 Father Peters Lane, New Canaan, Connecticut 06840 (the
"Employee" or "Gibbs").
W I T N E S S E T H :
WHEREAS, the Employee (a) through a corporate affiliate, is presently
serving as a consultant to the Company and its wholly-owned subsidiary, AB
Plastics, under a management agreement dated as of October 1, 1996 (the
"Management Agreement"), (b) is currently serving in the capacity and with the
title of Chief Executive Officer of AB Plastics, and (c) has extensive knowledge
with respect to the business of AB Plastics;
WHEREAS, the Company and AB Plastics desire to supersede the Management
Agreement with this Agreement, and desire that the Company and AB Plastics have
access to the personal services of the Employee as President of the Company and
Chief Executive Officer of AB Plastics from and after the "Effective Date" (as
herein defined) of this Agreement;
WHEREAS, the Employee is willing and able to render his services to the
Company and AB Plastics on the terms and conditions of this Agreement; and
WHEREAS, it is understood that this Agreement shall become effective on
the effective date of the Company's proposed initial public offering of
securities (the "Effective Date");
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, and intending to be legally bound thereby, the
parties hereby agree as follows:
1. Nature of Employment.
1.1 Subject to the terms and conditions of this Agreement, the
Company and AB Plastics (hereinafter together referred to as the "Corporations")
shall, throughout the Term (as defined in Section 2.1) of this Agreement, retain
the Employee, and the Employee shall render services (a) to the Company, in the
capacity and with the title of President, and (b) to AB Plastics, in the
capacity and with the title of Chief Executive Officer, and such additional
titles
<PAGE>
as may be assigned to the Employee from time to time by the Board of Directors
of the Company (the "Board"), which titles the Employee may be willing to
accept.
1.2 In such capacity, the Employee shall have and exercise
responsibility for overseeing and actively participating in all aspects of the
Corporations' businesses, including, without limitation, (a) the establishment
and implementation of corporate policy, (b) the initiation and negotiation of
opportunities for expansion in the areas of new product development,
acquisitions and other ventures, (c) responsibility for maintaining and
increasing the profitability of the Corporations, and (d) such other similar or
related duties customarily afforded a President or Chief Executive Officer as
may be assigned to the Employee from time to time by the Board.
1.3 Throughout the period of his employment hereunder, the
Employee shall: (a) devote not less than seventy-five (75%) percent of his
business and professional time, attention, knowledge and skills, faithfully,
diligently and to the best of his ability, to the active performance of his
duties and responsibilities hereunder on behalf of the Company; (b) observe and
carry out such rules, regulations, policies, directions and restrictions as may
be established from time to time by the Board, including but not limited to the
standard policies and procedures of the Company as in effect from time to time;
and (c) do such traveling at the Company's expense as may reasonably be required
in connection with the performance of such duties and responsibilities;
provided, however, that the Employee shall not be assigned to regular duties
that would reasonably require him to relocate his permanent residence from that
first set forth above.
1.4 Subject to compliance with his covenants and agreements
set forth in Section 1.3 above and his fiduciary duties to the Corporations as
an executive officer and director thereof, the Employee may engage (a) in other
business and professional activities, and (b) in charitable, educational,
religious, civic and similar types of activities (all of which shall be deemed
to benefit the Company), speaking engagements, membership on the board of
directors of other organizations, and similar activities; provided, that the
foregoing business and other activities do not inhibit or prohibit the
performance of his duties hereunder or inhibit or conflict in any material way
with the businesses of the Corporations.
2. Term of Employment.
2.1 Subject to prior termination in accordance with Section
2.2 below, the term of this Agreement and the Employee's employment hereunder
shall commence as of the Effective Date and shall continue through October 31,
2000, and shall thereafter automatically renew (except to the extent otherwise
provided in this Agreement) for additional terms of 12 celendar months each
unless either party gives written notice of termination to the other party not
less than ninety (90) days prior to the end of any such term (in which event
this Agreement shall terminate effective as of the close of such term), as the
same may be renewed (the "Term"). In addition, if this Agreement shall be
terminated on the expiration of its initial stated Term, the Employee shall
continue to render consulting services to the Company pursuant to the same terms
and conditions as are set forth in the Management Agreement.
2
<PAGE>
2.2 This Agreement may be terminated:
(a) upon mutual written agreement of the Company and
the Employee;
(b) at the option of the Employee, upon thirty (30)
days' prior written notice to the Company, in the event that
(i) the Company shall (A) fail to make any
payment to the Employee required to be made under the
terms of this Agreement within thirty (30) days after
payment is due, or (B) fail to perform any other
material covenant or agreement to be performed by it
hereunder (including the failure to re-appoint or
re-elect the Employee to the offices described in
Section 1.1 of this Agreement or causes any material
change in the duties of the Employee which reduces
the scope or importance of such position) or take any
action prohibited by this Agreement, and fail to cure
or remedy same within thirty (30) days after written
notice thereof to the Company; provided, however,
that if any periodic salary payment is not paid
within ten (10) days of its due date, the Employee
shall only be required to provide fifteen (15) days'
prior written notice of termination; or
(ii) the Company is declared insolvent,
liquidates, dissolves or discontinues the Company
Business (as defined below).
(c) at the option of the Company, upon written notice
to the Employee, "for cause" (as defined below);
(d) at the option of the Company, in the event of the
"permanent disability" (as defined below) of the Employee; or
(e) upon the death of the Employee, or as a result of
the voluntary resignation by the Employee for any reason other than as specified
in Section 2(b)(ii) above.
2.3 As used herein, the term "for cause" shall mean and be
limited to:
(a) any material breach of any of the material
covenants and agreements of the Employee contained in this Agreement, including
those provided in Section 5 below, which, in any case, is not corrected in all
material respects (if so correctable) within thirty (30) days after written
notice of same from the Company to the Employee;
(b) any material breach by the Employee of his
fiduciary duties and obligations to the Corporations which is not corrected in
all material respects (if so correctable) within thirty (30) days after written
notice of same from the Company to the Employee; or
3
<PAGE>
(c) conduct constituting fraud or embezzlement or
gross dishonesty by Employee in connection with the performance of his duties
under this Agreement, or a formal charge or indictment of the Employee for or
conviction of the Employee of a felony or, if it shall materially and adversely
damage or bring into disrepute the business, reputation or goodwill of the
Corporations, any crime involving moral turpitude.
Any notice required pursuant to this Section 2.3 shall specify with
particularity the covenant or agreement alleged to have been breached by the
Employee and action necessary to be taken by the Employee to cure the breach to
the satisfaction of the Company.
2.4 As used herein, the term "permanent disability" shall
mean, and be limited to, any physical or mental illness, disability or
impairment that prevents the Employee from continuing the performance of his
normal duties and responsibilities hereunder for a period in excess of four (4)
consecutive months or one hundred eighty (180) non-consecutive days within any
period of three hundred sixty five (365) calendar days. For purposes of
determining whether a "permanent disability" has occurred under this Agreement,
the written determination thereof by two (2) qualified practicing physicians
selected and paid for by the Company (and reasonably acceptable to the Employee)
shall be conclusive.
2.5 Upon any termination of this Agreement as provided above,
the Employee (or his estate or legal representatives, as the case may be) shall
be entitled to receive any and all earned but unpaid Base Salary (as defined in
Section 3.1) prorated through the effective date of termination, and any other
amounts and benefits then accrued or due and payable to the Employee hereunder;
provided that:
(a) if such termination is as a result of the death
of the Employee, his estate shall continue to receive the Base
Salary for a period of four (4) full months following the date
of the Employee's death; and
(b) the Employee's participation in any benefit or
welfare plans of the Company (including, without limitation,
the Stock Options described below and any profit-sharing
plans) shall terminate upon the effective date of termination
of employment except to the extent otherwise required by law
or provided under the express terms of the applicable plan.
All such payments shall be made on the next applicable payment
date therefor (as provided in Section 3 below) following the
effective date of termination. Except when termination is (i)
by the Employee pursuant to Section 2.2(b) above, or (ii) by
the Company other than "for cause" (any termination described
in clauses (i) or (ii) of this Section 2.5(b) being sometimes
hereinafter referred to as a "Non-Cause Termination"), the
foregoing constitutes all amounts to which the Employee shall
be entitled upon termination of this Agreement. In the case
of a Non-Cause Termination, the amount to which the Employee
shall be entitled is not so limited and shall include the
Option Benefit (defined below).
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2.6 In the event that there shall be a dispute among the
parties hereto as to whether or not a termination shall constitute a Non-Cause
Termination, during the pendency of such dispute the Company will place in
escrow with a third party attorney or financial institution in an
interest-bearing escrow account all subject periodic Base Salary payments and
the value of the Option Benefit (as hereinafter defined) and fringe benefits
which shall be disbursed to the appropriate party or parties upon the final
resolution or settlement of such dispute from which no appeal can or shall have
been taken. As used herein, the term Option Benefit means all the Option Shares
vested pursuant to Section 3.5(c) of this Agreement.
3. Compensation and Benefits.
3.1 Base Salary. As compensation for his services to be
rendered hereunder, the Corporations shall pay to the Employee a base salary of
Two Hundred Seventy-Five Thousand ($275,000) Dollars per annum (the "Base
Salary"), which shall be payable in periodic installments in accordance with the
standard payroll practices of the Corporations in effect from time to time, but
not less than twice each month.
3.2 Annual Bonus.
(a) In addition to his Base Salary, not later than
ninety (90) days after the end of each "Fiscal Year" (as herein defined) of the
Company, the Corporations shall pay to the Employee an annual cash bonus in
respect of such Fiscal Year (the "Bonus") in the amounts set forth below in the
event and to the extent that the "EBITDA" (as herein defined) of the "Compass
Group" (as herein defined) for the Fiscal Year in question shall equal or exceed
the amounts set forth below:
Fiscal Year Minimum EBITDA Amount of Bonus
- ----------- -------------- ---------------
1998..................... $12.0 million $100,000;
12.0-15.0 million 100,000;
15.0 million 140,000;
15.0-18.0 million 140,000, plus $1.00 for
each $50 of EBITDA over
$15.0 million;
18.0-21.0 million 200,000;
21.0-24.0 million 200,000, plus $1.00 for
each $30 EBITDA over
$21.0 million;
Over $24.0 million 300,000.
1999.................... 15.0 million $40,000;
15.0-18.0 million 40,000, plus $1.00 for
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each $18.75 of EBITDA
over $15.0 million;
18.0-21.0 million 200,000;
21.0-24.0 million 200,000, plus $1.00 for
each $30 of EBITDA over
$21.0 million;
Over $24.0 million 300,000.
2000.................... 21.0 million $ 40,000;
21.0-24.0 million 40,000, plus $1.00 for
each $11.54 of EBITDA
over $21.0 million.
(b) As used in this Agreement, the following terms
shall have the meanings set forth herein:
(i) "Fiscal Year" shall mean the fifty-two
weeks ended on the last business day of
October of each year, or such other fiscal
year end as shall be established by the
Board;
(ii) "EBITDA" shall mean consolidated net
income before deduction or application of
bonuses payable to executives and other
designated employees (including the Bonus
payable to the Employee hereunder), federal
and state income taxes, interest,
depreciation, amortization and other
non-cash charges, all as calculated in
accordance with generally accepted
accounting principles, consistently applied;
(iii) "Compass Group" shall mean the
Company, AB Plastics and any other direct or
indirect Subsidiary or division of the
Company or AB Plastics hereafter created or
acquired.
(iv) "Subsidiary" shall mean any person,
firm, corporation, partnership or other
entity, more than 50% of the capital stock
or equity of which shall be owned directly
or indirectly by either of the Corporations
or any of their Subsidiaries.
