<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
October 26, 1997 0-23027
COMPASS PLASTICS & TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-4611994
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15730 South Figueroa Street
Gardena, California 90248
--------------------------- -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 770-8771
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class which registered
------------------- -------------------------
Common Stock, par value $.0001 per share Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
the filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of January 22, 1998:
$20,841,574
The number of shares outstanding of the registrant's class of common
stock as of January 22, 1998:
4,883,750 shares
Page 1 of 82 Pages
Exhibit Index Appears on Page 36
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COMPASS PLASTICS & TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 26, 1997
TABLE OF CONTENTS
<TABLE>
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Page
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PART I
<S> <C>
ITEM 1. Business................................................................................................. 3
ITEM 2. Properties...............................................................................................12
ITEM 3. Legal Proceedings........................................................................................12
ITEM 4. Submission of Matters to a Vote of Security Holders......................................................12
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................13
ITEM 6. Selected Financial Data..................................................................................14
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................15
ITEM 8. Financial Statements and Supplementary Data..............................................................22
ITEM 9. Changes in and Disagreements on Accounting and Financial Disclosure......................................22
PART III
ITEM 10. Directors and Executive Officers of the Registrant......................................................23
ITEM 11. Executive Compensation..................................................................................27
ITEM 12. Security Ownership of Certain Beneficial Owners and Management..........................................32
ITEM 13. Certain Relationships and Related Transactions..........................................................33
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................35
</TABLE>
2
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PART I
ITEM 1. BUSINESS
--------
Compass Plastics & Technologies, Inc., with its wholly-owned
subsidiary, AB Plastics Corporation ("AB Plastics"), and any predecessor are
collectively referred to as the "Company."
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 enclosures for computer monitors,
televisions, electronic music keyboards and other consumer products. 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'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 70.0% and 12.2%, respectively, of
the Company's total sales for the fiscal year ended October 26, 1997. Of sales
to Sony, computer monitor components accounted for approximately 45.9% and
television components accounted for approximately 24.1% of the Company's total
sales during the fiscal year ended October 26, 1997. The Company has been an
uninterrupted supplier of custom injection-molded components to Sony since
1972, to Matsushita since 1983 and to two other customers for at least seven
years. New customers more recently added include Sanyo for televisions and
Samsung Group for computer monitors.
To improve its ability to support its major OEM customers, in
addition to its manufacturing facility in Gardena, California (approximately
15 miles south of Los Angeles), the Company has substantially completed a new
"build-to-suit" manufacturing facility in Tijuana, Mexico. This new facility
has increased manufacturing capacity and is located near all of its customers'
Tijuana manufacturing plants. Management believes that this facility will
enable the Company to capitalize on demand from new and existing customers
which have recently relocated their manufacturing operations to Tijuana from
the Far East and the United States. These operations benefit from lower labor
and transportation costs. Closer proximity to its major customers allows the
Company to be more efficient in delivering 15 to 20 daily truckloads of
components and eliminates time-consuming border crossings.
Custom injection-molded plastic components are 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 electronic products by OEMs has created a strong
demand for injection-molded plastic components for new and replacement
products. 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 create continued growth of the computer monitor market. The
Company believes that the anticipated availability of digital broadcasting,
Internet access, high-definition television (HDTV) and flat panel displays has
the potential to significantly increase television sales over the next ten
years.
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Initial Public Offering
The Company completed an initial public offering of its common stock
in September 1997 (the "IPO"), which provided net proceeds to the Company of
approximately $7,873,000. In October 1997, the Company received additional net
proceeds of $871,200 in connection with the exercise of the underwriters'
over-allotment option.
Business 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' plant located in Southern California and Baja (Tijuana and Mexicali),
Mexico. Management believes that the commencement of digital television
broadcasting 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 broadcasting with HDTV quality.
The key elements of the Company's business strategy include the
following:
Continue to Expand Computer Monitor Component Business. The Company
will seek to expand its computer monitor component business through continued
growth of the Company's computer monitor sales to Sony, which has grown from
$2.9 million in fiscal 1994 to $20.2 million in fiscal 1997, a 696% 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 Compaq Computer, but also
Sony's personal computer, known as Vaio, which began in July 1997. In
addition, the Company's recent marketing strategy includes targeting other
computer monitor and television OEMs, such as recently-added Sanyo and Samsung
Group.
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 component
requirements, reduce the number of suppliers 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 binding arrangement or agreement with respect to any acquisition
transactions.
Capitalize on Customer Demand in Tijuana Market. The Company has
leased and installed equipment in its recently-completed 90,000 square foot
"build-to-suit" manufacturing facility in Tijuana, Mexico, located adjacent to
Sony's manufacturing facilities. The new facility increases existing
manufacturing space by 50% and currently houses 10 molding machines. The
Company has an option to increase the facility to 140,000 square feet and
house 30 to 35 molding machines. In addition, the plant has four assembly
lines and its painting department is expected to be completed by March 1998.
The new facility will enable the Company to capitalize on current demand from
existing customers and to attract new customers located in Baja, 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 and Existing Computer and
Consumer Electronics Customers. 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 relationships across a number of products and
through multiple product models.
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Become a Total Plastic/Electronic Outsourcing Vendor. The Company
currently offers (in addition to molding parts) a total outsourcing solution
including assembling and decorating subassemblies and installing such
components as speakers, speaker grills, microphones, wiring harnesses and
switches utilizing its custom-designed automated assembly and test fixtures.
Management believes that its ability to offer a greater range of services will
be increasingly important as OEMs continue to reduce their number of
suppliers.
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 has
received ISO 9002 certification.
Develop Proprietary Products. The Company seeks to develop
proprietary products such as its recent acquisition of "grid molding
technology," in which a metal grid is implanted in plastic during the molding
process to act as an integrated EMI/RFI (electromagnetic interference/radio
frequency interference) shield. See Note 12 of Notes to the Company's
Financial Statements.
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 and electronic music keyboards.
The Company also provides a broad range of value-added services, including
painting, decorating and assembly of mechanical and electrical components. 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 components pursuant to the strict
color, cosmetic and dimensional specifications of its customers and assembles
the parts on automated production lines. The Company manufacturers computer
monitor components for Sony and Samsung Group. 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 Compaq Computer. 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 $20.2 million for the fiscal year ended October 26,
1997. The Company was selected to manufacture computer monitor components for
Sony's personal computer, known as Vaio, which began in July 1997. The Vaio
computer was introduced in April 1996 in the United States. Computer monitor
components represented approximately 48.0% of the Company's product sales for
the fiscal year ended October 26, 1997.
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), Sanyo and Hitachi. Television components
represented approximately 40.7% of the Company's product sales for the fiscal
year ended October 26, 1997.
5
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Electronic Music Keyboards and Other Consumer Products. The Company
manufacturers a variety of consumer electronics components, such as the top
and bottom covers for electronic music keyboards and cases for various
consumer products (such as electric tools). 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 9.0% of the
Company's product sales for the fiscal year ended October 26, 1997.
Value-Added Services. In addition to injection-molded plastic
components, the Company offers a broad range of "value-added" services
including painting, decorating and assembly. 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. In addition, the
Company has recently begun assembling plastic bezel speakers and speaker
grills, microphones, wiring harnesses and switches utilizing custom-designed
automated assembly and test fixtures. See "Manufacturing" below.
The Company provides design and engineering assistance in the early
stages of product development, thus assuring that tooling, process and
assembly considerations result in 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 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 competitors.
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's plants for use without the need for incoming
inspection.
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. New customers recently added include Sanyo for
televisions and Samsung Group for computer monitors.
Historical sales of the Company by principal customer are set forth
in the table below (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
Customer October 27, 1996 October 26, 1997
- - -------- ----------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Sony - Computer manufacturing
division................... $15,373 39.1% $20,170 45.9%
- Television manufacturing
division................... 10,773 27.4 10,602 24.1
Matsushita - Panasonic and Quasar ...... 7,093 18.0 5,366 12.2
Others....................................... 6,106 15.5 7,842 17.8
------- ----- ----- ----
Total sales............................ $39,345 100.0% $43,980 100.0%
======= ===== ======= ======
</TABLE>
6
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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 26, 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 finalized 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, and profit. 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" below.
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:
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Customer Product
-------- -------
Sony.................................. Computer monitors:
Private label programs -
Gateway 2000
Dell Computer
Silicon Graphics
Sun Microsystems
Compaq
Vaio brand
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
Samsung .............................. Computer monitors
Sanyo ................................ Television monitors
Sony has been a customer for 25 years, Matsushita has been a customer
for 14 years, and Hitachi and Casio have been customers for more than seven
years. The Company believes that, as it adds new customers and completes
acquisitions of complementary businesses, it will diversify its customer base
and reduce its dependence on these major customers. The Company anticipates,
however, that a significant portion of its sales, by virtue of the markets it
serves, will continue to be concentrated in a small number of customers.
As reflected in the customer sales table above, the Company
experienced a decline in sales to Matsushita for the fiscal year ended October
26, 1997. Matsushita is the Company's only customer in Baja with its own
in-house molding capability. As Matsushita adds more machines, its
requirements for outsourcing will continue to decline. The Company is
Matsushita's primary outside supplier and, as such, is used to fill overflow
seasonal demand and certain specialized components.
Sales
The Company's primary sales strategy is to develop and maintain close
working relationships with the engineering, procurement, quality, tooling and
manufacturing department of its customers. Sales to OEMs are made directly by
the Company's sales, engineering and production teams. Through these teams,
the Company services its OEM customers and assists their continuing programs
of new product design and product enhancements. 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 four 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, and
calls on substantially all existing facilities manufacturing televisions and
computer monitors.
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The Company typically sells on net 30-day terms under confirmed
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 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. As of January 20, 1998, the Company held
approximately 150 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
23 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 23 molding machines. The
Company also stores other resin in 1,000 pound corrugated containers. The
Company's finishing equipment is "state-of-the-art" and includes 24 paint
stations, a 1,265-foot overhead conveyor, infrared and gas fired drying ovens,
hot stamp machines, pad printing machines, silk screen machines, ten motorized
assembly lines and sonic welders.
The Company has substantially completed the construction of a new
manufacturing facility in Tijuana, Mexico, which consists of approximately
90,000 square feet of manufacturing and warehousing space and currently houses
10 injection molding machines. Of the 10 machines, five were newly purchased
and five were 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 30 to 35
molding machines. This new facility has been located near all of its
customers' Tijuana manufacturing plants. The Company expects to relocate a
significant amount of its painting, decorating and assembly operations to this
facility, primarily due to the area's lower-cost labor pool and customer
requirements, in the spring of 1998 when the painting department is completed.
See "Properties."
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 on 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 has
received ISO 9002 certification.
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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 of its molding machines at
each of its Gardena, California and Tijuana, Mexico manufacturing facilities
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.
Raw Materials and Supplies
The Company orders certain materials and supplies based on its
purchase orders and seeks to minimize its inventory of materials that are not
identified for use in filling specific orders. Raw materials used in
connection with the Company's components consist mainly of thermoplastic
resins such as high impact, ignition resistant polystyrene and
acrylonitrile-butadiene-styrene, and paint and ink, as well as corrugated
cardboard packaging. Although the Company uses a select group of suppliers,
the materials used in manufacturing injection-molded plastic components are
generally readily available in the open market. The Company has not
experienced any significant raw material shortages in the past ten years and
does not anticipate raw material shortages in the foreseeable future.