3.3 Fringe Benefits. The Corporations shall also make
available to the Employee, throughout the period of his employment hereunder,
such benefits and perquisites as are generally provided either of the
Corporations to other senior management employees (which benefits shall, in the
aggregate, be at least as generous as those supplied to the senior executive
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officers of AB Plastics), including but not limited to eligibility for
participation in any group life, health, dental, disability or accident
insurance, pension plan, 401(k) plan, profit-sharing plan, or other such benefit
plan or policy, if any, which may presently be in effect or which may hereafter
be adopted by AB Plastics for the benefit of its employees generally.
3.4 Expenses. Throughout the period of the Employee's
employment hereunder, the Corporations shall also reimburse the Employee,
reasonably promptly after presentment by the Employee to the Corporations of
appropriate receipts and vouchers therefor and related information in such form
and detail as the Corporations may reasonably request, for any reasonable
out-of-pocket business expenses incurred by the Employee in connection with the
performance of his duties and responsibilities hereunder.
3.5 Stock Options. Pursuant to the Company's 1997 Stock Option
Plan, approved by the stockholders and the Board on July 5, 1997 (the "1997
Plan"), and subject to the provisions of subsection (g) of this Section 3.5, the
Employee has been awarded options (the "Options") to purchase a maximum
aggregate of two hundred twenty two thousand two hundred and twenty two
(222,222) shares of common stock, par value $.001 per share (the "Common
Stock"), of the Company (the "Option Shares") at an exercise price equal to the
initial offering price per share (the "Exercise Price"), estimated to be between
$8.50 and $9.50 per share, that shares of Common Stock have been offered to the
public pursuant to the Company's prospectus, declared effective by the
Securities and Exchange Commission (the "SEC"). The number of Option Shares and
Exercise Price of the Options are subject to adjustment for stock dividends on
and/or subdivisions or splits, combinations, or reclassifications of the Common
Stock; provided, however, that all Options awarded hereunder are subject to the
terms and conditions hereinafter set forth including, without limitation, the
forfeiture provisions set forth below. The maximum number of Options that are
permissible under Section 422 of the Internal Revenue Code of 1986, as amended,
shall be deemed to be incentive stock options ("ISOs"), and the remaining
Options shall be non-qualified stock options.
(a) Term of Options. The Options shall have a term
expiring on October 31, 2002 (the "Option Expiration Date").
(b) Exercisability and Vesting. Subject to
termination of the Options prior to vesting as provided in Section 3.5(c) below,
the Options shall be exercisable and vest only, to the extent, and upon
occurrence of any of the events specified below:
(i) as to 74,074 Option Shares, in the event
that for any period of thirty (30) consecutive
trading days ending prior to the Option Expiration
Date, the average of the closing prices of the
Company's publicly traded Common Stock, as reported
on The Nasdaq Stock Market or any other national
securities exchange, shall equal or exceed $17.00
per share;
(ii) as to 148,148 Option Shares, in the
event that for any period of thirty (30) consecutive
trading days ending prior to the Option
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<PAGE>
Expiration Date, the average of the closing prices of
the Company's publicly traded Common Stock, as
reported on The Nasdaq Stock Market or any other
national securities exchange, shall equal or exceed a
price per share which shall equal or exceed $25.50
per share;
(iii) as to 222,222 Option Shares, in the
event that for any period of thirty (30) consecutive
trading days ending prior to the Option Expiration
Date, the average of the closing prices of the
Company's publicly traded Common Stock, as reported
on The Nasdaq Stock Market or any other national
securities exchange, shall equal or exceed $34.00 per
share;
(iv) if the Company shall effect a sale of
all or substantially all of the shares of the capital
stock or assets of the Company to any unaffiliated
third party, whether by merger, consolidation, stock
sale, asset sale or like transaction; or
(v) if the Employee's employment pursuant to
this Agreement is terminated by the Company for
reasons other than "for cause" or pursuant to Section
2(b)(i) of this Agreement.
(c) Termination of Options. Options not previously
vested and immediately exercisable pursuant to their terms shall immediately
terminate:
(i) if the Employee's employment with the
Company shall terminate "for cause";
(ii) if, for any reason other than a breach
by the Company of its obligations to the Employee
hereunder, prior to the expiration of the Term of
this Agreement, the Employee shall resign or
otherwise voluntarily terminate (except arising from
constructive termination) his employment with the
Company or any other member of the Compass Group, and
shall not thereafter continue to devote at least
seventy-five (75%) percent of his business and
professional time as a consultant to the Compass
Group; or
(iii) on the Option Expiration Date.
(d) Assignment of Options. Subject to the limitations
on transfer of ISOs as provided in the 1997 Plan, the Options may only be
transferred, assigned or otherwise disposed of by the Employee to the extent
they have become vested and are then immediately exercisable into Option Shares;
provided that the Employee shall have the right to assign all or any portion of
his Options which are not ISOs to any member of his family; provided, further,
8
<PAGE>
that any such permitted assignee shall execute a joinder or similar agreement
with the Company agreeing to be bound by all of the terms and conditions of this
Section 3.5.
(e) Reservation of Option Shares; Registration of
Options. The Company hereby covenants and agrees to:
(i) take all steps necessary and appropriate
to keep a sufficient number of Option Shares reserved
for issuance upon exercise of the Options; and
(ii) to the extent that the same have vested
and are then currently exercisable in accordance with
this Agreement, Company shall, at its sole cost and
expense, include the Options and underlying Option
Shares in any one or more Registration Statements on
Form S-8 filed by Company with the SEC to register
stock options for any executive officers, directors
or key employees of Company or any of its
subsidiaries.
(f) Cashless Exercise. The Employee shall have the
right to exercise his Options upon vesting pursuant to a "cashless" exercise.
Pursuant to such cashless exercise, the exercise price for such Option Shares
shall be paid by the Company's withholding of a number of Option Shares with an
aggregate fair market value equal to the aggregate exercise price.
Example: By way of example, if 74,074 Options shall
have vested at an exercise price of $9.00 per share and the closing price of the
Company's publicly traded Common Stock shall be $18.00 per share, the Employee
shall, upon exercise of all 74,074 vested Options, receive 37,037 shares of
Common Stock, with the remaining 37,037 shares being withheld by the Company as
payment of the aggregate exercise price.
4. Vacation.
The Employee shall be entitled to take, from time to time,
normal and reasonable vacations with pay, consistent with the Company's standard
policies and procedures in effect from time to time, at such times as shall be
mutually convenient to the Employee and the Corporations, and so as not to
interfere unduly with the conduct of the business of the Corporations.
5. Restrictive Covenants.
5.1 The Employee hereby acknowledges and agrees that (i) the
business contacts, customers, suppliers, technology, product designs and
specifications, know-how, trade secrets, marketing techniques, promotional
methods and other aspects of the business of AB Plastics are and will be of
value to AB Plastics and the Company, and have provided AB Plastics and the
Company with substantial competitive advantage in the operation of its business,
and (ii)
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<PAGE>
the Employee has and will continue to have detailed knowledge and possesses and
will possess confidential information concerning the business and operations of
AB Plastics and the Company.
5.2 Unless otherwise approved in writing by Company or its
Chairman of the Board after full disclosure by the Employee to the Board of all
relevant facts and circumstances, the Employee shall not, directly or
indirectly, for himself or through or on behalf of any other person or entity,
at any time during the "Restrictive Period" (as defined in paragraph (b) below):
(a) divulge, transmit or otherwise disclose or cause
to be divulged, transmitted or otherwise disclosed, any clients or customer
lists, technology, know-how, trade secrets, marketing techniques, contracts or
other confidential or proprietary information of the Company or AB Plastics of
whatever nature, whether now existing or hereafter created or developed
(provided, however, that for purposes hereof, information shall not be
considered to be confidential or proprietary if (i) the information, and its
relevance in the applicable instance, is a matter of common knowledge or public
record, (ii) the information, and its relevance in the applicable instance, is
generally known in the industry, (iii) the information is disclosed to Employee
after termination of his employment by another person not prohibited from making
such disclosure, (iv) the information is required to be disclosed by law
pursuant to court order or subpoena, or (v) the Employee can demonstrate that
such information, and its relevance in the particular instance, was already
known to the recipient thereof other than by reason of any breach of any
obligation under this Agreement or any other confidentiality or non-disclosure
agreement); and/or
(b) unless the Employee's employment with the Company
shall be terminated by reason of a Non-Cause Termination, at any time during the
period commencing on the Effective Date and continuing through and including the
date which shall be three (3) years following the voluntary resignation by the
Employee of his employment with the Company or his termination by the Company
"for cause," but in no event longer than 12 calendar months following the end of
the initial Term (the "Restrictive Period"), invest, carry on, engage or become
involved, either as an employee, agent, advisor, officer, director, stockholder
(excluding ownership of not more than 5% of the outstanding shares of a publicly
held corporation if such ownership does not involve managerial or operational
responsibility), manager, partner, joint venturer, participant or consultant in
any business enterprise (other than the Company or any of its Subsidiaries,
affiliates, successors or assigns) which derives 15% or more of its consolidated
revenues from the manufacture and sale in the western United States (comprised
of the states of California, Arizona, Oregon and Washington) of custom
injection-molded plastics products for original equipment manufacturers of
televisions, computers and other consumer electronics products (the "Company
Business"), or which engages in any other business substantially similar to and
directly competitive with the Company Business.
5.3 The Employee and the Company hereby acknowledge and agree
that, in the event of any breach by the Employee, directly or indirectly, of the
foregoing restrictive covenants, it will be difficult to ascertain the precise
amount of damages that may be suffered
10
<PAGE>
by the Company and/or AB Plastics by reason of such breach; and accordingly, the
parties hereby agree that, as liquidated damages (and not as a penalty) in
respect of any such breach, the breaching party or parties shall be required to
pay to the Company or AB Plastics (as the case may be), on demand from time to
time, cash amounts equal to any and all gross revenues derived by the Employee
or his affiliate(s), directly or indirectly, from any and all violative acts or
activities. The parties hereby agree that the foregoing constitutes a fair and
reasonable estimate of the actual damages that might be suffered by reason of
any breach of this Section 5 by the Employee, and the parties hereby agree to
such liquidated damages in lieu of any and all other measures of damages that
might be asserted in respect of any subject breach.
5.4 The Employee and the Company hereby further acknowledge
and agree that any breach by the Employee, directly or indirectly, of the
foregoing restrictive covenants will cause the Company and/or AB Plastics
irreparable injury for which there is no adequate remedy at law. Accordingly,
the Employee expressly agrees that, in the event of any such breach or any
threatened breach hereunder by the Employee, directly or indirectly, the Company
or AB Plastics (as the case may be) shall be entitled, in addition to the
liquidated damages provided for in Section 5.3 above, to seek and obtain
injunctive and/or other equitable relief to require specific performance of or
prevent, restrain and/or enjoin a breach under the provisions of this Section 5,
in any such case without the necessity of proving actual damages or posting
bond.
5.5 In the event of any dispute under or arising out of this
Section 5, the prevailing party in such dispute shall be entitled to recover
from the non-prevailing party or parties, in addition to any damages and/or
other relief that may be awarded, its reasonable costs and expenses (including
reasonable attorneys' fees and court costs) incurred in connection with
prosecuting or defending the subject dispute.
5.6 Upon the termination of the Employee's employment with the
Company, the Employee shall immediately surrender and deliver to the Company all
notes, drawings, diagrams, models, prototypes, lists, books, records, documents
and data of every kind or description, in whatever written or other media
(including, without limitation, electronic, tape, or other form of storage)
relating to or connected with the business contacts, client or customer lists,
technology, know-how, trade secrets, marketing techniques, contracts or other
confidential or proprietary information of the Company, its business, its
properties, or its customers referred to in Section 5.2(a) above.