Although thermoplastic resins have historically accounted for at
least 80% of its raw material costs, the Company does not believe that its
results of operations are subject to the risk of fluctuations in resin prices,
since the Company's arrangements with most of its customers provide that
increases or decreases in the price of such resins are passed through to the
customer through 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. The Company issues its purchase orders to
its customers.
Resin pricing during the fiscal year ended October 26, 1997 declined
consistently. Prices for certain television grade materials declined 5% to 7%.
Prices for certain computer monitor grade materials declined 3% to 4%. A
recent trend among the Company's computer monitor customers has been to switch
resin specifications to materials that are 17% to 25% lower in cost and part
designs that are lighter in weight. In the short term, gross profit on
existing models will be unaffected since changes in resin costs are passed to
the customer through adjusted sales prices. In the long term, these activities
will reduce the mark-up the Company can charge resulting in reduced sales and
gross profits. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
10
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Competition
The injection-molded plastic industry is highly fragmented and
characterized by intense competition. 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.
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 January 11, 1998, the Company had approximately 471 full-time
employees (297 employees in Gardena, California and 174 employees in Tijuana,
Mexico), of which 446 were engaged in manufacturing activities and 25 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.
11
<PAGE>
ITEM 2. PROPERTIES
----------
The Company maintains its principal executive offices and conducts
molding, assembly and finishing operations from Gardena, California
(approximately 15 miles south of Los Angeles), consisting of a 100,000 square
feet manufacturing facility on eight acres of land. This facility was leased
from an entity affiliated with the former owners of AB Plastics under a lease
expiring in 2006 and provided for rent of $35,200 per month. See "Certain
Relationships and Related Transactions." The Company also maintains off-site
leased facilities in Compton, California consisting of (i) approximately
60,000 square feet, from which the Company's warehousing and distribution
activities are conducted, and (ii) approximately 50,000 square feet, which is
being used as temporary storage space. The Compton facilities are leased from
unaffiliated entities under (i) a lease expiring in December 2000 providing
for rent of $19,465 per month and (ii) a month-to-month tenancy providing for
rent of $13,500 per month, respectively.
In August 1997, the Company purchased 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 demolished
its 20,000 square foot warehouse in Gardena and commenced the construction of
a 75,000 square foot warehouse and distribution facility, which is expected to
be completed by March 1998. Construction costs for such warehouse and
distribution facility are anticipated to be approximately $1.7 million, for a
total capital expenditure of $4.8 million at such site. Subsequent to the
completion of the warehouse construction, the Company intends to sublease the
Compton warehouse and terminate the Compton temporary space lease. The
warehouse facility purchase and construction are being financed by a mortgage
and construction loan facility of $3.5 million provided by Sumitomo and the
$1.3 million balance with a portion of the net proceeds of the Company's IPO.
The Company expects that 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 Relationships and Related Transactions."
The Company has substantially completed the construction of a new
manufacturing facility in Tijuana, Mexico, which consists of approximately
90,000 square feet of manufacturing and warehouse space and currently houses
10 injection molding machines. The new facility is leased from an unaffiliated
entity under a net lease which commenced upon completion of building
construction in August 1997 and expires in 2007, and requires 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 $6.2 million through 1998 to equip the new Tijuana facility,
substantially all of which has been committed as of January 11, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Capital Expenditures."
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is not a party to any legal proceedings other than
routine litigation incidental to its business, none of which is material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Company's Common Stock commenced trading on the Nasdaq National
Market ("Nasdaq") under the symbol "CPTI" on September 4, 1997. The following
table sets forth, for the period indicated, the high and low sales prices for
the Common Stock as reported on Nasdaq.
Fiscal 1997 High Low
- - ----------- ---- ---
Fourth Quarter (Sept. 4 to Oct. 26, 1997)......$ 9.875 $ 8.688
As of January 20, 1998, there were 22 holders of record of the
4,883,750 outstanding shares of Common Stock. The closing sales price for the
Common Stock on January 22, 1998 was $6.625 per share.
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 dividend or distribution on its Common Stock.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources."
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
------------------------
The following table presents selected pre-acquisition financial data
for AB Plastics and selected post-acquisition financial data for the Company.
<TABLE>
<CAPTION>
Predecessor(1) Company Company
--------------------------------------------------- ------------- ------------
52 weeks
52 Weeks 52 weeks 52 weeks 48 weeks 4 weeks ended 52 weeks
ended ended ended ended ended October 27, ended
October 31, October 30, October 29, September 27, October 27, 1996 October 26,
Statement of Operations Data: 1993 1994 1995 1996 1996(4) (pro forma (2)(4) 1997
---- ---- ---- ---- ---- -------------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Sales............................... $29,362 $34,027 $42,679 $36,080 $3,265 $39,345 $43,980
Cost of Goods Sold.................. 26,456 30,695 38,961 32,127 2,626 34,752 35,759
--------- --------- --------- --------- -------- ------ --------
Gross Profit........................ 2,906 3,332 3,718 3,953 639 4,593 8,221
Selling and Administrative.......... 2,053 1,715 1,683 1,872 241 2,173 2,775
--------- --------- --------- --------- -------- ------ --------
Operating Income.................... 853 1,617 2,035 2,081 398 2,420 5,446
Net Interest Expense................ 254 225 375 386 99 1,200 994
Other (Income)/Expense.............. (35) (218) (70) (5) 19 23 (16)
--------- --------- --------- --------- -------- ------ --------
Income before Income Taxes.......... 634 1,610 1,730 1,700 280 1,197 4,468
Income Tax Expense(3)............... 49 48 26 (10) 117 526 1,749
--------- --------- --------- --------- -------- ------ --------
Net Income before Extraordinary Item 585 1,562 1,704 1,710 163 671 2,719
Extraordinary Item, net of tax...... (469) 0 0 0 0 - 585
--------- --------- --------- --------- -------- ------ --------
Net Income ......................... $ 1,054 $1,562 $ 1,704 $ 1,710 $ 163 $ 671 $ 2,134
======= ====== ======= ======= ======= ======== =======
Net Income per Share
before Extraordinary Item ....... - - - - $0.05 $ 0.19 $0.70
Net Income per Share ............... - - - - $0.05(4) $ 0.19(4) $0.55
Weighted Average Shares Outstanding. - - - - 3,600 3,600 3,876
October 31, October 30, October 29, September 27, October 27, October 26,
1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ----
Balance Sheet Data:
Cash................................ $265 $128 $468 $318 $730 $ 412
Working Capital..................... 2,334 2,590 801 2,236 4,714 1,851
Total Assets........................ 12,796 14,349 20,613 18,267 20,194 31,391
Total Current Liabilities........... 5,105 5,479 10,855 7,175 5,109 9,305
Total Long Term Liabilities......... 2,593 3,288 2,886 3,444 12,121 8,438
Stockholders Equity................. 5,098 5,582 6,872 7,648 2,964 13,648
</TABLE>
- - ------------------------
(1) In September 1996, a corporate affiliate of Michael A. Gibbs, President of
the Company, and Private Equity Partners, LLC ("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 (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
"Certain Relationships and Related Transactions" and Note 1 of Notes to
the Company's Financial Statements.
(2) Gives effect to the acquisition of AB Plastics, assuming such transaction
had occurred as of October 30, 1995.
(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 the Company's Financial Statements for an
explanation of the basis used to calculate net income per share.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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, Tijuana and Mexicali
(collectively "Baja"), Mexico. The Company supplies plastic enclosures for
direct-tube televisions ranging from 13" to 35" and frames for 50" and 60"
projection televisions. The Company also supplies plastic enclosures and base
stands for 14" to 21" computer monitors manufactured by Sony and Samsung Group
for leading PC manufacturers, such as Gateway 2000, Dell Computer, Silicon
Graphics, and Compaq Computer, as well as plastic enclosures for Sony's
personal computer, known as "Vaio," in both 15" and 17" models, and other Sony
and Samsung branded monitors. The Company also manufactures enclosures for
electronic music keyboards.
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 Baja primarily due to reduced labor
costs. When fully operational, the Company's new Tijuana facility will
manufacture components for computer monitors and televisions for Sony's
Tijuana manufacturing and assembly plant and other consumer electronic OEM
manufacturers located in Baja. The Company's Gardena, California plant will
continue to service its customers requirements in the United States and
Mexico.
The Company is in the final stages of completing its new 90,000
square foot injection molding and assembly plant in Tijuana, and is scheduled
to be fully operational by March 1998. The plant's molding operations came
online in November 1997, as did certain assembly functions, however the
painting operations will not be fully completed until March 1998. As of
January 11, 1998, this location employed 174 people. 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, and those fluctuations are
not expected to be material to the Company's results of operations when the
new facility is operational.
The Company purchased its Gardena facility in August 1997 and
commenced construction if its new warehouse and distribution facility. The
facility is scheduled to be completed by March 1998. During the course of
construction, the Company is renting additional warehouse space on a month to
month basis. Upon completion of the new warehouse, the Company does not
anticipate a need for offsite warehouse space and has engaged a local real
estate broker to sublease the Company's Compton facility. To date, the Company
has not received any offers to sublease the facility.
The Company completed an initial public offering ("IPO") of 1,650,000
shares of its common stock in September 1997, of which 1.2 million shares were
sold by the Company and 450,000 shares were sold by existing shareholders. The
sale provided net proceeds to the Company of approximately $7,873,000. In
October 1997, the underwriters' purchased 123,750 additional shares of common
stock from the Company pursuant to their over-allotment option. The net
proceeds to the Company were $871,200. Application of the net proceeds
immediately reduced the Company's interest expense and the principal amount of
indebtedness required to be repaid by the Company in the future. The Company
retired a $4.0 million subordinated loan to Sirrom Investments, Inc. and
temporarily repaid the entire principal balance of the Company's revolving
credit facility ("Revolver") with Sumitomo Bank of California. In connection
with the retirement of the subordinated loan, the Company incurred a
extraordinary charge of approximately $585,000, net of taxes, from a
write-off of deferred financing costs.
15
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain
information relating to the Company's operations expressed as a percentage of
the Company's net sales and gives effect to the acquisition of AB Plastics
assuming such transaction had occurred as of October 30, 1995.
<TABLE>
<CAPTION>
Predecessor Company
----------------------------- ---------------------------------------
52 weeks
52 weeks 48 weeks 4 weeks ended 52 weeks
Statement of Income: ended ended ended October 27, ended
October 29, September 27 October 27, 1996 October 26,
1995 1996 1996 Pro forma 1997
---- ---- ---- ------------ ----
<S> <C> <C> <C> <C> <C>
Sales....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales............................... 91.3% 89.0% 80.4% 88.3% 81.3%
Gross Profit................................ 8.7% 11.0% 19.6% 11.7% 18.7%
Selling and Administrative.................. 3.9% 5.2% 7.4% 5.5% 6.3%
Operating Income............................ 4.8% 5.8% 12.2% 6.2% 12.4%
Interest Expense............................ 0.9% 1.1% 3.0% 3.0% 2.3%
Other Expense / (Income).................... (0.2%) 0.0% 0.6% 0.1% 0.0%
Income before Income Taxes and extraordinary loss 4.1% 4.7% 8.6% 3.0% 10.2%
Provision for Income Taxes.................. 0.1% 0.0% 3.6% 1.3% 4.0%
Income before Extraordinary Loss............ 4.0% 4.7% 5.0% 1.7% 6.2%
Extraordinary loss related to early retirement
of debt..................................... 0.0% 0.0% 0.0% 0.0% 1.3%
Net Income.................................. 4.0% 4.7% 5.0% 1.7% 4.9%
</TABLE>
Fiscal Year ended October 26, 1997 Compared to fifty-two weeks ended
October 27, 1996
The Company's net sales for the 52 weeks ended October 26, 1997
("1997 fiscal year") were $44.0 million, an increase of $4.6 million, or
11.7%, from $39.4 million in sales for the 52 weeks ended October 27, 1996
(pro forma) ("1996 pro forma"). 1997 fiscal year sales were comprised of
$21.1 million of computer monitor components sales, $17.9 million of
television monitor component sales, $3.9 million of electronic music keyboard
component sales, and $1.1 million of other sales.
Computer monitor component sales increased $5.6 million, or 36.1%,
from 1996 fiscal year sales of $15.5 million. This was due to an increase in
orders from Sony of approximately $4.9 million and an increase in orders from
another customer of $700,000. Resin prices for computer monitor components
declined during the fiscal year to a level 3% to 4% lower than the end of
fiscal year 1996, which also contributed to lower sales. Television component
sales declined $1.6 million from 1996 fiscal year sales of $19.5 million. This
decrease was due to a reduction in orders from Matsushita of $1.6 million, a
reduction from Sony of $300,000 and a reduction from Hitachi of $200,000,
which was offset by new orders from Sanyo of $500,000, Resin prices for
television components declined during the fiscal year to a level 5% to 7%
lower than the end of fiscal year 1996, which also contributed to lower sales.
Electronic music keyboard sales to Casio increased $600,000, or 18.2% from
fiscal year 1996 sales of $3.3 million. Resin price changes were passed on to
the customer in the form of lower selling prices.
The Company's gross profit for the 1997 fiscal year was $8.2 million,
or 18.7% of net sales, compared to $4.6 million, or 11.7% of net sales for the
1996 (pro forma). This increase was the result of increased sales, improved
quality and other productivity improvements, which lowered manufacturing
costs.
The Company's S&A expense for the 1997 fiscal year was $2.8 million,
or 6.3% of net sales, compared to $2.1 million, or 5.5% of net sales for the
1996 (pro forma). This increase is related to added personnel in sales,
finance and administration subsequent to the acquisition of AB Plastics and
management bonus accruals. Expenses related to the Company's IPO were netted
against the proceeds of the offering. The Company anticipates higher S&A
expenses in 1998 related to the addition of accounting and administrative
personnel at its new plant in Tijuana, and incremental administrative costs
associated with being a publicly held company.
16
<PAGE>
The Company's interest expense for the 1997 fiscal year was $994,000,
or 2.3% of net sales, compared to $528,000, or 1.2% of net sales, for the 52
weeks ended October 27, 1996 (pro forma) year. The increase was due to the
increased debt related to the acquisition of AB Plastics, (pro forma)and the
purchase of the Gardena property in August 1997. Approximately $4,000,000 of
the net proceeds of the Company's IPO were used to retire the subordinated
loan from Sirrom Investments, Inc. ("Sirrom") and the balance of the net
proceeds was used to temporarily reduce the revolving credit facility.
Retirement of the subordinated loan will result in future interest savings of
$540,000 per year. However, given the future capital expenditure plans, the
Company is anticipating that interest expense for 1998 will exceed the amount
for 1997. See "Capital Expenditures" below.
The Company's provision for income taxes reflects the change in tax
status subsequent to the acquisition of AB Plastics. The Company's predecessor
received tax treatment under subchapter S of the Internal Revenue Code of 1986
("the Code"), as a result of which federal income taxes were paid by the
individual shareholders and the predecessor's income tax expense reflected
only California income taxes. The Company currently receives tax treatment
under subchapter C of the Code, which requires the Company to pay any federal
income taxes.
Approximately $4,000,000 of the net proceeds of the Company's IPO
were used to retire the subordinated loan from Sirrom Investments, Inc. This
resulted in an extraordinary charge of $586,000, net of income taxes, related to
the write-off of the remaining deferred financing costs.
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 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 another customer of approximately $179,000.
Electronic music keyboard component sales for the period from October
30, 1995 to September 27, 1996 decreased $3.2 million, or 51.6%, from 1995
fiscal year sales of $6.2 million. Of this decrease, $300,000 is attributed to
the shorter period comparison. Sales for the 52 weeks ended October 27, 1996
(pro forma) decreased $2.9 million, or 46.7%, from the 1995 fiscal year. This
decrease was the result of a decrease in orders from Casio. In addition,
during this time, resin prices decreased and were passed on to the customer in
the form of lower prices.
The Company's gross profit for the period from October 30, 1995 to
September 27, 1996 was $4.0 million, or 11.0% of sales, compared to $3.7
million, or 8.7% of net sales, for the 1995 fiscal year. The Company's gross
profit for the 52 weeks ended October 27, 1996 (pro forma) was $4.6 million,
or 11.7% of sales. This increase in profitability was principally due to
productivity improvements through a 20% reduction in its workforce and tighter
controls on operating expenses. The Company does not currently anticipate that
productivity improvements will continue at this level in the future. These
improvements were offset by a one-time write-off and revaluation of certain
assets including $458,000 of inventory, $159,000 of disputed accounts
receivable which the Company decided not to pursue, and $80,000 of licensing
fees related to a discontinued product. These adjustments were recorded in the
period from October 30, 1995 to September 27, 1996.
17
<PAGE>
The Company's S&A 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
was 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 by 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 foregoing, the Company began to record amortization of
goodwill.
The Company's net interest expense for the period from October 30,
1995 to September 27, 1996 was $386,000, or 1.1% of sales, compared with
$375,000, or 0.9% of sales, for the 1995 fiscal year. The increase was due to
an increase in borrowings by the Company. See "Liquidity and Capital
Resources" below.
The Company's income tax expense was immaterial in the historical
periods reflecting the Predecessor's election of subchapter S status. On a
going forward basis, the Company will file consolidated tax returns under
subchapter C of the Internal Revenue Code.
Four Weeks ended October 27, 1996
The Company's net sales for the four weeks ended October 27, 1996
were $3.3 million, consisting of $1.8 million of television component sales,
$1.1 million of computer monitor component sales, and $300,000 of electronic
music keyboard component sales.
The Company's gross profit for the four weeks ended October 27, 1996
was $639,000, or 19.6% of net sales. This increase in gross profit as a
percentage of net sales compared to the periods from October 30, 1995 to
September 27, 1996 and the 52 weeks ended October 27, 1996 (pro forma), was
principally due to a continuation of productivity improvements and tighter
controls on operating expenses under a program instituted earlier in 1996,
and, as noted, the Company had recorded in such earlier periods a one-time
offsetting write-off and revaluation of certain assets totaling $697,000. The
Company believes that these productivity improvements have reduced the
Company's manufacturing costs, resulting in higher gross profit percentages,
and the Company believes such costs are expected to continue at comparable
levels on an ongoing basis. With the integration of the Company's new
manufacturing facility in Mexico, these percentages may be adversely affected
in the future to the extent that the Company does not fully utilize its
increased manufacturing capacity.
The Company's SGA expenses for the four weeks ended October 27, 1996
were $241,000. Interest expense during this period was $99,000, a substantial
portion of which was attributable to debt related to the acquisition.
The Company's income tax expense for the four weeks ended October 27,
1996 was $117,000, reflecting the Company's change in tax status to subchapter
C of the Internal Revenue Code.
Fiscal Year ended October 29, 1995 Compared to Fiscal Year ended
October 30, 1994
The Company's net sales for the 1995 fiscal year were $42.7 million,
an increase of $8.7 million, or 25.5%, from $34.0 million in the fiscal year
ended October 30, 1994 (the "1994 fiscal year"). For the 1995 fiscal year, net
sales were comprised of $24.1 million in television component sales, $11.2
million in computer monitor component sales, and $6.2 million in electronic
keyboard component sales, and other component sales of $1.2 million.
18
<PAGE>
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 S&A 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
The Company's primary cash requirements are for operating expenses
and capital expenditures. As of October 26,1997, the Company had working
capital of $1.9 million compared to $4.7 million at the end of the 52 weeks
ended October 27, 1996 (pro forma) year. The decrease in working capital was
attributable to increased accounts payable related to the purchase of
equipment for the Tijuana plant and the repayment of the Company's revolving
line of credit. The Company's net available borrowings under its revolving
line of credit were $5.2 million at 1997 fiscal year end and in November 1997,
the Company borrowed $3.0 million from General Electric Capital Corporation to
fund the purchase of the above equipment.
Net cash provided by operating activities for the 1997 fiscal year
was approximately $5.5 million, compared to $3.2 million for the 52 weeks
ended October 27, 1996 (pro forma) year. The difference between the Company's
net income of $2.1 million and operating cash flow of $5.5 million was
attributable to $2.0 million in depreciation and amortization, including a
non-recurring charge of $1.0 million related to the write-off of deferred loan
fees, plus an increase in accounts payable of $3.7 million, offset by a $2
million increase in inventory. The increases in accounts payable and inventory
is related to increased purchasing activity, including machinery and
equipment, related to the start-up of the Tijuana plant. The inventory at year
end represented approximately 41 days sales compared to 20 days sales at the
end of the 1996 fiscal year.
Net cash used in investing activities for the 1997 fiscal year was
$10.0 compared to $7.7 million for the 1996 fiscal year. Cash flow for the
1997 fiscal year reflects approximately $9.5 million in capital expenditures
incurred primarily in connection with the purchase and expansion of the
Company's Gardena facility and the new plant in Tijuana. In connection with
the acquisition of AB Plastics, the Company indemnified certain selling
shareholders against specific claims against the Robert J. Adams Separate
Property Trust. The matter was settled in September 1997 and the Company has
recorded a $500,000 obligation payable in equal installments through the year
2000.
19
<PAGE>
Net cash provided by financing activities for the 1997 fiscal year
was $4.2 million, compared to net cash provided of $4.8 million for the 52
weeks ended October 27, 1996. This reflects approximately $8.6 million from
the sale of common stock which was used to retire a $4.0 million subordinated
loan and to repay approximately $3.5 million in revolving credit. AB Plastics
entered into approximately $700,000 in capitalized leases relating to the
addition of three 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 $4.8 million (reducing at the rate of $100,000 per
month commencing November 30, 1997), and (b) an equipment line of credit (the
"Equipment Line"), available through October 31, 1998, in an aggregate
principal amount of up to $2.0 million to be utilized for the purchase of
equipment. 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, 1998) and prime rate plus 0.25% per annum (from and after
November 1, 1998) 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, 1998 are repayable in 48 equal monthly payments beginning
December 1, 1998, provided the last payment shall be made on October 31,
2001. The Company temporarily repaid the total outstanding balance of the
revolving facility with a portion of the net proceeds of the IPO. As of
November 23, 1997, the net borrowing availability was $4.0 million. The net
borrowing availability under the equipment line was $1.5 million.