6. Inventions; Intellectual Property.
6.1 The Employee shall promptly communicate to AB Plastics and
disclose to AB Plastics in such form as AB Plastics requests from time to time,
all drawings, sketches, models, records, information, details and data (in
whatever media the same may be created or recorded including, without
limitation, print, tape, electronic or otherwise) pertaining to all ideas,
processes, trademarks, inventions, improvements, discoveries and improvements,
product designs and specifications, and other intellectual property, whether
patented or unpatented, and
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copyrightable or uncopyrightable, made, conceived, developed, acquired or
implemented by the Employee, solely or jointly, during the period of his
employment hereunder, whether or not conceived during regular working hours
through the use of AB Plastics' time, material or facilities or otherwise (each
of the foregoing hereinafter referred to, individually and collectively, as a
"Development"). The Employee hereby assigns, transfers, conveys and sells to AB
Plastics all right, title and interest in and to all Developments, whether now
existing or created, and acknowledges that the same, whether now existing or
hereafter created, are the sole and exclusive property of AB Plastics for which
the Employee is being adequately compensated hereunder. At any time and from
time to time, upon the request of AB Plastics and at its expense, the Employee
will execute and deliver to AB Plastics any and all applications, assignments,
instruments, documents and papers, give evidence and do any and all other acts
which, in the opinion of AB Plastics, are or may be necessary or desirable to
document such transfer or to enable AB Plastics to file and prosecute
applications for and to acquire, maintain and enforce any and all patents,
trademark or tradename registrations, copyrights or other rights under United
States, foreign, state or local law with respect to any such Developments or to
obtain any extension, validation, reissue, continuance, division or renewal of
any of the same, in whole or in part, and otherwise to establish, protect and
enforce AB Plastics' rights in and to such intellectual property.
6.2 Notwithstanding anything to the contrary contained in this
Agreement, the foregoing Section 6.1 shall only apply and be effective to the
extent permitted under applicable law. In this regard, the provisions of Section
6.1 which provide that the Employee shall assign or offer to assign to AB
Plastics any of the Employee's rights in an invention shall not apply to any
invention for which no equipment, supplies, facility or trade secret information
of AB Plastics or the Company was used and which was developed entirely on the
Employee's own time, unless (a) the invention relates (i) directly to the
business of AB Plastics or the Company, or (ii) to AB Plastics' or the Company's
actual or demonstrably anticipated research or development, or (b) the invention
results from any work performed by the Employee for AB Plastics or the Company.
7. Non-Assignability.
In light of the unique personal services to be performed by
the Employee hereunder, it is acknowledged and agreed that any purported or
attempted assignment or transfer by the Employee of this Agreement or any of his
duties, responsibilities or obligations hereunder shall be void.
8. Notices.
Any notices, requests, demands or other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been given when delivered personally, one (1) day after being
sent by recognized overnight courier service will all charges prepaid or charged
to the sender's account, or three (3) days after being mailed by certified mail,
return receipt requested, addressed to the party being notified at the address
of such party
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first set forth above, or at such other address as such party may hereafter have
designated by notice; provided, however, that any notice of change of address
shall not be effective until its receipt by the party to be charged therewith.
9. General.
9.1 Neither this Agreement nor any of the terms or conditions
hereof may be waived, amended or modified except by means of a written
instrument duly executed by the party to be charged therewith. Any waiver or
amendment shall only be applicable in the specific instance, and shall not
constitute or be construed as a waiver or amendment in any other or subsequent
instance. No failure or delay on the part of any party in respect of any
enforcement of obligations hereunder shall in any manner affect such party's
right to seek or effect enforcement at any other time or in respect of any other
required performance.
9.2 The captions and section headings used in this Agreement
are for convenience of reference only, and shall not affect the construction or
interpretation of this Agreement or any of the provisions hereof.
9.3 This Agreement, and all matters or disputes relating to
the validity, construction, performance or enforcement hereof, shall be
governed, construed and controlled by and under the laws of the State of
Connecticut applicable to contracts entered into and performed wholly within
Connecticut.
9.4 This Agreement shall be binding upon and shall inure to
the sole and exclusive benefit of the parties hereto and their respective heirs,
executors, administrators, personal representatives, successors and permitted
assigns, and no other person or entity shall have any right to rely on this
Agreement or to claim or derive any benefit herefrom absent the express written
consent of the party to be charged with such reliance or benefit; provided, that
neither this Agreement nor any rights or obligations hereunder may be assigned
by any party without the express prior written consent of each other party.
9.5 This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original hereof, but all of
which together shall constitute one and the same instrument.
9.6 This Agreement constitutes the sole and entire agreement
and understanding between the parties hereto as to the subject matter hereof,
and supersedes all prior discussions, agreements and understandings of every
kind and nature between them as to such subject matter.
9.7 If any provision of this Agreement is held invalid or
unenforceable, either in its entirety or by virtue of its scope or application
to given circumstances, such provision shall thereupon be deemed modified only
to the extent necessary to render same valid, or not
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applicable to given circumstances, or excised from this Agreement, as the
situation may require; and this Agreement shall be construed and enforced as if
such provision had been included herein as so modified in scope or application,
or had not been included herein, as the case may be.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the date first set forth above.
COMPASS PLASTICS & TECHNOLOGIES, INC.
By: /s/ Geoffrey J.F. Gorman
-------------------------
Geoffrey J.F. Gorman
Chairman of the Board
AB PLASTICS CORPORATION
By: /s/ James S. Adams
-------------------------
James S. Adams
President
EMPLOYEE:
/s/ Michael A. Gibbs
-------------------------
Michael A. Gibbs
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Exhibit 10.11
FIRST AMENDMENT TO THE
COMMERCIAL LOAN AGREEMENT
This First Amendment to the Commercial Loan Agreement ("Amendment") is
entered into the 5th day of June, 1997, by and between AB Plastics Corporation,
a California corporation ("Borrower") and SUMITOMO BANK OF CALIFORNIA ("Bank"),
with reference to the following:
RECITALS
A. Borrower and Bank have entered into a Commercial Loan Agreement,
dated September 27, 1996 (the "Agreement"), pursuant to which Bank agreed,
subject to the terms and conditions of the Agreement, to (i) on a revolving
basis, make advances to Borrower, which may not at any time exceed, in the
aggregate outstanding, a principal amount equal to the lesser of Ten Million
Dollars ($10,000,000) or the Borrowing Base (the "Revolving Line of Credit");
and (ii) make equipment loans under an Equipment Line in the aggregate principal
amount not to exceed Two Million Dollars ($2,000,000). Capitalized terms used
herein without definition shall have the meanings given them in the Agreement.
B. The Revolving Line of Credit is evidenced by that certain Revolving
Line Note dated September 27, 1996 in the maximum principal amount of Ten
Million and No/100 Dollars ($10,000,000). The Equipment Line is evidenced by
that certain Equipment Line Note dated September 27, 1996 in the maximum
principal amount of Two Million Dollars ($2,000,000).
C. In connection with the Agreement, Borrower executed that certain
Security Agreement dated as of September 27, 1996 in favor of Bank (the
"Security Agreement").
D. Borrower and Bank now desire to amend the Agreement and the other
Loan Documents as described below:
AMENDMENT
NOW THEREFORE in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Borrower and Bank hereby agree as follows:
1. AMENDMENTS TO THE AGREEMENT. The Agreement is hereby amended, effective as of
the date hereof, as follows:
a. Section 1.5(a), 1.5(b), and 1.5(d)(ii) are restated in their
entirety as follows:
<PAGE>
"(a) Equipment Line Availability Period. The period under which
Borrower may draw on the Equipment Line (the "Equipment Line
Availability Period") is between the date of this Agreement and
October 31, 1997, provided that Bank need not make any Equipment
Loan upon occurrence and during the continuance of any Event of
Default or any other event which, with the giving of notice or
the passage of time (or both), would constitute an Event of
Default. The total balance outstanding under the Equipment Line
at October 31, 1997 will be termed out into an Equipment Term
Loan."
"(b) Interest Rate. During the Equipment Line Availability
Period, each Equipment Loan outstanding under the Equipment Line
will bear interest at a rate per annum equal to the Bank's Prime
Rate in effect from time to time. Commencing November 1, 1997,
the Equipment Term Loan will bear interest at a rate per annum
equal to the Bank's Prime Rate in effect from time to time plus
one quarter of one percent (0.25%).
"(d) Repayment Terms.
"(ii) The aggregate principal amount outstanding under the
Equipment Line at October 31, 1997 shall be repaid by Borrower in
forty-eight (48) equal monthly payments, with the first such
payment to be made on December 1, 1997 and then on the first day
of each month thereafter, provided that the last such payment
shall be made on November 1, 2001."
b. Section 6.6(a), (b) and (c) remain unchanged, Section 6.6 last paragraph,
is restated in its entirety as follows:
"Since the date of the most current financial statements
submitted to Bank, there has been no material adverse change in
the assets, financial condition, or operating performance of
Borrower."
c. Section 7.1 is restated in entirety as follows:
"7.1 Use of Proceeds. To use the proceeds of the Revolving Line
of Credit only for working capital purposes, except that Borrower
may, for the purpose of purchasing the real property and
improvements located at 15730 S. Figueroa Street and West 57th
Street, Gardena, California ("Gardena Property"), borrow and
utilize in one single drawdown, a principal amount under the
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Revolving Line of Credit equal to the lesser of (a) $3,200,000,
or (b) 100% of the appraised value of the Gardena Property as
reflected in an appraisal satisfactory to Bank".
d. Section 7.2 (a), (b) and (d) are restated in their entirety as follows:
"(a) Within 120 days of Borrow's fiscal year end, the
consolidating and consolidated financial statements of Borrower
and AB Plastics Holding Corporation ("Holdings"). These financial
statement must be audited (with an unqualified opinion) by a
Certified Public Accountant ("CPA") reasonably acceptable to
Bank. Along with the financial statements, Borrower shall also
provided Bank a CPA compliance certificate in form reasonably
satisfactory to Bank."
"(b) Within 30 days of the month's end, the consolidating and
consolidated financial statements of Borrower and Holdings
(including balance sheet, income statement and statement of cash
flows). These financial statements may be Borrower prepared. The
statements shall reflect the results for the month just ended as
well as the results for the fiscal year-to-date period and shall
be accompanied by a compliance certificate in form reasonably
satisfactory to Bank."
"(d) Within 60 days after the start of each of Borrower's fiscal
years, a one year consolidated operating plan covering the
current fiscal year. Such plan will detail, on a monthly basis,
Borrower's best estimate of revenues, expenses and balance sheet
categories, and will be presented in the customary form of
balance sheet, income statement and statement of cash flows."
e. Section 7.3 is restated in its entirety as follows:
"7.3 Quick Ratio. To maintain on a consolidated basis for
Borrower and Holdings, as of the last day of each fiscal month, a
ratio of Quick Assets to Current Liabilities (as such terms are
hereinafter defined) of at least 0.45:1, effective 1/31/97 and
thereafter."
For purposes of this Section 7.3, (i) "Quick Assets" means the sum of cash, plus
unencumbered short term cash investments, plus net trade receivables, plus
unencumbered marketable securities not classified as long-term investments, and
(ii) "Current Liabilities" will include any outstanding balance under the
Revolving Line of Credit that is in excess of the amount borrowed for purposes
of funding the acquisition of the Gardena Property or funding the construction
on the Gardena Property.
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Notwithstanding the above, upon the completion of an initial public offering
("IPO") by Borrower or Holdings, the minimum Quick Ratio shall be reset at
0.85:1 effective with the first full month following the IPO"
f. Section 7.4 (Tangible Net Worth) is hereby deleted in its entirety.
g. Section 7.5 is restated in its entirety as follows:
"7.5 Total Liabilities to Tangible Net Worth. To maintain on a
consolidated basis for Borrower and Holdings as of the last day
of each fiscal month, ration of Total Liabilities Not
Subordinated to Tangible Net Worth not exceeding the amounts
indicated for each period specified below.
Period Ratio
------ -----
5/31/97 through 10/30/97 3.50:1
10/31/97 through 10/30/98 3.25:1
10/31/98 through lO/30/99 2.75:1
10/31/99 and thereafter 2.00:1
Notwithstanding the above, upon the completion of an IPO by
Borrower or Holdings, the ratio of Total Liabilities Not
Subordinated to Tangible Net Worth shall be set at a maximum of
2:1 effective with the first full month following the IPO.
"Tangible Net Worth" means the gross book value of Holding's and Borrower's
assets (excluding goodwill, patents, trademarks, trade names, organization
expenses, treasury stock, unamortized debt discount and expense, deferred
research and development costs, deferred marketing expenses, and other like
intangibles), plus debt subordinated to Bank in a manner acceptable to Bank,
less total liabilities, including, without limitation, accrued and deferred
income taxes, and any reserves against assets.
"Total Liabilities Not Subordinated" means the sum of Borrower's current
liabilities plus long term liabilities, excluding debt subordinated to
Borrower's obligations to Bank in a manner acceptable to Bank."
h. Section 7.6 is restated it is entirety as follows:
"7.6 Fixed Charge Coverage Ratio. To maintain on a consolidated
basis for Borrower and Holdings, as of last day of each fiscal
quarter, a ratio of EBITDA to Fixed Charges of at least the
levels indicated for each period specified below:
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Period Ratio
------ -----
4/30/97 through 10/31/97 1.15:1
thereafter 1.25:1
"EBITDA" means, for any period (a) net income for that period, plus (b) interest
expense for that period, plus (c) provision for income tax expense for that
period, plus (d) depreciation and depletion expenses for that period, plus (e)
amortization expense for that period.
"Fixed Charges" means, for any period, (a) interest expense for that period,
plus (b) capital expenditures (net of new purchase money financing, including
amounts borrowed for the purchase and/or development of the Gardena Property)
during such period, plus (c) income taxes paid for such period, plus (d) the
current portion of long term debt as of the date of calculation.
For any period of measurement, the (i) EBITDA would be calculated at the end of
such period using fiscal year-to-date results on an annualized basis, and (ii)
the Fixed Charges would be similarly calculated except that the current portion
of long term debt would be the amount shown on the balance sheet as of the date
of measurement."
i. Section 7.7 is restated in its entirety as follows:
"7.7. Profitability. To maintain on an unconsolidated basis for
Borrower, and also on a consolidated basis with Holdings, a positive
net income before taxes and extraordinary items and a positive net
income after taxes and extraordinary items as of the end of each of
Borrower's fiscal years. In addition, Borrower shall not experience a
negative net income (either before or after taxes and extraordinary
items) in each of any two (2) consecutive fiscal quarters."
j. Section 7.10 is restated in its entirety as follows:
"7.10 Leases. Not to permit the net aggregate payments due in any
fiscal year under all leases (including capital and opening leases for
real or personal property) to exceed Two Million Two Hundred and Fifty
Thousand Dollars ($2,250,000); however, such aggregate payments
limitation shall reduce to One Million Eight Hundred Thousand Dollars
(1,800,000) following the month of completion of the construction of a
warehouse, as approved by Bank on the Gardena Property."
k. A new Section 7.24 (i) is hereby being added:
"(i) Holdings shall not incur any debt, direct or contingent, except
for the Four Million dollars ($4,000,000) principal amount (plus
interest and charges thereon) owed to Sirrom
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Investments, Inc., or provide any guarantee of any person's one
entity's (other than Borrower's) debt without the prior written consent
of Bank."
2. AMENDMENT TO THE EQUIPMENT LINE NOTE. The third paragraph of the Equipment
Line Note dated as of September 27, 1996 is hereby restated in its entirety as
follows:
"The principal indebtedness evidenced by this Equipment Line Note shall
be payable as provided in the Agreement and any amendments thereof and
in any event in full on November 1, 2001."
3. REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES. Borrower reaffirms all of
the representations and warranties contained in the Agreement.
4. ONGOING EFFECT. Except as set forth herein, all of the terms and conditions
of the Agreement and the Equipment Line Note remain unmodified and in full force
and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
caused their duly authorized, representatives to execute this Agreement, as of
the day and year first above written.
BORROWER: AB PLASTICS CORPORATION
a California corporation
By: /s/Michael A. Gibbs
----------------------
CEO
BANK: SUMITOMO BANK OF CALIFORNIA
By: /s/Sajeda Simjee
-------------------
Sajeda Simjee, Vice President
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Exhibit 10.13
LOAN AGREEMENT
THIS LOAN AGREEMENT ("Agreement"), dated as of the 27th day of
September, 1996, is made and entered into on the terms and conditions
hereinafter set forth, by and between AB PLASTICS HOLDING CORPORATION, a
Delaware corporation ("Holding"), and AB PLASTICS CORPORATION, a California
corporation ("Plastics") (individually, a "Borrower" and collectively, the
"Borrowers"), and SIRROM INVESTMENTS, INC., a Tennessee corporation ("Lender").
RECITALS:
WHEREAS, Borrowers have requested that Lender make available to
Borrowers a term loan in the original principal amount of Four Million and
No/100ths Dollars ($4,000,000) (the "Loan") on the terms and conditions
hereinafter set forth, and for the purpose(s) hereinafter set forth; and
WHEREAS, in order to induce Lender to make the Loan to Borrowers,
Borrowers have made certain representations to Lender; and
WHEREAS, Lender, in reliance upon the representations and inducements
of Borrowers, has agreed to make the Loan upon the terms and conditions
hereinafter set forth.
AGREEMENT:
NOW, THEREFORE, in consideration of the agreement of Lender to make the
Loan, the mutual covenants and agreements hereinafter set forth, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Borrowers and Lender hereby agree as follows:
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ARTICLE 1
THE LOAN
1.1 Evidence of Loan Indebtedness and Repayment. Subject to the terms
and conditions hereof, the Lender shall make the Loan to Borrowers by wire
transfer in immediately available funds. The Loan shall be evidenced by a
Secured Subordinated Promissory Note in the original principal amount of Four
Million and No/100ths Dollars ($4,000,000.00), substantially in the form of
Exhibit A attached hereto and incorporated herein by this reference (the
"Note"), dated as of the date hereof, executed by Borrowers, in favor of Lender.
The Loan shall be payable in accordance with the terms of the Note. The Note,
this Agreement and any other instruments and documents executed by Borrowers or
any shareholder of either Borrower, now or hereafter evidencing, securing or in
any way related to the indebtedness evidenced by the Note are herein
individually referred to as a "Loan Document" and collectively referred to as
the "Loan Documents."
1.2 Processing Fee. Borrowers shall pay Lender a processing fee of One
Hundred Twenty Thousand Dollars ($120,000.00), Fifteen Thousand ($15,000) of
which has previously been paid and the balance of which shall be paid on the
date the Loan is funded.
1.3 Partial Prepayment. Borrowers may prepay the indebtedness evidenced
by the Note in whole or in part at any time and from time to time, without
penalty.
1.4 Purposes of Loan and Use of Proceeds. The purpose of the loan shall
be to finance the acquisition of Plastics and to provide additional working
capital to Borrowers.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
2.1 Borrower's Representations. Each Borrower hereby represents and
warrants to Lender as follows:
(a) Corporate Status. Each Borrower is a corporation duly
organized, validly existing and in good standing under the laws of the
State of its incorporation; and has the corporate power to own and
operate its properties, to carry on its business as now conducted and
to enter into and to perform its obligations under this Agreement and
the other Loan Documents to which it is a party. Each Borrower is duly
qualified to do
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business and in good standing in each state in which a failure to be so
qualified would have a material adverse effect on Borrowers'
consolidated financial position or its ability to conduct its business
in the manner now conducted (a "Material Adverse Effect").
(b) Subsidiaries. Except for the 100% ownership of Plastics by
Holding, neither Borrower owns nor has an interest in, directly or
indirectly, any other corporation, partnership, joint venture or other
business organization ("Subsidiaries").
(c) Authorization. Each Borrower has full legal right, power
and authority to conduct its business and affairs. Each Borrower has
full legal right, power and authority to enter into and perform its
obligations hereunder, without the consent or approval of any other
person, firm, governmental agency or other legal entity. The execution
and delivery of this Agreement, the borrowing hereunder, the execution
and delivery of each Loan Document to which each Borrower is a party,
and the performance by each Borrower of its obligations thereunder are
within the corporate powers of each Borrower and have been duly
authorized by all necessary corporate action properly taken, have
received all necessary governmental approvals, if any were required,
and do not and will not contravene or conflict with any provision of
law, any applicable judgment, ordinance, regulation or order of any
court or governmental agency, the charter or bylaws of each Borrower,
or any agreement binding upon each Borrower or its properties in which
such contravention or conflict would have a Material Adverse Effect.
The officer(s) executing this Agreement, the Note and all of the other
Loan Documents to which each Borrower is a party are duly authorized to
act on behalf of each Borrower.
(d) Validity and Binding Effect. This Agreement and the other
Loan Documents are the legal, valid and binding obligations of each
Borrower, enforceable in accordance with their respective terms,
subject to limitations imposed by bankruptcy, insolvency, moratorium or
other similar laws affecting the rights of creditors generally or the
application of general equitable principles.
(e) Capitalization. As of the date hereof, the authorized
capital stock of Holding consists solely of 5,000,000 shares of common
stock, $.0001 par value per share ("Common Stock"), of which 500,000
shares shall be issued and outstanding (the "Shares") and 200,000
shares of which shall be reserved for issuance upon exercise of the
Stock Purchase Warrant dated as of the date hereof and issued to Lender
(the "Warrant") and 1,000,000 shares of preferred stock, $.0001 par
value per share, none of which is outstanding; provided, however, that
the number of shares reserved for issuance upon
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exercise of the Warrant shall be subject to adjustment, from time to
time, in accordance with the antidilution provisions of the Warrant. As
of the date hereof, Holding does not have outstanding any stock or
securities convertible or exchangeable for any shares of its Common
Stock or containing any profit participation features, nor shall it
have outstanding any rights or options to subscribe for or to purchase
its Common Stock or any stock appreciation rights or phantom stock
plans, except (i) as set forth on Schedule 2.1(e) and (ii) in the
Warrant. Schedule 2.1(e) accurately sets forth the following with
respect to all outstanding options and rights to acquire the Holding's
Common Stock from Holding: (i) the total number of shares issuable upon
exercise of all outstanding options, (ii) the range of exercise prices
for all such outstanding options, (iii) the number of shares issuable,
the exercise price and the expiration date for each such outstanding
option and (iv) with respect to all outstanding options, warrants and
rights to acquire Holding's capital stock other than the Warrant, the
holder, the number of shares covered, the exercise price and the
expiration date. As of the date hereof, Holding is not subject to any
obligation (contingent or otherwise) to repurchase, redeem, retire or
otherwise acquire any shares of its capital stock or any warrants,
options or other rights to acquire its capital stock, except as set
forth in the Warrant or on Schedule 2.1(e). As of the date hereof, all
of the outstanding shares of Holding's capital stock shall be validly
issued, fully paid and nonassessable. Except as set forth on Schedule
2.1(e), there are no statutory or contractual preemptive rights, rights
of first refusal, anti-dilution rights or any similar rights, held by
stockholders or option holders of Holding, with respect to the issuance
of the Warrant or the issuance of the Common Stock upon exercise of the
Warrant. All such rights granted in the documents listed on Schedule
2.1(e) have been effectively waived with regard to the issuance of the
Warrant, the exercise of the Warrant and the issuance of the Common
Stock upon exercise of the Warrant. Holding has not violated any
applicable federal or state securities laws in connection with the
offer, sale or issuance of any of its capital stock, and the offer,
sale and issuance of the Warrant hereunder do not require registration
under the Securities Act or any applicable state securities laws. To
the best of Holding's knowledge, there are no agreements among
Holding's stockholders with respect to any other aspect of Holding's
affairs, except as set forth on Schedule 2.1(e). Except as set forth on
Schedule 2.1(e), Holding owns all of the issued and outstanding capital
stock of Plastics free and clear of all liens, claims, charges,
restrictions, security interests, pledges or encumbrances of any kind.