The Company and AB Plastics were 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.
In September, 1997, the loan was repaid in full from a portion of the net
proceeds of the IPO.
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, AB Plastics entered into an additional $310,000 in
capitalized lease obligations and received $468,000 in proceeds from its
equipment line of credit.
In August 1997, AB Plastics completed the purchase of its Gardena
facilities for $3.1 million and commenced construction of a new 75,000 square
foot addition. AB Plastics borrowed approximately $2.1 million under a
mortgage and construction loan agreement with Sumitomo Bank. Under the terms
of the agreement, AB Plastics can borrow up to a maximum of $3.5 million. The
loan bears interest at the bank's prime rate plus 0.50% per annum. Interest is
payable monthly in arrears. Commencing February 1, 1998, AB will make
principal amortization payments in the amount of $14,583.33. The loan matures
on August 31, 2004 at which time a remaining principal balance of
approximately $2.4 million, plus any and all accrued interest, will be due and
payable.
In November 1997, AB Plastics borrowed approximately $3.0 million
dollars from General Electric Capital Corporation to finance the purchase of
certain equipment located at its plant in Tijuana. The loan is secured by that
equipment and is guaranteed by the Company. The loan bears interest at 9.47%
per annum and is repayable in 59 monthly installments of principal and
interest.
20
<PAGE>
Capital Expenditures
During the 1997 fiscal year, the Company committed over $12 million
in capital spending, including $6.2 million for its Tijuana plant and $4.8
million to purchase and expand the Gardena facility. Of the $12 million,
approximately $9.5 million was spent in 1997 leaving a balance of $2.5 million
to be spent in the 1998 fiscal year. Proceeds from the loan with General
Electric Capital Corp. plus available borrowings under the construction loan
and the Revolver, both with Sumitomo Bank, should be sufficient to fund these
expenditures. The Company anticipates having sufficient availability under its
Revolver and equipment line of credit, as well as vendor financing, to fund
the approximately $1.8 million of new projects currently being contemplated.
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.
In February 1997 the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"), which is required to be adopted beginning with the quarter
ended December 31, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options and warrants will be excluded. The
Company does not anticipate the adoption of SFAS 128 to have a significant
impact on the calculation of primary and fully diluted earnings per share.
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements are based largely on the Company's
expectations and are subject to a number of risks and uncertainties, certain
of which are beyond the Company's control. Actual results could differ
materially from these forward-looking statements as a result of, among other
factors, risks related to the Company's dependence on the computer and
consumer electronics industries, its concentration of customers, fluctuations
in operating results, potential significant indebtedness and leverage,
competition, variability of customer requirements and nature of customer
commitments on orders, the integration of the Company's new Mexican
manufacturing facility and other risks described in the Company's Registration
Statement on Form S-1 in respect of its IPO. In light of these risks and
uncertainties, there can be no assurance that the forward-looking information
contained in this report will in fact occur.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements and supplementary data of the Company appear
on pages F-2 through F-22 of this Annual Report on Form 10-K, are indexed
herein under Item 14(a)(1), and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
As approved by the Company's Board of Directors, the Company replaced
Block, Plant, Eisner, Fiorito & Belak-Berger ("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.
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The directors and executive officers of the Company and the executive
officers and key employees of AB Plastics, and their ages as of January 20,
1998, 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................... 37 Vice President - Technology of AB Plastics
Jawed Ghias........................ 43 Vice President - Manufacturing of AB
Plastics
Paul J. Iacono..................... 37 Vice President - Finance of the Company
and AB Plastics
Christopher H.B. Mills............. 44 Director
Jay M. Swanson..................... 45 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
23
<PAGE>
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 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.
24
<PAGE>
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 Northern Management Corp. and
is a partner in The Contrarian 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.
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
In September 1997, the Company established an Audit Committee and a
Compensation Committee. The Audit Committee, among other things, makes
recommendations to the Board of Directors regarding the independent auditors
to be nominated for ratification by the stockholders, reviews the independence
of those auditors and reviews audit results. The Compensation Committee
recommends to the Board compensation plans and arrangements with respect to
the Company's executive officers and key personnel. The Audit Committee
currently consists of Michael A. Gibbs, Christopher H.B. Mills and Jay M.
Swanson, and the Compensation Committee currently consists of 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.
25
<PAGE>
Compensation of Directors
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. In addition, the Company pays Jay M. Swanson, a director of the
Company, an annual retainer of $10,000 for serving on the Board of Directors,
plus $1,000 for each meeting of the Board of Directors or committee thereof
attended. Mr. Swanson also received an option to purchase 10,000 shares of
Common Stock at an exercise price of $8.00 per share for serving as a director.
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 General Corporation Law
(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.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Based solely upon its review of the copies of reports required by
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), received by the Company, or representations from certain
reporting persons that no year-end Forms 5 were required for those persons,
the Company believes that, during the fiscal year ended October 26, 1997, all
filing requirements applicable to its executive officers, directors and
greater than ten percent beneficial owners under Section 16(a) of the Exchange
Act were complied with.
26
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The following table sets forth the total compensation paid by the
Company to the Company's Chief Executive Officer and the other four executive
officers of the Company (collectively, the "Named Executive Officers") whose
total compensation exceeded $100,000 for the fiscal year ended October 26,
1997:
<TABLE>
<CAPTION>
Long-Term
Summary Compensation Table 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.................. 1997 $120,833(2) $ 0 222,222 $0
President of the Company and Chief 1996 0(3) 0 200,000 0
Executive Officer of AP Plastics
James S. Adams.................... 1997 $100,000 $ 8,000 0 $0
President of AB Plastics 1996 232,365 0 46,124 0
Jawed Ghias....................... 1997 $140,000 $35,000 0 $0
Vice President-Manufacturing of AB 1996 99,523 5,000 160,000 0
Plastics
Paul J. Iacono.................... 1997 $ 85,289 $42,500 0 $0
Vice President - Finance of the 1996 3,269 0 120,000 0
Company and AB Plastics(4)
Stephen M. Adams.................. 1997 $100,000 $16,000 0 $0
Vice President-Technology of AB 1996 96,366 0 23,062 0
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 approximately
$92,000 from the Company pursuant to a management agreement effective as
of August 1, 1996. See "-Employment and Management Agreements."
(3) Mr. Gibbs and a corporate affiliate of Mr. Gibbs received in the aggregate
approximately $200,000 pursuant to a consulting agreement commencing in
February 1996, superseded by a management agreement effective as of August
1, 1996. See "-Employment and Management Agreements."
(4) Mr. Iacono became Vice President - Finance of the Company and AB Plastics
in October 1996.
Options Granted During Fiscal 1997
The following table sets forth certain information regarding grants
of stock options to purchase the Company's Common Stock made to each of the
Named Executive Officers during the fiscal year ended October 26, 1997:
27
<PAGE>
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed
Annual Rates of
Stock Price
Appreciated for
Individual Grants Option Term (2)
------------------------------------- -----------------
Number Percent of
of Total
Securities Options Exercise Fair Market
Underlying Granted Price Value on
Options to Employees in Per Date Expiration
Name Granted Fiscal Year Share(1) of Grant Date 5% 10%
- - ---- ------- ----------- -------- -------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Michael A. Gibbs ..... 222,222 100% $8.00 $8.00 10/31/2002 $0 $0
President of the
Company
and Chief Executive
Officer of AB Plastics
</TABLE>
- - --------------
(1) All options were granted at or above market value on the date of grant.
(2) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on option exercises are dependent upon other factors,
including the future performance of the Common Stock and overall stock
market conditions.
Aggregated Option Exercises During Fiscal 1997 and Fiscal Year-End Option Values
The following table sets forth information on options exercised,
unexercised options and year-end option values in each case with respect to
options to purchase shares of the Company's Common Stock held at October 26,
1997 by each of the Named Executive Officers:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal at Fiscal Year End(1)
Shares Acquired Year End (Exercisable/ (Exercisable/
Name on Exercise(2) Value Realized Unexercisable) Unexercisable(2)
---- -------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Michael A. Gibbs................. 200,000 $1,400,000 0/222,222 -
President of the Company and Chief
Executive Officer of AB Plastics
James S. Adams................... 46,124 $ 322,868 -- --
President of AB Plastics
Jawed Ghias...................... - - 0/160,000 0/1,233,600
Vice President-Manufacturing of AB
Plastics
- - 0/120,000 0/937,200
Paul J. Iacono...................
Vice President - Finance of the
Company and AB Plastics
Stephen M. Adams................. 23,062 $ 161,434 -- --
Vice President - Technology of AB
Plastics
</TABLE>
- - -------------
(1) Represents the difference between the closing sales price of the Common
Stock on October 26, 1997 ($8.81) and the exercise price of the option
multiplied by the applicable number of options.
(2) Each officer delivered to the Company his promissory note in respect of
the aggregate exercise price for such shares. See "Certain Relationships
and Related Transactions."
28
<PAGE>
Employment and Management 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 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 September 1997, Mr. Gibbs entered into an employment agreement
with the Company expiring October 31, 2000. Pursuant to such agreement, Mr.
Gibbs serves as the President of the Company and Chief Executive Officer of AB
Plastics, and devotes 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 receives a base salary of $275,000 per year,
and is entitled to receive annual bonuses of $100,000, $200,000 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
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 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 $16.00 per share, (ii) 148,148 shares if the
Average Closing Price shall equal or exceed $24.00 per share and (iii) 222,222
shares if the Average Closing Price shall equal or exceed $32.00 per share.
See "Stock Option Plans" below.
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 Adams has agreed to continue to
supervise, on a day-to-day basis, the technical aspects of the Company's
business. The Company currently pays each of James S. Adams and Stephen M.
Adams an annual salary of $100,000 and provides them with customary health and
medical benefits. These individuals have also agreed not to compete with the
Company for the period through September 2001 and September 2000,
respectively, and not to disclose confidential information relating to the
Company at any time.
29
<PAGE>
AB Plastics has also entered into employment agreements with each of
G. Michael Frink, Jawed Ghias and Paul J. Iacono to serve as Senior 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
$100,000 to Messrs. Frink, Ghias and Iacono, respectively. 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. Messrs. Ghias and Iacono are entitled to participate in AB
Plastics' bonus pool for executive employees, to be established by the Board,
to receive up to one-half of his annual base salary. 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 for 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 were exercised in September 1997.
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 share
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 330,722 shares of Common Stock, of which 222,222 options are
at an exercise price of $8.00 per share and 108,500 options are at an exercise
price of $8.50 per share. See "Employment and Management Agreements." The
requirements of the 1997 Plan with respect to incentive stock options are
identical to the requirements of the 1996 Plan.