(f) Trademarks, Patents, Etc. Schedule 2.1(f) is an accurate
and complete list of all patents, trademarks, tradenames, trademark
registrations, service names, service marks, copyrights, licenses,
formulas and applications therefor owned by or used or
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<PAGE>
required by each Borrower in the operation of such Borrower's business;
title to each of which is, except as set forth in Schedule 2.1(f)
hereto, held by such Borrower free and clear of all adverse claims,
liens, security agreements, restrictions or other encumbrances. Except
as set forth on Schedule 2.1(f) is no infringement action, lawsuit,
claim or complaint which asserts that a Borrower's operations violate
or infringe the rights or the trade names, trademarks, trademark
registration, service name, service mark or copyright of others with
respect to any apparatus or method of such Borrower or any adversely
held trademark, trade name, trademark registration, service name,
service mark or copyright, and neither Borrower is in any way making
use of any confidential information or trade secrets of any person
except with the consent of such person.
(g) No Conflicts. Except as contemplated by loan or credit
agreements listed on Schedule 2.1(l) which shall be refinanced and
terminated as of the Closing Date, consummation of the transactions
hereby contemplated and the performance of the obligations of Borrowers
under and by virtue of the Loan Documents will not result in any breach
of, or constitute a default under, any mortgage, security deed or
agreement, deed of trust, lease, bank loan or credit agreement,
corporate charter or bylaws, agreement or certificate of limited
partnership, partnership agreement, license, franchise or any other
instrument or agreement to which any Borrower is a party or by which
any Borrower or its respective properties may be bound or affected or
to which any Borrower has not obtained an effective waiver.
(h) Litigation. Except as discussed on Schedule 2.1(h), there
are no actions, suits or proceedings pending, or, to the knowledge of
Borrowers threatened, against or affecting Borrowers or involving the
validity or enforceability of any of the Loan Documents at law or in
equity, or before any governmental or administrative agency; and to
each Borrower's knowledge, such Borrower is not in default with respect
to any order, writ, injunction, decree or demand of any court or any
governmental authority.
(i) Financial Statements. The financial statements of
Borrowers dated ____________________, 19___, which are attached hereto
as Schedule 2.1(i)(A), are true and correct in all material respects
have been prepared on the basis of accounting principles consistently
applied, and fairly present the financial condition of the Borrower as
of the date(s) thereof. No material adverse change has occurred in the
financial condition of any Borrower since the date(s) thereof, and no
additional borrowings have been made by any Borrower since the date(s)
thereof other than as set forth on Schedule 2.1(i)(B).
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(j) Other Agreements; No Defaults. Neither Borrower is a party
to any indenture, loan or credit agreement, lease or other agreement or
instrument, or subject to any charter or corporate restriction, that
could have a material adverse effect on the business, properties,
assets, operations or conditions, financial or otherwise, of such
Borrower, or the ability of such Borrower to carry out its obligations
under the Loan Documents to which it is a party. Neither Borrower is in
default in any respect in the performance, observance or fulfillment of
any of the obligations, covenants or conditions contained in any
agreement or instrument material to its business to which it is a
party, including but not limited to this Agreement and the other Loan
Documents, and no other default or event has occurred and is continuing
that with notice or the passage of time or both would constitute a
default or event of default under any of same.
(k) Compliance With Law. Except to the extent that
noncompliance, in the aggregate, cannot reasonably be expected to have
a Material Adverse Effect and will not materially adversely affect each
Borrower's ability to perform its obligations under the Loan Documents,
each Borrower (i) has obtained all necessary licenses, permits and
approvals and authorizations necessary or required in order to conduct
its business and affairs as heretofore conducted and as hereafter
intended to be conducted; and (ii) to each Borrower's knowledge, such
Borrower is in compliance with all laws, regulations, decrees and
orders applicable to it (including but not limited to laws,
regulations, decrees and orders relating to environmental, occupational
and health standards and controls, antitrust, monopoly, restraint of
trade or unfair competition).
(l) Debt. Schedule 2.1(l) is a complete and correct list of
all credit agreements, indentures, purchase agreements, promissory
notes and other evidences of indebtedness, guaranties, capital leases
and other instruments, agreements and arrangements presently in effect
providing for or relating to extensions of credit (including agreements
and arrangements for the issuance of letters of credit or for
acceptance financing) in respect of which the Borrowers or any of the
properties thereof is in any manner directly or contingently obligated;
and the maximum principal or face amounts of the credit in question
that are outstanding and that can be outstanding are correctly stated,
and all liens of any nature given or agreed to be given as security
therefore are correctly described or indicated in such Schedule.
(m) Taxes. Except as disclosed on Schedule 2.1(m): (i) each
Borrower has filed or caused to be filed all tax returns that to its
knowledge are required to be filed (except for returns that have been
appropriately extended), and has paid, or will pay when
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<PAGE>
due, all taxes shown to be due and payable on said returns and all
other taxes, impositions, assessments, fees or other charges imposed on
them by any governmental authority, agency or instrumentality, prior to
any delinquency with respect thereto (other than taxes, impositions,
assessments, fees and charges currently being contested in good faith
by appropriate proceedings, for which appropriate amounts have been
reserved); and (ii) no tax liens have been filed against either
Borrower or any of the property thereof.
(n) Small Business Concern. Borrowers, together with their
"affiliates" (as that term is defined in Title 13, Code of Federal
Regulations, ss. 121.103), are a "small business concern" within the
meaning of the Small Business Investment Act of 1958, as amended, and
the regulations promulgated thereunder. The information set forth in
the Small Business Administration Forms 480, 652 and Parts A and B of
Form 1031 regarding Borrowers upon delivery, pursuant to Section 4.1
hereof, will be accurate and complete. Borrowers do not presently
engage in, and will not hereafter engage in, any activities, and
Borrowers will not use directly or indirectly, the proceeds from the
Loan, for any purpose for which a Small Business Investment Company is
prohibited from providing funds by the Small Business Investment Act
and the regulations thereunder, including Title 13, Code of Federal
Regulations Section 107.720.
(o) Certain Transactions. Except as set forth on Schedule
2.1(o) hereto, neither Borrower is indebted, directly or indirectly, to
any of its officers or directors or to their respective spouses or
children, in any amount whatsoever; none of said officers or directors
or any members of their immediate families, are indebted to any
Borrower or have any direct or indirect ownership interest in any firm
or corporation with which such Borrower has a business relationship, or
any firm or corporation which competes with Borrower, except that
officers and/or directors of each Borrower may own no more than 4.9% of
outstanding stock of publicly traded companies which may compete with
any Borrower. Except as disclosed on Schedule 2.1(o), no officer or
director or any member of their immediate families, is, directly or
indirectly, interested in any material contract with Borrowers. Neither
Borrower is a guarantor or indemnitor of any indebtedness of any other
person, firm or corporation.
(p) Statements Not False or Misleading. No representation or
warranty given as of the date hereof by Borrowers contained in this
Agreement or any schedule attached hereto or any statement in any
document, certificate or other instrument furnished or to be furnished
to Lender pursuant hereto, taken as a whole, contains or will (as of
the time so furnished) contain any untrue statement of a material fact,
or omits or will (as of the
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time so furnished) omit to state any material fact which is necessary
in order to make the statements contained therein not misleading.
(q) Margin Regulations. Neither Borrower is engaged in the
business of extending credit for the purpose of purchasing or carrying
margin stock. No proceeds received pursuant to this Agreement will be
used to purchase or carry any equity security of a class which is
registered pursuant to Section 12 of the Securities Exchange Act of
1934, as amended.
(r) Significant Contracts. Schedule 2.1(r) is a complete and
correct list of all contracts, agreements and other documents pursuant
to which Borrowers receive revenues in excess of $100,000 per year.
Each such contract, agreement and other document is in full force and
effect as of the date hereof and Borrowers know of no reason why such
contracts, agreements and other documents would not remain in full
force and effect pursuant to the terms thereof.
(s) Environment. Each Borrower has duly complied with, and its
business, operations, assets, equipment, property, leaseholds or other
facilities are in compliance with, the provisions of all federal, state
and local environmental, health, and safety laws, codes and ordinances,
and all rules and regulations promulgated thereunder, except which such
non-compliance would have a Material Adverse Effect. Each Borrower has
been issued and will maintain all required federal, state and local
permits, licenses, certificates and approvals relating to (1) air
emissions; (2) discharges to surface water or groundwater; (3) noise
emissions; (4) solid or liquid waste disposal; (5) the use, generation,
storage, transportation or disposal of toxic or hazardous substances or
wastes (which shall include any and all such materials listed in any
federal, state or local law, code or ordinance and all rules and
regulations promulgated thereunder as hazardous or potentially
hazardous); or (6) other environmental, health or safety matters,
except where non-issuance or non-maintenance of any of the foregoing
would note have a Material Adverse Effect. Except as disclosed on
Schedule 2.1(s), neither Borrower has received notice of, or knows of,
or suspects facts which might constitute any violations of any federal,
state or local environmental, health or safety laws, codes or
ordinances, and any rules or regulations promulgated thereunder with
respect to its businesses, operations, assets, equipment, property,
leaseholds, or other facilities. To the best knowledge of Borrower,
except in accordance with a valid governmental permit, license,
certificate or approval, there has been no emission, spill, release or
discharge into or upon (1) the air; (2) soils, or any improvements
located thereon; (3) surface water or groundwater; or (4) the sewer,
septic
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system or waste treatment, storage or disposal system servicing the
premises, of any toxic or hazardous substances or wastes at or from the
premises; and accordingly the premises of Borrower are free of all such
toxic or hazardous substances or wastes. Except as disclosed on
Schedule 2.1(s), there has been no complaint, order, directive, claim,
citation or notice by any governmental authority or any person or
entity with respect to (1) air emissions; (2) spills, releases or
discharges to soils or improvements located thereon, surface water,
groundwater or the sewer, septic system or waste treatment, storage or
disposal systems servicing the premises; (3) noise emissions; (4) solid
or liquid waste disposal; (5) the use, generation, storage,
transportation or disposal of toxic or hazardous substances or waste;
or (6) other environmental, health or safety matters affecting Borrower
or its business, operations, assets, equipment, property, leaseholds or
other facilities. Borrower does not have knowledge of any indebtedness,
obligation or liability (absolute or contingent, matured or not
matured), with respect to the storage, treatment, cleanup or disposal
of any solid wastes, hazardous wastes or other toxic or hazardous
substances (including without limitation any such indebtedness,
obligation, or liability with respect to any current regulation, law or
statute regarding such storage, treatment, cleanup or disposal), except
as disclosed on Schedule 2.1(s) hereto.
(t) ERISA. Borrower is in compliance in all material respect
with all applicable provisions of ERISA as defined in Section 3.11
hereof). Neither a reportable event nor a prohibited transaction (as
defined in ERISA) has occurred and is continuing with respect to any
Plan (as defined in Section 3.11 hereof); no notice of intent to
terminate a Plan has been filed nor has nay Plan been terminated; no
circumstances exist which constitute grounds entitling the Pension
Benefit Guaranty Corporation (together with any entity succeeding to or
all of its functions, the "PBGC") to institute proceedings to
terminate, or appoint a trustee to administer, a Plan, nor has the PBGC
instituted any such proceedings; neither Borrower nor any commonly
controlled entity (as defined in ERISA) has completely or partially
withdrawn from a multiemployer plan(as defined in ERISA); each Borrower
and each commonly controlled entity has met its minimum funding
requirements under ERISA with respect to all of its Plans and the
present fair market value of all Plan property exceeds the present
value of all vested benefits under each Plan, as determined on the most
recent valuation date of the Plan and in accordance with the provisions
of ERISA and the regulations thereunder for calculating the potential
liability of such Borrower or any commonly controlled entity to the
PBGC or the Plan under Title IV or ERISA; and neither Borrower nor any
commonly controlled entity has incurred any liability to the PBGC under
ERISA.
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(u) Title to Properties. Each Borrower has good, indefeasible
and insurable title to, or valid leasehold interests in, all its real
properties and good title to its other assets, free and clear of all
liens other than Permitted Liens (as defined in Section 3.15 hereof).
(v) Limited Offering of Note and Warrant. Neither Borrower nor
anyone acting on its behalf has offered the Note, the Warrant or any
similar securities for sale to, or solicited any offer to buy any of
the same from, or otherwise approached or negotiated in respect
thereof, with, any person other than Lender and not more than 35 other
institutional investors. Neither Borrower nor anyone acting on its
behalf has taken, or will take, any action which would subject the
issuance or sale of the Note and Warrant to Section 5 of the Securities
Act of 1933, as amended, or the registration or qualification
provisions of the blue sky laws of any state.
(w) Registration Rights. Except as described in the Warrant,
Holding is not under any obligation to register under the Securities
Act of 1933, as amended, or the Trust Indenture Act of 1939, as
amended, any of its presently outstanding securities or any of its
securities that may subsequently be issued.
(x) Employees. Neither Borrower has any current labor problems
or disputes which have resulted or either Borrower reasonably believes
could be expected to have a Material Adverse Effect.
(y) Issuance Taxes. All taxes imposed on Borrowers in
connection with the issuance, sale and delivery of the Note, the
Warrant and the capital stock issuable upon exercise of the Warrant
have been or will be fully paid, and all laws imposing such taxes have
been or will be fully satisfied by Borrowers.
ARTICLE 3
COVENANTS AND AGREEMENTS
Borrowers covenant and agree, jointly and severally, that during the
term of this Agreement:
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3.1 Payment of Obligations. Borrowers shall pay the indebtedness
evidenced by the Note according to the terms thereof, and shall timely pay or
perform, as the case may be, all of the other obligations of Borrowers to
Lender, direct or contingent, however evidenced or denominated, and however and
whenever incurred, including but not limited to indebtedness incurred pursuant
to any present or future commitment of Lender to Borrowers, together with
interest thereon, and any extensions, modifications, consolidations and/or
renewals thereof and any notes given in payment thereof.
3.2 Financial Statements and Reports. Holding shall furnish to Lender
(i) as soon as practicable and in any event within ninety (90) days after the
end of Holding's fiscal year, an audited consolidated and consolidating balance
sheet of Borrowers as of the close of such fiscal year, an audited consolidated
and consolidating statement of earnings and retained earnings of Borrowers as of
the close of such fiscal year and an audited consolidated and consolidating
statement of cash flows for Borrowers for such fiscal year, prepared in
accordance with generally accepted accounting principles consistently applied
and accompanied by an unqualified audit report prepared by an independent
certified public accountant reasonably acceptable to Lender showing the
financial condition of Borrowers at the close of such year and the results of
its operations during such year and accompanied by a certificate of the
President of Holding, stating that to the best of the knowledge of such officer,
such Borrower has kept, observed, performed and fulfilled each covenant, term
and condition of this Agreement and the other Loan Documents during the
preceding fiscal year and that no Event of Default has occurred and is
continuing (or if an Event of Default has occurred and is continuing, specifying
the nature of same, the period of existence of same and the action such
Borrowers propose to take in connection therewith), (ii) within twenty (20) days
of the end of each calendar month, a status report indicating the financial
performance of each Borrower during such month and the financial position of
each Borrower as of the end of such month, (iii) within forty-five (45) days of
the end of each quarter, a consolidated and consolidating balance sheet of
Borrowers as of the close of such quarter and a consolidated and consolidating
statement of earnings and retained earnings of Borrowers as of the close of such
quarter, all in reasonable detail, and prepared substantially in accordance with
generally accepted accounting principles consistently applied (except for the
absence of footnotes and subject to year-end adjustments), and (iv) with
reasonable promptness, such other financial data as Lender may reasonably
request.
3.3 Maintenance of Books and Records; Inspection. Each Borrower shall
maintain its books, accounts and records in accordance with generally accepted
accounting principles consistently applied, and permit Lender, its officers and
employees and any professionals designated by Lender in writing, at Lender's
expense, to visit and inspect any of its properties,
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corporate books and financial records, and to discuss its accounts, affairs and
finances with such Borrower or the principal officers of such Borrower during
reasonable business hours, all at such times as Lender may reasonably request;
provided that no such inspection shall materially interfere with the conduct of
such Borrower's business.
3.4 Insurance. Without limiting any of the requirements of any of the
other Loan Documents, Borrowers shall maintain, in amounts customary for
entities engaged in comparable business activities, (i) to the extent required
by applicable law, worker's compensation insurance (or maintain a legally
sufficient amount of self insurance against worker's compensation liabilities,
with adequate reserves, under a plan approved by Lender, such approval not to be
unreasonably withheld or delayed), and (ii) fire and "all risk" casualty
insurance on its properties against such hazards and in at least such amounts as
are customary in Borrowers' business. Borrowers will make reasonable efforts to
obtain and maintain public liability insurance in an amount, and at a cost,
deemed reasonable to the Borrowers' Board of Directors. At the request of
Lender, Borrowers will deliver forthwith a certificate specifying the details of
such insurance in effect.
3.5 Taxes and Assessments. Each Borrower shall (i) file all tax returns
and appropriate schedules thereto that are required to be filed under applicable
law, prior to the date of delinquency, (ii) pay and discharge all taxes,
assessments and governmental charges or levies imposed upon such Borrower upon
its income and profits or upon any properties belonging to it, prior to the date
on which penalties attach thereto, and (iii) pay all taxes, assessments and
governmental charges or levies that, if unpaid, might become a lien or charge
upon any of its properties; provided, however, that a Borrower in good faith may
contest any such tax, assessment, governmental charge or levy described in the
foregoing clauses (ii) and (iii) so long as appropriate reserves are maintained
with respect thereto.
3.6 Corporate Existence. Each Borrower shall maintain its corporate
existence and good standing in the state of its incorporation, and its
qualification and good standing as a foreign corporation in each jurisdiction in
which such qualification is necessary pursuant to applicable law.
3.7 Compliance with Law and Other Agreements. Except where the failure
to do so would not materially adversely affect a Borrower's operations or its
ability to fulfill its obligations under the Loan Documents, each Borrower shall
maintain its business operations and property owned or used in connection
therewith in compliance with (i) all applicable federal, state and local laws,
regulations and ordinances governing such business operations and the use and
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ownership of such property, and (ii) all agreements, licenses, franchises,
indentures and mortgages to which each Borrower is a party or by which each
Borrower or any of its properties is bound. Without limiting the foregoing, each
Borrower shall pay all of its indebtedness promptly in accordance with the terms
thereof.
3.8 Notice of Default. Borrowers shall give written notice to Lender of
the occurrence of any default, event of default or Event of Default under this
Agreement or any other Loan Document promptly upon the occurrence thereof.
3.9 Notice of Litigation. Borrowers shall give notice, in writing, to
Lender of (i) any actions, suits or proceedings wherein the amount at issue is
in excess of Twenty-Five Thousand and No/100ths Dollars ($25,000.00) instituted
by any persons whomsoever against either Borrower or affecting any of the assets
of either Borrower, and (ii) any dispute, not resolved within sixty (60) days of
the commencement thereof, between a Borrower on the one hand and any
governmental regulatory body on the other hand, which dispute might materially
interfere with the normal operations of a Borrower.
3.10 Conduct of Business. Borrowers will continue to engage in a
business of the same general type and manner as conducted by it on the date of
this Agreement.
3.11 ERISA Plan. If either Borrower has in effect, or hereafter
institutes, a pension plan that is subject to the requirements of Title IV of
the Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406,
September 2, 1974, 88 Stat. 829, 29 U.S.C.A. Section 1001 et seq. (1975), as
amended from time to time ("ERISA"), then the following warranty and covenants
shall be applicable during such period as any such plan (the "Plan") shall be in
effect: (i) Borrower hereby warrants that no fact that might constitute grounds
for the involuntary termination of the Plan, or for the appointment by the
appropriate United States District Court of a trustee to administer the Plan,
exists at the time of execution of this Agreement, (ii) Borrower hereby
covenants that throughout the existence of the Plan, Borrower's contributions
under the Plan will meet the minimum funding standards required by ERISA and
Borrower will not institute a distress termination of the Plan, and (iii)
Borrower covenants that it will send to Lender a copy of any notice of a
reportable event (as defined in ERISA) required by ERISA to be filed with the
Labor Department or the Pension Benefit Guaranty Corporation, at the time that
such notice is so filed.
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3.12 Dividends, Stock Rights, etc. Neither Borrower shall declare or
pay any dividend of any kind (other than stock dividends payable to all holders
of any class of capital stock), in cash or in property, on any class of its
capital stock, or purchase, redeem, retire or otherwise acquire for value any
shares of such stock, nor make any distribution of any kind in cash or property
in respect thereof, nor make any return of capital of shareholders, nor make any
payments in cash or property in respect of any stock options, stock bonus or
similar plan (except as required or permitted hereunder), nor grant any
preemptive rights with respect to its capital stock, without the prior written
consent of Lender.
3.13 Guaranties; Loans; Payment of Debt. Neither Borrower shall,
without Lender's prior express written consent, guarantee nor be liable in any
manner, whether directly or indirectly, or become contingently liable after the
date of this Agreement in connection with the obligations or indebtedness of any
person or entity whatsoever, except for the endorsement of negotiable
instruments payable to a Borrower for deposit or collection in the ordinary
course of business. Neither Borrower shall, without Lender's prior express
written consent, which shall not be unreasonably withheld, (i) make any loan,
advance or extension of credit to any person other than in the normal course of
its business, or (ii) make any payment on any indebtedness for money borrowed
expressly subordinated by its terms to the Notes.
3.14 Debt. Without the express prior written consent of Lender, neither
Borrower shall create, incur, assume or suffer to exist indebtedness of any
description whatsoever, excluding:
(a) the indebtedness evidenced by the Note;
(b) indebtedness in the aggregate maximum amount of $12,000,000 to
Sumitomo Bank of California ("Sumitomo") or any other bank,
commercial finance company, insurance company or other
institutional lender, the lending activities of which are
regulated by Federal or state law (with Sumitomo a "Senior
Lender") on terms and conditions substantially the same as those
set forth in the loan documents evidencing and securing on the
date hereof the indebtedness owing to Sumitomo;
(c) the endorsement of negotiable instruments payable to Borrowers
for deposit or collection in the ordinary course of business;
(d) purchase money or installment indebtedness incurred in the
ordinary course of business in accordance with Borrowers' annual
capital expenditure budget approved by Lender,or other similar
indebtedness (each of which, individually, does not exceed
$100,000 or $500,000 in the aggregate); and
(e) the other indebtedness listed on Schedule 2.1(l) hereto.
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3.15 No Liens. Neither Borrower shall create, incur, assume or suffer
to exist any lien, security interest, security title, mortgage, deed of trust or
other encumbrance upon or with respect to any of its properties, now owned or
hereafter acquired, except the following permitted liens (the "Permitted
Liens"):
(a) liens in favor of Lender;
(b) liens for taxes or assessments or other governmental charges or
levies if not yet due and payable;
(c) liens in connection with the leasing of equipment in favor of the
lessor of such equipment;
(d) liens in favor of a Senior Lender;
(e) liens incurred in connection with permitted indebtedness
described in Section 3.14; and
(f) liens described on Schedule 2.1(l) hereto.