30
<PAGE>
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee of the Board of Directors
are Geoffrey J.F. Gorman, Christopher H.B. Mills and Jay M. Swanson. No member
of the Board of Directors or the Compensation Committee has any interlocking
relationship with any other corporation that requires disclosure under this
heading.
Board Compensation Committee Report on Executive Compensation
The Compensation Committee (the "Committee") of the Board of
Directors of the Company was established in September 1997 and did not hold
any meetings during the fiscal year ended October 26, 1997. The duties and
responsibilities of the Committee include the following:
(a) approval of annual salaries and other benefits provided for
executive officers of the Company;
(b) approval of the adoption of compensation plans in which the
executive officers of the Company may be participants and
awarding of benefits under such plans; and
(c) undertaking studies and making recommendations with respect to
the Company's compensation structure and policies and the
development of management personnel.
The Committee's policies with respect to executive compensation are
intended to achieve the following goals. First, they are intended to create
base compensation levels sufficient to attract and retain talented and
dedicated executive officers. Second, the compensation policies are intended
to provide a direct link between performance during the year (both the
performance of the Company as a whole and the performance of the individual
officer) as a part of the officer's compensation. Third, the compensation
policies are intended to provide executive officers with the opportunity to
acquire an equity stake in the Company through the grant of options pursuant
to the Company's stock-based incentive plan.
During the fiscal year ended October 26, 1997, the full Board
approved bonuses and granted options to certain of its executive officers and
certain employees. In each case, the Board's decision was based upon the
principles and procedures outlined above.
31
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------
The following table sets forth certain information regarding
beneficial ownership of the Company's Common Stock as of January 20, 1998, 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)
all directors and executive officers of the Company as a group, and (iv) 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>
Number of Percent of
Shares Common Stock
Name and Address of Beneficially Beneficially
Beneficial Owner (1) Owned (2) Owned (2)
-------------------- --------- ---------
<S> <C> <C>
North Atlantic Smaller Companies Investment
Trust plc................................................... 787,500 16.1%
Private Equity Partners, L.P.(3) ............................. 279,106 5.7
Sirrom Investments, Inc. ..................................... 447,144 9.2
Geoffrey J.F. Gorman.......................................... 479,914(4) 9.8
Michael A. Gibbs.............................................. 446,515(5) 9.1
James S. Adams................................................ 46,124 *
G. Michael Frink.............................................. 1,250 *
Stephen M. Adams.............................................. 23,062 *
Christopher H.B. Mills........................................ 787,500(6) 16.1
All directors and executive officers as a group
(8 persons)................................................. 1,737,852 35.6
</TABLE>
- - ---------------------
* Represents less than 1% of outstanding Common Stock or voting power.
(1) The address of North Atlantic Smaller Companies Investment Trust plc and
Christopher H.B. Mills 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
4,883,750 shares of Common Stock outstanding. 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) PEP is the general partner of Private Equity Partners, L.P., a Delaware
limited partnership.
(4) Includes (i) 279,106 shares of Common Stock owned by Private Equity
Partners, L.P., of which Mr. Gorman is the managing partner of PEP, its
general partner, and (ii) 271,091 shares of Common Stock owned directly
which are pledged to the Company as collateral for certain loans. See
"Certain Relationships and Related Transactions."
(5) Includes (i) 46,515 shares of Common Stock owned beneficially through
Private Equity Partners, L.P., and (ii) 400,000 shares of common stock
owned directly which are pledged to the Company as collateral for certain
loans. Does not include 222,222 shares of Common Stock which may be issued
in the future upon certain circumstances under options granted to Mr.
Gibbs under the Company's 1997 Plan. See "Executive Compensation --
Employment and Management Agreements" and "Certain Relationships and
Related Transactions."
(6) Represents shares owned beneficially by North Atlantic Smaller Companies
Investment Trust plc, of which Mr. Mills is a managing director.
32
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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. In September 1997, Sirrom
exercised such warrant. 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.
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.
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, James S. Adams, President of AB Plastics, and
Stephen M. Adams, Vice President-Technology of AB Plastics. In September 1997,
each of Messrs. Gorman, Gibbs, James S. Adams and Stephen M. Adams exercised
all stock options and warrants issued to them as a result of which Mr. Gorman
purchased an aggregate of 200,808 shares of Common Stock for $200,808, Mr.
Gibbs purchased an aggregate of 400,000 shares of Common Stock for $400,000,
James S. Adams purchased an aggregate of 46,124 shares of Common Stock for
$46,124, and Stephen M. Adams purchased an aggregate of 23,062 shares of
Common Stock for $23,062. The purchase price for such shares were 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
Messrs. Adams by delivering 8% full-recourse promissory notes, 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 such individuals
shall effect any public or private sale, transfer or other disposition of any
of their shares of Common Stock which they paid for with promissory notes,
they will be obligated to apply all cash proceeds received by them, net of
applicable federal and state taxes, to the prepayment of their respective
notes, plus accrued and unpaid interest thereon to the date of sale, transfer
or disposition.
Under the terms of its partnership agreement with the limited
partners of Private Equity Partners, L.P., PEP is entitled to receive 20% of
the Net Profits (defined as all amounts received by the subject limited
partners in excess of their total cash capital investment in the partnership)
derived by all limited partners, other than Michael A. Gibbs, from the sale or
disposition of partnership investments. Under the terms of the partnership
agreement, as a result of the sale of a portion of the Company shares owned by
Private Equity Partners, L.P., PEP received a cash payment of $159,182 in the
IPO. In addition, Michael A. Gibbs, who owns 16-2/3% of the limited
partnership interests of Private Equity Partners, L.P., received an aggregate
of $259,178 from the sale of 36,815 shares beneficially owned by him through
Private Equity Partners, L.P.
33
<PAGE>
In October 1996, the Company entered into a management agreement
effective as of August 1, 1996, with PEP, of which Geoffrey J.F. Gorman, the
Chairman of the Board of the Company, is the managing partner. See "Executive
Compensation - Employment and Management Agreements."
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 agreed to serve as a consultant of the
Company with primary responsibilities, subject to the direction of the
Company's Board, to review the general policies of the Company 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 $183,333, representing fees
for services provided prior to the date of such agreement, and agreed to pay
Mr. Gibbs and his affiliate an 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. In September
1997, at the consummation of the IPO, the management agreement between the
Company and Mr. Gibbs and his affiliate was terminated.
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.
In April 1997, the Company advanced $50,000 to Michael A. Gibbs as a
personal loan evidenced by a note payable out of any net proceeds received by
Mr. Gibbs from the sale of any shares of the Company's Common Stock held by
him directly (not beneficially). The note bears interest at a rate equal to
the highest interest rate paid by the Company or AB Plastics from time to time
for borrowed money.
Prior to the purchase of its principal executive offices in Gardena,
California, the Company leased such offices 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 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 purchased this
facility in August 1997 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. See "Properties"
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.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
---------------------------------------------
(a)(1) Financial Statements.
The financial statements of Compass Plastics & Technologies, Inc. are
submitted in a separate section beginning on page F-1 pursuant to the
requirements of Form 10-K, Part II, Item 8 and Part IV, Items 14(a) and 14(d).
(a)(2) Financial Statement Schedules.
All schedules are omitted because they are not applicable or are not
required, or because required information is included in the financial
statements or the notes thereto.
35
<PAGE>
(a)(3) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
- - ----------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company.(1)
3.2 By-Laws of the Company. (1)
4.1 Specimen Common Stock Certificate.(1)
10.1 Form of Indemnification Agreement.(1)
10.2 1996 Stock Option Plan.(1)
10.3 1997 Stock Option Plan.(1)
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.(1)
10.5 Form of Employment Agreement, dated July 1997, between the Company and Michael A. Gibbs.(1)
10.6 Employment Agreement, dated September 27, 1996, between AB Plastics and James S. Adams.(1)
10.7 Employment Agreement, dated January 31, 1997, between AB Plastics and G. Michael Frink.(1)
10.8 Employment Agreement, dated September 27, 1996, between AB Plastics and Stephen M. Adams.(1)
10.9 Employment Agreement, dated as of September 27, 1996, between AB Plastics and Jawed Ghias.(1)
10.10 Employment Agreement, dated as of September 27, 1996, between AB Plastics and Paul J. Iacono.(1)
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.(1)
10.12 Facility License Agreement, dated May 1, 1994, between Melea Limited and AB Plastics.(1)
10.13 Loan Agreement, dated as of September 27, 1996, between Sirrom Investments, Inc. and AB
Plastics.(1)
10.14 Second Amendment to the Commercial Loan Agreement, dated August 1, 1997, between AB
Plastics and Sumitomo Bank of California.(2)
10.15 Construction Loan Agreement, dated as of August 1, 1997, between Sumitomo Bank of California
and AB Plastics.(2)
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.16 Master Security Agreement, dated as of November 20, 1997, between General Electric Capital
Corporation and AB Plastics, as amended, with form of Promissory Note and Corporate Guaranty of
the Company.
21.1 Subsidiaries of the Company.(1)
27.1 Financial Data Schedule.
</TABLE>
- - ----------------------
(1) Incorporated herein by reference to Registration Statement on Form S-1
(No. 333-28741), effective September 3, 1997.
(2) Incorporated herein by reference from Quarterly Report on Form 10-Q for
the quarterly period ended July 27, 1997, filed October 15, 1997.
(b) Reports on Form 8-K.
--------------------
None.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
COMPASS PLASTICS & TECHNOLOGIES, INC.
By:/s/ Michael A. Gibbs
----------------------------------
Michael A. Gibbs
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Geoffrey J.F. Gorman Chairman of the Board and Director January 23, 1998
- - -------------------------------
Geoffrey J.F. Gorman
/s/ Michael A. Gibbs President and Director (principal executive officer) January 21, 1998
- - -------------------------------
Michael A. Gibbs
/s/ Paul J. Iacono Vice President-Finance (principal financial and January 21, 1998
- - ------------------------------- accounting officer)
Paul J. Iacono
- - ------------------------------- Director January __, 1998
Christopher H.B. Mills
/s/ Jay M. Swanson Director January 20, 1998
- - -------------------------------
Jay M. Swanson
</TABLE>
38
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
REPORTS OF INDEPENDENT ACCOUNTANTS.................................. F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of October 27, 1996 and as of
October 26, 1997 (Company).................................... F-4
Statements of Operations for the Fifty-Two Weeks Ended
October 29, 1995, 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 Fifty-Two
Weeks Ended October 26, 1997 (Company)........................ F-6
Statements of Stockholders' Equity for the Fifty-Two Weeks Ended
October 29, 1995, and 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 Fifty-Two Weeks
Ended October 26, 1997
(Company)...................................................... F-7
Statements of Cash Flows for the Fifty-Two Weeks Ended
October 29, 1995, 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 Fifty-Two Weeks Ended October
26, 1997 (Company)............................................. F-8
NOTES TO FINANCIAL STATEMENTS........................................ F-10
F-1
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
Report of Independent Accountant
To the Board of Directors of
Compass Plastics & Technologies Inc.