3.14 Mergers, Consolidations, Acquisitions and Sales. Without the prior
written consent of Lender, neither Borrower shall (a) be a party to any merger,
consolidation or corporate reorganization, nor (b) purchase or otherwise acquire
all or substantially all of the assets or stock of, or any partnership or joint
venture interest in, any other person, firm or entity, nor (c) sell, transfer,
convey, grant a security interest in or lease all or any substantial part of its
assets, nor (d) create any Subsidiaries nor convey any of its assets to any
Subsidiary.
3.15 Transactions With Affiliates. Neither Borrower shall enter into
any transaction, including, without limitation, the purchase, sale or exchange
of property or the rendering of any service, with any affiliate, except in the
ordinary course of and pursuant to the reasonable requirements of a Borrower's
business and upon fair and reasonable terms no less favorable to such Borrower
than such Borrower would obtain in a comparable arm's length transaction with a
person not an affiliate. For the purposes of this Section 3.17, "affiliate"
shall mean a person, corporation, partnership or other entity controlling,
controlled by or under common control with Borrower.
3.16 Environment. Each Borrower shall be and remain in compliance with
the provisions of all federal, state and local environmental, health, and safety
laws, codes and ordinances, and all rules and regulations issued thereunder;
notify Lender immediately of any notice of a hazardous discharge or
environmental complaint received from any governmental agency or any other
party; notify Lender immediately of any hazardous discharge from or affecting
its premises; immediately contain and remove the same, in compliance with all
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applicable laws; promptly pay any fine or penalty assessed in connection
therewith; permit Lender to inspect the premises, to conduct tests thereon, and
to inspect all books, correspondence, and records pertaining thereto; and at
Lender's request, and at Borrowers' expense, provide a report of a qualified
environmental engineer, satisfactory in scope, form, and content to Lender, and
such other and further assurances reasonably satisfactory to Lender that the
condition has been corrected.
ARTICLE 4
CONDITIONS TO CLOSING
4.1 Closing of the Loan. The obligation of Lender to fund the Loan on
the date hereof (the "Closing Date") is subject to the fulfillment, on or prior
to the Closing Date, of each of the following conditions:
(a) Borrowers shall have performed and complied in all
material respects with all of the covenants, agreements, obligations
and conditions required by this Agreement.
(b) Lender shall have received an opinion of the Borrowers'
counsel, Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, dated
the Closing Date, in form and substance satisfactory to Lender's
counsel, Caldwell & Caldwell, P.C.
(c) Borrowers shall have delivered to Lender a Note executed
by Borrowers, substantially in the form of Exhibit A attached hereto
and incorporated herein by this reference.
(d) Borrowers shall have delivered to Lender a Stock Purchase
Warrant executed by Holding, substantially in the form of Exhibit B
attached hereto and incorporated herein by this reference.
(e) Borrowers shall have delivered to Lender a Security
Agreement executed by Borrowers and a related UCC-1 Financing
Statements executed by Borrowers, each of which is substantially in the
form of Exhibit C attached hereto and incorporated herein by this
reference.
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(f) Holding shall have delivered to Lender a Pledge and
Security Agreement and related stock certificates and stock powers,
executed by Holding, substantially in the form of Exhibit D attached
hereto and incorporated herein by this reference.
(g) Borrowers shall have delivered to Lender the Small
Business Administration Forms 480, 652 and 1031 (Parts A and B)
completed by Borrowers.
(h) Borrowers shall have delivered to Lender the Small
Business Administration Economic Impact Assessment completed by
Borrowers, a form of which is attached hereto as Exhibit F and
incorporated herein by this reference.
(i) Lender shall have received copies of the corporate charter
and other publicly filed organizational documents of Borrowers,
certified by the Secretary of State or other appropriate public
official in the jurisdiction in which Borrowers are incorporated.
(j) Lender shall have received certified (as of the date of
this Agreement) copies of all corporate action taken by Borrowers,
including resolutions of their Boards of Directors, authorizing the
execution, delivery and performance of the Loan Documents.
(k) Lender shall have received a certificate as to the legal
existence and good standing of the Borrowers, issued by the Secretary
of State or other appropriate public official in the jurisdiction in
which the Borrowers are incorporated.
(l) Lender shall have received certificates of the Secretaries
of State or other appropriate public officials as to Borrowers'
qualification to do business and good standing in each jurisdiction in
which a failure to be so qualified would have a material adverse effect
on their financial position or its ability to conduct their business in
the manner now conducted and as hereafter intended to be conducted.
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ARTICLE 5
DEFAULT AND REMEDIES
5.1 Events of Default. The occurrence of any of the following shall
constitute an Event of Default hereunder:
(a) Default in the payment of the principal of or interest on
the indebtedness evidenced by the Note in accordance with the terms of
the Note, which default is not cured within ten (10) days;
(b) Any misrepresentation by Borrowers as to any material
matter hereunder or under any of the other Loan Documents, or delivery
by Borrowers of any schedule, statement, resolution, report,
certificate, notice or writing to Lender that is untrue in any material
respect on the date as of which the facts set forth therein are stated
or certified;
(c) Failure of Borrowers to perform any of their obligations,
covenants or agreements under this Agreement, the Note or any of the
other Loan Documents;
(d) Either Borrower (i) shall generally not pay or shall be
unable to pay its debts as such debts become due; or (ii) shall make an
assignment for the benefit of creditors or petition or apply to any
tribunal for the appointment of a custodian, receiver or trustee for it
or a substantial part of its assets; or (iii) shall commence any
proceeding under any bankruptcy, reorganization, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect; or (iv) shall have
had any such petition or application filed or any such proceeding
commenced against it in which an order for relief is entered or an
adjudication or appointment is made; or (v) shall indicate, by any act
or intentional and purposeful omission, its consent to, approval of or
acquiescence in any such petition, application, proceeding or order for
relief or the appointment of a custodian, receiver or trustee for it or
a substantial part of its assets; or (vi) shall suffer any such
custodianship, receivership or trusteeship to continue undischarged for
a period of sixty (60) days or more;
(e) Either Borrower shall be liquidated, dissolved,
partitioned or terminated, or the charter thereof shall expire or be
revoked;
(f) A default or event of default shall occur under any of the
other Loan Documents and, if subject to a cure right, such default or
event of default shall not be
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cured within the applicable cure period, provided that if such default
shall be subsequently waived by the Senior Lender under any other Loan
Document, such waiver shall be deemed to cure such default or event of
default hereunder;
(g) Borrowers shall default in the timely payment or
performance of any obligation now or hereafter owed to Lender in
connection with any other indebtedness of Borrowers now or hereafter
owed to Lender;
(h) Either Borrower shall have defaulted and continue to be in
default in the timely payment or performance of any other indebtedness
or obligation, which in the aggregate exceeds One Hundred Thousand and
No/100ths Dollars ($100,000.00);
(i) Any two of Jawed Ghias, Michael Gibbs and Paul Iacono
shall no longer be employed in an executive management position by
Plastics; or
(j) Borrowers shall enter into an agreement with a Senior
Lender extending the maturity date of the indebtedness owed to the
Senior Lender beyond the Maturity Date (as defined in the Note) of the
Note, without Lender's prior written consent.
With respect to any Event of Default described above that is capable of
being cured and that does not already provide its own cure procedure (a "Curable
Default"), the occurrence of such Curable Default shall not constitute an Event
of Default hereunder if such Curable Default is fully cured and/or corrected
within thirty (30) days (ten (10) days, if such Curable Default may be cured by
payment of a sum of money) of notice thereof to Borrowers given in accordance
with the provisions hereof.
5.2 Acceleration of Maturity; Remedies. Upon the occurrence and during
the continuance of any Event of Default described in subsection 5.1(d), the
indebtedness evidenced by the Note as well as any and all other indebtedness of
Borrowers to Lender shall be immediately due and payable in full; and upon the
occurrence and during the continuance of any other Event of Default described
above, Lender at any time thereafter may at its option accelerate the maturity
of the indebtedness evidenced by the Note as well as any and all other
indebtedness of Borrowers to Lender; all without notice of any kind. Upon the
occurrence and during the continuance of any such Event of Default and the
acceleration of the maturity of the indebtedness evidenced by the Note:
(a) Lender shall be immediately entitled to exercise any and
all rights and remedies possessed by Lender pursuant to the terms of
the Note and all of the other Loan Documents; and
(b) Lender shall have any and all other rights and remedies
that Lender may now or hereafter possess at law, in equity or by
statute.
5.3 Remedies Cumulative; No Waiver. No right, power or remedy conferred
upon or reserved to Lender by this Agreement or any of the other Loan Documents
is intended to be exclusive of any other right, power or remedy, but each and
every such right, power and remedy shall be cumulative and concurrent and shall
be in addition to any other right, power and remedy given hereunder, under any
of the other Loan Documents or now or hereafter existing at law, in
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equity or by statute. No delay or omission by Lender to exercise any right,
power or remedy accruing upon the occurrence of any Event of Default shall
exhaust or impair any such right, power or remedy or shall be construed to be a
waiver of any such Event of Default or an acquiescence therein, and every right,
power and remedy given by this Agreement and the other Loan Documents to Lender
may be exercised from time to time and as often as may be deemed expedient by
Lender.
5.4 Proceeds of Remedies. Any or all proceeds resulting from the
exercise of any or all of the foregoing remedies shall be applied as set forth
in the Loan Document(s) providing the remedy or remedies exercised; if none is
specified, or if the remedy is provided by this Agreement, then as follows:
First, to the costs and expenses, including reasonable
attorney's fees, incurred by Lender in connection with the exercise of
its remedies;
Second, to the expenses of curing the default that has
occurred, in the event that Lender elects, in its sole discretion, to
cure the default that has occurred;
Third, to the payment of the obligations of Borrower under the
Loan Documents (the "Obligations"), including but not limited to the
payment of the principal of and interest on the indebtedness evidenced
by the Note, in such order of priority as Lender shall determine in its
sole discretion; and
Fourth, the remainder, if any, to Borrowers or to any other
person lawfully thereunto entitled.
ARTICLE 6
TERMINATION
6.1 Termination of this Agreement. This Agreement shall remain in full
force and effect until the later of (i) the Maturity Date (as defined in the
Note), or (ii) the payment by Borrowers of all amounts owed to Lender, at which
time Lender shall cancel the Note and deliver it to Borrowers; provided,
however, that if at any time Borrowers have satisfied all obligations to Lender,
Borrowers may terminate this Agreement by providing written notice to Lender.
ARTICLE 7
SUBORDINATION AGREEMENT
7.1 Simultaneously with its execution of this Agreement, Lender has
entered into a Subordination Agreement with Sumitomo in the form of Exhibit G
hereto, pursuant to which inter alia Lender's security interests and rights
under the Security Agreement with Borrowers are
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expressly subordinated to the security interests and rights of Sumitomo securing
indebtedness owed to Sumitomo.
7.2 In the event Borrowers shall subsequently refinance the
indebtedness owed to Sumitomo or otherwise incur indebtedness permitted under
Section 3.14(b) above, to another Senior Lender, the Lender shall enter into a
related subordination agreement with such other Senior Lender with respect to
such indebtedness consistent with Exhibit G hereto.
ARTICLE 8
MISCELLANEOUS
8.1 Performance By Lender. If Borrowers shall default in the payment,
performance or observance of any covenant, term or condition of this Agreement,
which default is not cured within the applicable cure period, then Lender may,
at its option, pay, perform or observe the same, and all payments made or costs
or expenses incurred by Lender in connection therewith (including but not
limited to reasonable attorney's fees), with interest thereon at the highest
default rate provided in the Note (if none, then at the maximum rate from time
to time allowed by applicable law), shall be immediately repaid to Lender by
Borrowers and shall constitute a part of the Obligations. Lender shall be the
sole judge of the necessity for any such actions and of the amounts to be paid.