We have audited the accompanying consolidated balance sheets of Compass
Plastics & Technologies Inc. and Subsidiary as of October 27, 1996 and October
26, 1997, and the related statements of operations, stockholders' equity and
cash flows for the forty-eight weeks ended September 27, 1996 ("Predecessor"),
and the consolidated statements of operations, stockholders' equity and cash
flows for the four weeks ended October 27, 1996 and for the fifty-two weeks
ended October 26, 1997 ("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 for the fifty-two weeks ended October 29, 1995 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Compass Plastics
& Technologies Inc. and Subsidiary as of October 27, 1996 and October 26, 1997
and the results of their operations and their cash flows for the forty-eight
weeks ended September 27, 1996, the consolidated results of their operations
and their cash flows for the four weeks ended October 27, 1996 and the
fifty-two weeks ended October 26, 1997 are in conformity with generally
accepted accounting principles.
Marcum & Kleigman LLP
Woodbury, New York
January 10, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
AB Plastics Corporation
Gardena, California
We have audited the statements of operations, shareholders' equity and cash
flows of AB Plastics Corporation (an S Corporation) for the fifty-two weeks
ended October 29, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of AB Plastics
Corporation (an S Corporation) for the fifty-two weeks ended October 29, 1995
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.
Consolidated Balance Sheets
Assets
Company
---------------------------------
October 27, October 26,
1996 1997
Current Assets
Cash and cash equivalents $ 729,729 $ 411,930
Accounts receivable, net 5,915,207 5,750,205
Accounts receivable, other 36,196 339,139
Inventories 1,893,668 3,898,600
Prepaid expenses 1,124,185 227,131
Prepaid income taxes 18,515 0
Income tax receivable 78,220 0
Other current assets, net 17,500 528,442
----------- -----------
Total Current Assets 9,813,220 11,155,447
Property, Plant & Equipment, net 8,622,927 18,111,455
Other Assets
Goodwill, net 1,376,523 1,807,409
Deposits 167,953 123,748
Other assets, net 213,578 192,830
----------- -----------
Total Other Assets 1,758,054 2,123,987
=========== ===========
Total Assets $20,194,201 $31,390,889
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
Consolidated Balance Sheets
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
Company
-------------------------------------------
October 27, October 26,
1996 1997
<S> <C> <C>
Current Liabilities
Accounts payable and accrued expenses $ 4,181,770 $ 7,802,412
Accrued payroll and related expenses 564,365 924,535
Current portion of capitalized lease obligations 286,705 122,846
Income taxes payable 76,300 54,597
Current portion of long-term debt 0 400,303
------------ ------------
Total Current Liabilities 5,109,140 9,304,693
Other Liabilities
Capitalized lease obligations, net of current portion 387,034 573,089
Long-term debt, net of current portion 10,000,000 6,026,435
Deferred income taxes payable 1,734,437 1,838,648
------------ ------------
Total Other Liabilities 12,121,471 8,438,172
------------ ------------
Total Liabilities 17,230,611 17,742,865
Stockholders' Equity
Preferred stock par value $.0001; 5,000,000
shares authorized, none outstanding 0 0
Common stock, par value $.0001; 20,000,000
shares authorized, 2,000,000 and 4,883,750 shares
issued and outstanding respectively 200 488
Additional paid-in capital 2,799,800 12,083,397
Notes receivable from issuance of stock 0 (733,224)
Retained earnings 163,590 2,297,363
------------ ------------
Total Stockholders' Equity 2,963,590 13,648,024
------------ ------------
Total Liabilities and Stockholders' Equity $ 20,194,201 $ 31,390,889
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
Statements of Operations
<TABLE>
<CAPTION>
Predecessor Company
-------------------------------------- ------------------------------------
For the 52 For the 48 For the 4 For the 52
weeks ended weeks ended weeks ended weeks ended
October 29, September 27, October 27, October 26,
1995 1996 1996 1997
(Consolidated) (Consolidated)
<S> <C> <C> <C> <C>
Sales $ 42,678,959 $ 36,080,237 $ 3,265,206 $ 43,980,178
Cost of Sales 38,960,968 32,126,687 2,625,813 35,758,880
------------ ------------ ------------ ------------
Gross Profit 3,717,991 3,953,550 639,393 8,221,298
Operating Expenses
Selling 443,916 478,866 36,922 684,562
Administrative 1,239,549 1,393,184 203,906 2,091,015
------------ ------------ ------------ ------------
Total Operating Expenses 1,683,465 1,872,050 240,828 2,775,577
------------ ------------ ------------ ------------
Operating Income 2,034,526 2,081,500 398,565 5,445,721
Other expense (income)
Other income (130,676) (48,296) 0 (16,379)
Interest expense 434,761 429,216 98,742 994,596
Other expense 0 0 19,397 0
------------ ------------ ------------ ------------
Total other expense 304,085 380,920 118,139 978,217
------------ ------------ ------------ ------------
Income before income taxes and
extraordinary loss 1,730,441 1,700,580 280,426 4,467,504
Income tax expense (benefit) 26,457 (9,526) 116,836 1,748,955
------------ ------------ ------------ ------------
Income before extraordinary loss 1,703,984 1,710,106 163,590 2,718,549
Extraordinary loss on existing extinguishment
of debt, net of applicable tax benetif of
$376,237 584,776
------------ ------------ ------------ ------------
Net income $ 1,703,984 $ 1,710,106 $ 163,590 $ 2,133,773
============ ============ ============ ============
Per share data :
Net income before extraordinary item $ 0.05 $ 0.70
Extraordinary loss 0.00 0.15
------------ ------------
Net income per share $ 0.05 $ 0.55
============ ============
Weighted average common stock and
common stock equivalents outstanding 3,600,000 3,876,353
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Total
Number of Common Paid-in Retained Stockholders'
Predecessor Shares Stock Capital Earnings Other Equity
----------- ------ ----- ------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1994 9,965.40 $110,840 0 $5,470,884 $ 5,581,724
Net income 1,703,984 1,703,984
Distributions (413,600) (413,600)
------------ -------- ----------- ---------- -----------
Balance, October 29, 1995 9,965.40 110,840 0 6,761,268 6,872,108
Net income 1,710,106 1,710,106
Distributions (933,868) (933,868)
------------ -------- ----------- ---------- -----------
Balance, September 27, 1996 9,965.40 110,840 0 7,537,506 7,648,346
Common
------
Recapitalization (7,537,506) (7,537,506)
Net income 163,590 163,590
Issuance of warrants 800,000 800,000
Stock retirement (9,965.40) (110,840) (110,840)
Issuance of stock 500,000.00 50 1,999,950 2,000,000
Stock split 1,500,000.00 150 (150) 0
------------ -------- ----------- ---------- -----------
Consolidated balance, October 27, 1996 2,000,000.00 200 2,799,800 163,590 2,963,590
Net income 2,133,773 2,133,773
Issuance of warrants 165 165
Issuance of stock - Initial public
offering 2,883,750.00 288 9,283,432 9,283,720
Notes receivable from issuance of
stock (733,224) (733,224)
------------ -------- ----------- ---------- -------- -----------
Consolidated balance, October 26, 1997 4,883,750.00 $ 488 $12,083,397 $2,297,363 (733,224) $13,648,024
============ ======== =========== ========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Predecessor Company
------------------------------------ ---------------------------------
For the 52 For the 48 For the 4 For the 52
weeks ended weeks ended weeks ended weeks ended
October 29, 1995 September 27, October 27, October 26,
1996 1996 1997
(Consolidated) (Consolidated)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
- - ------------------------------------
Net Income $ 1,703,984 $ 1,710,106 $ 163,590 $ 2,133,773
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on sale of equipment 7,975 0 19,397 0
Depreciation and amortization 875,651 826,238 82,385 1,083,011
Deferred income taxes 5,775 (1,587) 38,142 70,806
Extraordinary charge 961,013
Changes in assets - (increase) decrease:
Accounts receivable, net (2,562,502) 325,737 253,360 165,002
Accounts receivable, other 184 10,892 (34,353) (302,944)
Inventories (708,385) 1,285,098 118,037 (2,065,223)
Prepaid expenses 17,566 434,866 (305,967) (140,966)
Prepaid income taxes 24,749 0 15,878 18,515
Income tax refund receivable 0 (78,220) 0 (642,020)
Deposits (75,008) (167,953) 0 44,206
Other assets (160,208) 132,060 13,298 (572,986)
Changes in liabilities - increase (decrease): 0
Accounts payable and accrued expenses 1,865,574 (1,417,354) (320,491) 3,720,642
Accrued payroll and payroll taxes payable 65,521 10,602 (2,866) 360,170
Income taxes payable (4,067) (7,939) 62,816 698,537
------------ ------------ ------------ ------------
Total Adjustments (647,175) 1,352,440 (60,364) 3,397,763
------------ ------------ ------------ ------------
Net Cash Provided by Operating Activities $ 1,056,809 $ 3,062,546 $ 103,226 $ 5,531,535
------------ ------------ ------------ ------------
Cash Flows from Investing Activities
- - ------------------------------------
Proceeds from sale of equipment $ 91,462 $ 0 $ 6,000 $ 0
Purchase of equipment and improvements (3,490,848) (764,287) (15,930) (9,502,996)
Collection on note receivable, other 145,979 268,845 431,165 0
Proceeds from notes receivable, other (90,000) 0 0 (50,000)
Investment in subsidiary 0 0 (7,637,555) (500,000)
------------ ------------ ------------ ------------
Net Cash Used in Investing Activities ($ 3,343,407) ($ 495,442) ($ 7,216,320) ($10,052,996)
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows, continued
<TABLE>
<CAPTION>
Predecessor Company
-------------------------------------- ----------------------------------
For the 52 For the 48 For the 4 For the 52
weeks ended weeks ended weeks ended weeks ended
October 29, 1995 September 27, October 27, October 26,
1996 1996 1997
(Consolidated) (Consolidated)
<S> <C> <C> <C> <C>
Cash Flows from Financing Activities
Proceeds from long-term debt $ 3,615,439 $ 0 $ 4,000,000 $ 3,892,343
Proceeds from line of credit 0 2,050,000 6,000,000 16,700,000
Repayment of long-term debt (490,000) (3,545,419) (4,451,250) (4,065,605)
Repayment of capitalized lease obligations (312,358) (288,349) (23,739) (673,739)
Repayment of line of credit 0 0 0 (20,200,000)
Proceeds from issuance of stock 0 0 2,000,000 8,550,662
Distributions to shareholders (185,800) (933,868) 0 0
Net Cash (Used) Provided by
------------ ------------ ------------ ------------
Financing Activities $ 2,627,281 ($ 2,717,636) $ 7,525,011 $ 4,203,661
------------ ------------ ------------ ------------
Net Increase (Decrease) in Cash and
------------ ------------ ------------ ------------
Cash Equivalents 340,683 (150,532) 411,917 (317,799)
Cash and Cash Equivalents - Beginning 127,661 468,344 317,812 729,729
------------ ------------ ------------ ------------
Cash and Cash Equivalents - Ending $ 468,344 $ 317,812 $ 729,729 $ 411,930
============ ============ ============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid during the periods for:
Interest $ 396,569 $ 389,328 $ 0 $ 970,809
Income taxes $ 0 $ 0 $ 0
Non-cash investing activities
Sale of equipment for a note receivable $ 27,631
Sale of common stock for notes receivable $ 733,224
Issue of warrant $ 800,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the fifty-two weeks ended October 29, 1995, forty-eight weeks
ended September 27, 1996, four weeks ended October 27, 1996
and for the fifty-two weeks ended October 26, 1997.