8.2 Successors and Assigns Included in Parties. Whenever in this
Agreement one of the parties hereto is named or referred to, the heirs, legal
representatives, successors, successors-in-title and assigns of such parties
shall be included, and all covenants and agreements contained in this Agreement
by or on behalf of Borrowers or by or on behalf of Lender shall bind and inure
to the benefit of their respective heirs, legal representatives,
successors-in-title and assigns, whether so expressed or not.
8.3 Costs and Expenses. Borrowers agree, jointly and severally, to pay
all reasonable costs and expenses incurred by Lender in connection with the
making of the Loan, including but not limited to filing fees, recording taxes
and reasonable attorneys' fees, promptly upon demand of Lender. Borrowers
further agree, jointly and severally, to pay all premiums for insurance required
to be maintained by Borrowers pursuant to the terms of the Loan Documents and
all of the out-of-pocket costs and expenses incurred by Lender in connection
with the collection of the Loan, amendment to the Loan Documents, or prepayment
of the Loan, including but not limited to reasonable attorneys' fees, promptly
upon demand of Lender.
8.4 Assignment. The Note, this Agreement and the other Loan Documents
may be endorsed, assigned and/or transferred in whole or in part by Lender, and
any such holder and/or assignee of the same shall succeed to and be possessed of
the rights and powers of Lender under all of the same to the extent transferred
and assigned. Lender may grant participations in all or any portion of its
interest in the indebtedness evidenced by the Note, and in such event Borrowers
shall continue to make payments due under the Loan Documents to Lender and
Lender shall have the sole responsibility of allocating and forwarding such
payments in the appropriate manner and
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amounts. Borrowers shall not assign any of their rights nor delegate any of
their duties hereunder or under any of the other Loan Documents without the
prior express written consent of Lender.
8.5 Time of the Essence. Time is of the essence with respect to each
and every covenant, agreement and obligation of Borrowers hereunder and under
all of the other Loan Documents.
8.6 Severability. If any provision(s) of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
8.7 Interest and Loan Charges Not to Exceed Maximum Allowed by Law.
Anything in this Agreement, the Note or any of the other Loan Documents to the
contrary notwithstanding, in no event whatsoever, whether by reason of
advancement of proceeds of the Loan, acceleration of the maturity of the unpaid
balance of the Loan or otherwise, shall the interest and loan charges agreed to
be paid to Lender for the use of the money advanced or to be advanced hereunder
exceed the maximum amounts collectible under applicable laws in effect from time
to time. It is understood and agreed by the parties that, if for any reason
whatsoever the interest or loan charges paid or contracted to be paid by
Borrowers in respect of the indebtedness evidenced by the Note shall exceed the
maximum amounts collectible under applicable laws in effect from time to time,
then ipso facto, the obligation to pay such interest and/or loan charges shall
be reduced to the maximum amounts collectible under applicable laws in effect
from time to time, and any amounts collected by Lender that exceed such maximum
amounts shall be applied to the reduction of the principal balance of the
indebtedness evidenced by the Note and/or refunded to Borrowers so that at no
time shall the interest or loan charges paid or payable in respect of the
indebtedness evidenced by the Note exceed the maximum amounts permitted from
time to time by applicable law.
8.8 Article and Section Headings; Defined Terms. Numbered and titled
article and section headings and defined terms are for convenience only and
shall not be construed as amplifying or limiting any of the provisions of this
Agreement.
8.9 Notices. Any and all notices, elections or demands permitted or
required to be made under this Agreement shall be in writing, signed by the
party giving such notice, election or demand and shall be delivered personally,
telecopied, telexed, or sent by certified mail or overnight via nationally
recognized courier service (such as Federal Express), to the other party at the
address set forth below, or at such other address as may be supplied in writing
and of which receipt has been acknowledged in writing. The date of personal
delivery, telecopy or telex or two (2) business days after the date of mailing
(or the next business day after delivery to such courier service), as the case
may be, shall be the date of such notice, election or demand. For the purposes
of this Agreement:
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The Address of Lender is: Sirrom Investments, Inc.
Suite 200
500 Church Street
Nashville, TN 37219
Attention: David Sinutko
with a copy to: Caldwell & Caldwell, P.C.
500 Church Street, Suite 200
Nashville, TN 37219
Attention: Maria-Lisa Caldwell, Esq.
The Address of Borrowers is: AB Plastics Corporation
15730 South Figueroa Street
Gardena, CA 90247
Attention: President
with a copy to: Greenberg, Traurig, Hoffman, Lipoff,
Rosen & Quentel
153 East 53rd Street
New York, NY 10022
Attention: Stephen A. Weiss
8.10 Entire Agreement. This Agreement and the other written agreements
between Borrowers and Lender represent the entire agreement between the parties
concerning the subject matter hereof, and all oral discussions and prior
agreements are merged herein; provided, if there is a conflict between this
Agreement and any other document executed contemporaneously herewith with
respect to the Obligations, the provision of this Agreement shall control. The
execution and delivery of this Agreement and the other Loan Documents by the
Borrowers were not based upon any fact or material provided by Lender, nor were
the Borrowers induced or influenced to enter into this Agreement or the other
Loan Documents by any representation, statement, analysis or promise by Lender.
8.11 Governing Law and Amendments. This Agreement shall be construed
and enforced under the laws of the State of Tennessee applicable to contracts to
be wholly performed in such State. No amendment or modification hereof shall be
effective except in a writing executed by each of the parties hereto.
8.12 Survival of Representations and Warranties. All representations
and warranties contained herein or made by or furnished on behalf of the
Borrowers in connection herewith shall survive the execution and delivery of
this Agreement and all other Loan Documents.
8.13 Jurisdiction and Venue. Each Borrower hereby consents to the
jurisdiction of the courts of the State of Tennessee and the United States
District Court for the Middle District of Tennessee, as well as to the
jurisdiction of all courts from which an appeal may be taken from such courts,
for the purpose of any suit, action or other proceeding arising out of any of
its obligations arising under this Agreement or any other Loan Documents or with
respect to the
23
<PAGE>
transactions contemplated hereby, and expressly waives any and all objections it
may have as to venue in any of such courts.
8.14 Waiver of Trial by Jury. LENDER AND BORROWERS HEREBY WAIVE TRIAL
BY JURY IN ANY ACTION, PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS, WHETHER IN
CONTRACT OR TORT, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATING TO
THIS AGREEMENT OR THE LOAN DOCUMENTS.
8.15 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties to this Agreement in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same Agreement.
8.16 Construction and Interpretation. Should any provision of this
Agreement require judicial interpretation, the parties hereto agree that the
court interpreting or construing the same shall not apply a presumption that the
terms hereof shall be more strictly construed against one party by reason of the
rule of construction that a document is to be more strictly construed against
the party that itself or through its agent prepared the same, it being agreed
that the Borrower, Lender and their respective agents have participated in the
preparation hereof.
24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
have caused this Agreement to be executed by their duly authorized officers, as
of the day and year first above written.
LENDER:
SIRROM INVESTMENTS, INC., a Tennessee
corporation
By: /s/ Kathy Harris
-------------------------
Title: Vice President
BORROWERS:
AB PLASTICS HOLDING CORPORATION,
a Delaware corporation
By: /s/Geoffrey Gorman
-------------------------
Title: Chairman
AB PLASTICS CORPORATION,
a California corporation
By: /s/Geoffrey Gorman
-------------------------
Title: Vice President and Chairman
25
<PAGE>
EXHIBIT 11.1
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 the 1,560,000
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. 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.
The computation of weighted average number of shares outstanding as of
follows:
<TABLE>
<CAPTION>
Common Stock Stock
Stock Options Warrants Total
------------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Number of shares outstanding as of
September 27, 1996 (Inception) ......... 500,000 -0- -0- 500,000
Issuance of stock options ............... -0- 200,000 -0- 200,000
Issuance of warrants to officers ......... -0- -0- 100,000 100,000
Issuance of warrants to a financial
institution ........................... -0- -0- 200,000 200,000
--------- -------- ---------- ---------
Number of shares outstanding ............ 500,000 200,000 300,000 1,000,000
Purchase of treasury stock* ............ (100,000) -0- -0- (100,000)
--------- -------- ---------- ---------
400,000 200,000 300,000 900,000
Stock split .............................. 4 4 4 4
--------- -------- ---------- ---------
Common stock and common equivalents
outstanding after the retroactive effect
of stock split ........................ 1,600,000 800,000 1,200,000 3,600,000
========= ======== ========== =========
</TABLE>
- ------------
* For purposes of calculation using the Modified Treasury Stock Method.
<PAGE>
Exhibit 16.1
BLOCK, PLANT, EISNER, FIORITO & BELAK-BERGER
July __, 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 and Shareholders of
Compass Plastics & Technologies, Inc.
(formerly AB Plastics Holding
Corporation) and Subsidiary
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. 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
July 21, 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. We have
read the last paragraph under "Experts" and are in agreement with statements
contained therein.
BLOCK, PLANT, EISNER, FIORITO & BELAK-BERGER
Encino, California
July 18, 1997
<PAGE>
Exhibit 99.1
Marcum & Kliegman LLP
Certified Public Accountants & Consultants
A Limited Liability Partnership Consisting of Professional Corporations
July 10, 1997
Ms. Lisa Mitrovich
Securities and Exchange Commission
Division of Corporate Finance
Washington, D.C. 20549
Re: Compass Plastics & Technologies, Inc. Registration Statement
on Form S-1
Filed June 6, 1997
File No. 333-28741
Response to Comment Number 30 of letter dated July 2, 1997
Dear Ms. Mitrovich:
As per our telephone conversation of today, we respectfully reiterate the
following facts in response to Comment Number 30 of the Commission's letter
dated July 2, 1997:
o In connection with our audits of Compass Plastics &
Technologies, Inc. (the "Company") for the periods ended
October 27, 1997 and September 27, 1997, the audit fieldwork
procedures were performed by Block, Plant, Eisner, Fiorito &
Blelak-Berge ("Block"), an accounting firm registered in
California and were supervised and reviewed by Marcum &
Kliegman LLP. The audit procedures performed by Block were of
a quality which met professional standards and enabled us to
opine on the financial statements of the Company for the above
periods in accordance with generally accepted auditing
standards.
o Marcum & Kliegman was originally engaged to prepare the tax
returns of the Company. This engagement was based on a
long-standing professional relationship of approximately
fifteen (15) years between myself and Michael A. Gibbs,
President of the Company and a member of the new ownership
group. After Mr. Gibbs was advised of our firm's audit and
SEC expertise, Mr. Gibbs engaged our firm to perform the
audits for the above periods.
o Marcum & Kliegman LLP is not presently licensed in the State of
California. During recent conversations between Ms. Dottie Hayes
(senior staff person) of the California Board of Accountancy and a
member of our firm (Patrick Rossetti, CPA), she indicated that given
the above circumstances it was her
<PAGE>
Securities and Exchange Commission
Division of Corporate Finance
July 10, 1997
Page 2
view that we would be able to opine on the Company's financial
statements and not be in violation of the California Accountancy Act.
Marcum & Kliegman LLP is currently not licensed as a public accountancy
firm in California because it does not actively solicit business in
California. Ms Hayes recommended that Marcum & Kliegman LLP register
with the California State Board of Accountancy. Marcum & Kliegman LLP
is in the process of filing its application to become licensed in
California, but no assurance can be given that this process will be
finalized prior to the effective date of this registration statement.
o Marcum & Kliegman LLP is in compliance with Rule 2-O1(a) of Regulation
S-X since it is duly registered and in good standing under the laws of
the State of New York, where the firm's principal office is located.
We respectfully request that the audit reports of Marcum & Kliegman LLP are
acceptable to the Commission for inclusion in the Company's registration on Form
S-1. We would appreciate your written response to this matter as soon as
possible. Please call myself or Patrick Rossetti if you have any further
questions.
Very truly yours,
Marcum & Kliegman LLP
/s/Philip F. Strassler
Philip F. Strassler, PA, PC
PFS/jml