NOTE 1 - Summary of Significant Accounting Policies
Description of Business
Compass Plastics & Technologies, Inc. (formerly AB Plastics Holding
Corporation) and Subsidiaries (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
at September 27, 1996 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.
In connection with the acquisition of AB Plastics, the Company had a
contingent liability up to $500,000. On September 22, 1997, the liability was
settled for $500,000, which was recorded as additional goodwill and will be
amortized in accordance with the Company's policy for amortization of
goodwill.
General Accounting Policies
The Company's accounting policies are substantially the same as that
of the Predecessor.
New Subsidiary
On February 12, 1997, AB Plastics de Mexico, S.A. de C.V. (AB Mexico)
was formed as a wholly-owned subsidiary of Compass for the purpose of
manufacturing plastic parts in Mexico. AB Mexico commenced partial molding
operations on November 1, 1997. As Mexico is considered a highly inflationary
economy for the purpose of applying FASB Statement No. 52, "Foreign Currency
Translation," the United States dollar will be used as the functional currency
for this subsidiary. Therefore, all translation gains or losses, in addition to
all gains and losses from foreign currency transactions, will be included in
consolidated net income in fiscal 1998 and thereafter.
Principles of Consolidation
The consolidated financial statements for the fifty-two weeks ended
October 26, 1997 include the accounts of Compass and its wholly owned
subsidiaries, AB Plastics, and AB Mexico. The consolidated financial
statements for the four weeks ended October 27, 1996 include the accounts of
Compass and its wholly owned subsidiary AB Plastics. All significant
inter-company transactions have been eliminated in consolidation.
F-10
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the fifty-two weeks ended October 29, 1995, forty-eight weeks
ended September 27, 1996, four weeks ended October 27, 1996
and for the fifty-two weeks ended October 26, 1997.
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 26, 1997, October 27, 1996 and October 29,
1995, 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 29,1995, forty-eight weeks ended September 27,
1996, four weeks ended October 27, 1996 and for the fifty-two weeks ended
October 26, 1997 amounted to $0, $0, $5,274 and $69,113, respectively.
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 and October 26, 1997.
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.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures
for renewals and improvements are capitalized and maintenance and repairs are
expensed as incurred. Depreciation and amortization are computed by the
straight line method over the estimated useful lives of the assets as follows:
Buildings 40 years
Machinery and equipment 5 to 20 years
Office furniture and equipment 3 to 10 years
Building improvements 10 years
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.
F-11
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the fifty-two weeks ended October 29, 1995, forty-eight weeks
ended September 27, 1996, four weeks ended October 27, 1996
and for the fifty-two weeks ended October 26, 1997.
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).
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 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.
52 weeks ended 52 weeks ended
October 27,1996 October 29,1995
(Unaudited) (Unaudited)
----------------- -----------------
Revenue $39,345,443 $42,678,959
Operating income $2,420,065 $2,034,526
Other expenses $1,223,059 $1,065,390
Net income $670,644 $535,450
Net income per share $0.19 $0.15
Weighted average common stock and
common stock equivalents outstanding 3,600,000 3,600,000
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 using the modified treasury stock method. The number of
outstanding
F-12
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the fifty-two weeks ended October 29, 1995, forty-eight weeks
ended September 27, 1996, four weeks ended October 27, 1996
and for the fifty-two weeks ended October 26, 1997.
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.
In February 1997 the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"), which is required to be adopted beginning with the quarter
ended December 31, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options and warrants will be excluded. The
Company does not anticipate the adoption of SFAS 128 to have a significant
impact on the calculation of primary and fully diluted earnings per share.
Accounts Receivable
Accounts receivable at October 27, 1996 and October 26, 1997 is shown
net of allowance for doubtful accounts of $12,400.
Pre-operating Costs
Included in other current assets as of October 26, 1997 are pre-operating
costs which amounted to $397,408 which represent organization and start-up
costs (excluding capital expenditures) incurred by the Company in connection
with construction of its new manufacturing facility in Tijuana, Mexico (the
"facility") during its pre-operating period. Such expenditures will be fully
amortized over a one year period commencing when the facility becomes
operational.
Reclassifications
Certain amounts from the 1996 financial statements have been reclassified
in order to conform with the 1997 presentation.
NOTE 2 -- Inventories
Inventories consist of the following:
October 27, 1996 October 26, 1997
----------------- ------------------
Raw Materials $912,708 $2,127,034
Finished Goods and Work-in-Progress 980,960 1,771,566
---------- ----------
Total $1,893,668 $3,898,600
========== ==========
NOTE 3 -- Prepaid Expenses
Prepaid expenses consist of the current portion of deferred
financing costs and various other prepaid expenses. Deferred financing costs
are being amortized over the life of the respective loan and other prepaid
expenses are being amortized over their useful lives.
NOTE 4 - Property, Plant and Equipment
Property, plant and equipment consist of the following:
October 27, 1996 October 26, 1997
------------------ ------------------
Land $0 $2,400,000
Buildings & Improvements 0 1,410,462
Equipment 7,947,016 8,550,626
Mobile Equipment 29,979 30,177
Office Furniture and Equipment 353,935 562,496
Leasehold Improvements 367,880 0
Construction in Progress 0 6,104,610
---------- -----------
$8,698,810 $19,058,371
Less : Accumulated Depreciation 75,883 946,916
---------- -----------
Property, Plant and Equipment, Net $8,622,927 $18,111,455
========== ===========
F-13
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the fifty-two weeks ended October 29, 1995, forty-eight weeks
ended September 27, 1996, four weeks ended October 27, 1996
and for the fifty-two weeks ended October 26, 1997.
Depreciation expense charged to operations for the fifty-two
weeks ended October 29,1995, forty-eight weeks ended September 27, 1996, four
weeks ended October 27, 1996 and for the fifty-two weeks ended October 26,
1997 amounted to, $808,984, $822,103, $75,883 and $871,033, respectively.
On September 27, 1996, equipment and improvements were revalued
in accordance with the purchase method of accounting.
NOTE 5 -- Other Assets
Other assets are stated at cost and consist of the following:
October 27, 1996 October 26, 1997
------------------ -------------------
Deferred Financing Costs $178,442 $115,199
Other Asset 7,505 0
Notes Receivable 27,631 77,631
-------- -------
$213,578 $192,830
======== ========
Amortization expense charged to operations for the fifty-two
weeks ended October 29,1995, forty-eight weeks ended September 27, 1996, four
weeks ended October 27, 1996 and for the fifty-two weeks ended October 26,
1997 amount to $66,667, $4,135, $1,228 and $111,613 respectively.
Included in other assets is a note receivable from the President
of the Company which amounts to $50,000 at October 26, 1997 bearing interest
at 13.5% with principal and interest payable upon the President receiving any
proceeds from the sale of stock in the Company. The note is collaeralized by
the maker's options and warrants in the Company.
NOTE 6 -- Long-Term Debt
On September 27, 1996, AB Plastics entered into a line of credit
agreement (the "Credit Agreement"), with Sumitumo bank of California (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 26, 1997 was $4,800,000 and commencing October
31, 1997 is to be reduced by $100,000 monthly. The Line of Credit matures on
July 31, 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 8 1/2% on October 26, 1997, unless AB Plastics elects an
optional interest calculation based on Eurodollars. At October 26, 1997,
$2,500,000 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 an
outstanding balance of $467,837 at October 26, 1997. The interest rate on this
line is 1/4% above the Bank's prime rate which was 8 1/2% on October 26, 1997.
Interest is payable monthly and the principal balance is 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.
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.
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 26,
1997. The Company's revolving line of credit prohibits the Company from
declaring, paying or making any dividend or distributiononits Common Stock.
On September 27, 1996, Compass and AB Plastics entered into a
loan agreement with a Sirron Investments, Inc. (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,
F-14
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the fifty-two weeks ended October 29, 1995, forty-eight weeks
ended September 27, 1996, four weeks ended October 27, 1996
and for the fifty-two weeks ended October 26, 1997.
April 1, 2000 and April 1, 2001 equaling 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' books, was utilized by Compass to purchase the stock of AB Plastics.
The Note, which has restrictions as to payment of dividends and issuance of
stock rights, is subordinated to the Credit Agreement and is secured by
substantially all the assets of AB Plastics.
In consideration of making the loan, the Lender was granted the
right (the "Warrant") to purchase up to 800,000 shares (after giving effect to
the Company's 4-for-1 stock split) of the Company's common stock for a total
exercise price of $2,000 (see Note 10). The Warrant is exercisable at any time
until October 31, 2001. The Warrant, which was valued at $800,000 on September
27, 1996, has been recorded as deferred loan fees and is being amortized over
the life of the loan. The Company's fair value determination was based on the
Company's actual contemporaneous sales of common stock at $1.00 per share and
contemporaneous grants of stock options having an exercise price of $1.00 per
share.
On August 21, 1997, the lender exercised its warrant and
purchased 800,000 shares of the Company's outstanding common stock for a total
exercise price of $2,000. On September 9, 1997, the Company repaid the note
with an outstanding balance of $4,000,000 to the lender from proceeds from its
IPO. In connection with repayment of subordinated debt, the company recorded
an extraordinary loss of $584,776 (net of applicable income tax benefit of
$376,237) resulting from the write off of deferred financing costs in
connection with repayment of such indebtedness.
On May 16, 1997, AB Plastics borrowed $1 million from Transamerica
Business Credit Corporation to fund capital expenditures related to its
Tijuana plant and to retire certain capitalized leases and loans . Net
proceeds to AB Plastics were $465,334 after $534,666 was used to repay the
outstanding principal balance, accrued interest and prepayment penalties on
the outstanding debt. The loan is secured by certain equipment and is
guaranteed by the Company. The loan's interest rate is 10.03% and repayable in
60 monthly payments of principal and interest. At October 26, 1997 $934,395 was
outstanding under this borrowing.
On August 1, 1997, AB Plastics entered into a construction loan
agreement (the "Construction Loan") in the amount of $3,500,000 for the
purpose of purchasing the South Figueroa Street facility (see Note 9) and the
construction of a warehouse facility at such location. The construction loan
which is evidenced by a promissory note (the "Note") which is secured by a
deed of trust on the facility, bears interest at the bank's prime rate plus
0.50% per annum with interest only payable monthly commencing September 1,
1997. The note provides for repayment of principal in equal monthly
installments of $14,583.33 commencing on February 1. 1998 to August 31, 2004
at which time the outstanding principal balance will be due and payable. The
construction loan has been guaranteed by Compass. AB Plastics has entered into
an environmental indemnity agreement with the bank, whereby AB Plastics will
indemnify the bank for any loss arising under any environmental law in
connection with its operations at the facility. At October 26, 1997 $2,224,506
was outstanding under the Construction Loan.
Long-term debt consists of:
October 27, 1996 October 26, 1997
----------------- -----------------
13.5% promissory note - Sirron Investments 4,000,000
Bank borrowings - Sumitomo Bank of California 6,000,000 5,192,343
10.03% promissory note 934,395
Other debt 230,000
---------- ---------
Long-term debt 10,000,000 6,426,738
Less current portion of long-term debt 400,303
---------- ---------
Long-term debt, net of current portion 10,000,000 6,026,435
========== =========
F-15
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the fifty-two weeks ended October 29, 1995, forty-eight weeks
ended September 27, 1996, four weeks ended October 27, 1996
and for the fifty-two weeks ended October 26, 1997.
The following is a schedule of the future minimum principal payment
requirements on the Company's long-term debt:
52 Weeks ending last
Sunday in October Amount
--------
1998 $507,516
1999 578,770
2000 625,099
2001 403,118
2002 318,979
Thereafter 1,393,256
----------
Total $3,826,738
==========
NOTE 7 -- Capitalized Lease Obligations
The Company is the lessee of equipment under capital leases
expiring through the year 2002. 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 29, 1995, forty-eight weeks ended
September 27, 1996, four weeks ended October 27, 1996 and for the fifty-two
weeks ended October 26,1997 amounted to $62,072, $72,132, $6,012 and $38,976
respectively. The following is a summary of property held under capital leases
included in equipment:
October 27, 1996 October 26, 1997
---------------- ----------------
Equipment $1,351,859 $806,247
Less: Accumulated Depreciation (6,012) (11,849)
---------- --------
Total $1,345,847 $794,398
========== ========
Minimum future lease payments under capital leases as of October
26, 1997 for each of the next five years, and in the aggregate, are as
follows:
52 Weeks ending last
Sunday in October Amount
--------
1998 $215,596
1999 255,336
2000 255,336
2001 119,856
2002 30,815
----------
Total minimum lease payments 876,939
Less : Amount representing interest (181,004)
==========
Present value of net minimum lease payments $695,935
==========
Current portion $122,846
Long-term portion 573,089
==========
Total $695,935
==========
F-16
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the fifty-two weeks ended October 29, 1995, forty-eight weeks
ended September 27, 1996, four weeks ended October 27, 1996
and for the fifty-two weeks ended October 26, 1997.
Interest rates on capitalized leases vary from 8.35% to 15.23%
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:
<TABLE>
<CAPTION>
Predecessor Company
------------------------------------- ----------------------------------
For the 52 For the 48 For the 4 For the 52
weeks ended weeks ended weeks ended weeks ended
October 29, 1995 September 27, 1996 October 27, 1996 October 26, 1997
<S> <C> <C> <C> <C>
Federal $0 $0 $49,000 $1,483,795
State 20,682 (7,939) 29,694 403,874
Deferred Income Taxes 5,775 (1,587) 38,142 (138,714)
------- -------- -------- -----------
Total Income Taxes $26,457 ($9,526) $116,836 $1,748,955
======= ======== ======== ==========
</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 For the 48 For the 4 For the 52
weeks ended weeks ended weeks ended weeks ended
October 29, 1995 September 27, 1996 October 27, 1996 October 26, 1997
---------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Computed at the expected statutory rate 34.00% 34.00%
Surtax exemption (0.41%)
State income tax - net of federal tax benefit 6.14% 5.15%
-------- -------- ------ ------
Income tax expense - effective rate "S-Corp" "S-Corp" 39.73% 39.15%
======== ======== ====== ======
</TABLE>
Significant components of the Company's deferred income tax
liabilities and assets as of October 29, 1995, September 27, 1996, October 27,
1996 and October 26,1997 as calculated in accordance with FASB Statement No.
109 consist primarily of temporary differences in depreciation relating to
property, plant and equipment.
F-17
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the fifty-two weeks ended October 29, 1995, forty-eight weeks
ended September 27, 1996, four weeks ended October 27, 1996
and for the fifty-two weeks ended October 26, 1997.
NOTE 9 -- Commitments and Contingencies
Lease Commitments
The Company is presently obligated under a noncancelable
operating lease for a building which it occupies, expiring on December 31, 2000
and July 18, 2007 as well as equipment leases expiring at various dates through
September 2002. Prior to August 20, 1997, the Company was obligated under a
noncancelable operating lease for its main operating facility located in
Gardena, California. On August 20, 1997, AB Plastics purchased its main
operating facility from the prior stockholders for $3,100,000. A warehouse
facility in Compton, California is being leased from an outside party at an
annual rental of $230,400 through March 1998. The annual rent will be increased
to $253,440 from April 1998 through the end of the lease term. A second facility
is being leased from a outside party for the Company's Mexico operations at an
annual rental of $454,886. Per the lease agreement, the rent which is payable in
US Dollars will be increase 3% at the end of each lease year. In addition to
minimum lease payments, the building lease requires payment of applicable
operating expenses (including property taxes and various maintenance costs).
Total operating lease expense for facilities and equipment for the
fifty-two weeks ended October 29, 1994, forty-eight weeks ended September 27,
1996, four weeks ended October 27, 1996 and fifty-two weeks ended October 26,
1997 amounted to $900,623, $834, 584, $55,731 and $563,971 respectively.
The following is a schedule of future minimum rental payments
subject to cost of living increases:
<TABLE>
<CAPTION>
Fifty-Two weeks ending Building Equipment Total
last Sunday in October Leases Leases Amount
---------------------- -------- --------- -------
<S> <C> <C> <C>
1998 $735,778 $96,528 $832,306
1999 750939 91172 842111
2000 766556 63563 830119
2001 590640 46623 637263
2002 568807 28561 597368
Thereafter 2886319 0 2886319
---------- -------- ----------
Total $6,299,039 $326,447 $6,625,486
========== ======== ==========
</TABLE>
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 26, 1997, excluding bonuses, was
approximately $2,305,000.
Other 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.
In September 1996, the Company entered into an agreement with JO
Hambro & Partners Limited ("JO Hambro"), of which 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. 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.
Litigation
The Company is a party to litigation in the normal course of
business, which in the opinion of management the outome of such litigation
will not have a material impact on the Company's financial statements.
Stock Option Plan and Stock Warrants
On September 29, 1996, Compass adopted a stock option plan
providing for both incentive and nonqualified stock options, pursuant to which
the Company reserved 200,000 shares of common stock of Compass ("Common
Stock") for grant under the Plan (the "1996 Plan"). The 1996 Plan required
that all options be granted at an exercise price not less than fair market
value unless otherwise determined by the option committee. On September 29,
1996, Compass granted incentive options to various employees and officers of
the Company to purchase 200,000 shares of common stock at an exercise price of
$4.00 per share to be exercised over a six year period (see Note 1). Such
share amounts and exercise price were subsequently adjusted on an arithmetic
basis to reflect the 4-for-1 stock split described in Note 12.
F-18
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the fifty-two weeks ended October 29, 1995, forty-eight weeks
ended September 27, 1996, four weeks ended October 27, 1996
and for the fifty-two weeks ended October 26, 1997.
1997 Stock Option Plan
Compass issued warrants to the Chairman and President of the
Company to purchase an aggregate of 100,000 shares of common stock at $4.00
per share, exercisable at any time and from time to time in whole or in part
from the date of grant through December 31, 2002.
In June 1997, the stockholders of Compass approved Compass' 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 currently outstanding stock options under
the 1997 Plan which expire on October 31, 2002. The options, which are
variable plan options, are exercisable at the IPO price only during the period
of the employment of the holder of the options and are exercisable only to the
extent of (a) 74,074 shares only if the average of the closing prices of the
Company's common stock, as reported on Nasdaq or any national securities
exchange for any 30 consecutive trading days (the "Average Closing Price"),
equals or exceeds $16.00 per share, (b) 148,148 shares only if the Average
Closing Price equals or exceeds $24.00 per share, or (c) 222,222 shares only
if the Average Closing Price equals or exceeds $32.00 per share. (See Note 1).
Effective on the date of the Initial Public Offering (see Note
12), certain of such stock options were exercised. Pursuant to such option
exercises, and the exercises of the warrants described below, the Company
issued an aggregate of $1,560,000 post-split shares of common stock, and will
receive aggregate proceeds of 762,000 (of which $2,000 was paid in cash and
$733,224 were in the form of promissory notes). The Company outstanding
promissory notes in connection with the exercise of the warrants in the amount
of $733,224 which have been reflected in the financial statements as a
reduction of stockholders equity.
Except for $2,000 received in cash from a financial institution
upon exercise of warrants for 800,000 shares, the purchase price for such
shares were paid by delivering to the Company 8% non-recourse promissory notes
by Chairman and President of the Company which are secured only by a pledge of
their respective shares and by 8% full-recourse promissory notes by the
remaining individual holders of the options and warrants, in each case payable
semi-annually as to interest, and as to principal, to occur on the earlier of
(a) the sale of the Company to any unaffiliated third party, whether through
merger, sale of assets or like consolidation or combination or (b) September
30, 2001. In addition, to the extent that such officers shall effect any
public or private sale, transfer or other disposition of any of their shares
of common stock, they will be obligated to apply all net after-tax proceeds to
the payment of their respective notes until such notes are paid in full. In
accordance with the terms of the full-recourse promissory notes, the Company
intends to exercise its rights with respect to payment of such notes. No new
measurement date will occur at the date of the notes for stock compensation
purposes. At October 26, 1997, the Company had outstanding promissory notes in
connection with the exercise of the warrants in the amount of $733,224, which
have been reflected in the financial statements as a reduction of stockholders'
equity.
The Company follows Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations in accounting for its stock options. Under APB 25, when the
exercise price of employee stock options equals or exceeds the market price of
the underlying stock on the "measurement date," no compensation expense is
recognized.
F-19
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the fifty-two weeks ended October 29, 1995, forty-eight weeks
ended September 27, 1996, four weeks ended October 27, 1996
and for the fifty-two weeks ended October 26, 1997.
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>
NOTE 10 -- Stock Option Plans
Summary information with respect to the stock option plans 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 $4.00 200,000 323,063
Stock Split 4 4 4
-------------- --------------- --------------
Balance after the retroactive effect of stock split $1.00 800,000 92,252
Granted $1.00 to 8.00 232,222 10,000
Exercised 1.00 360,000 92,252
Canceled 0.00 0 0
-------------- --------------- --------------
Balance October 26, 1997 $2.84 672,222 10,000
============== =============== ==============
</TABLE>
F-20
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
As of October 26, 1997, an aggregate 200,000 (800,000 post split) shares of the
Company's common stock were reserved for issuance under the 1996 Stock Option
Plan, and 800,000 shares under the 1997 Stock Option Plan. As of October 26,
1997.
Options to purchase 408,715 of such shares were exercisable. Pro forma
information regarding net income and earnings per share is required SFAS 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of SFAS 123. The fair market value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1997 and 1996:
<TABLE>
<CAPTION>
Assumption October 27, 1996 October 26, 1997
- - ---------- ---------------- ----------------
<S> <C> <C> <C>
Risk-free rate 1996 Plan 5.6% to 5.8% 5.6% to 5.8%
1997 Plan 5.8% 5.8%
Dividend yield 1996 Plan -0- -0-
1997 Plan -0- -0-
Volatility factor of the expected market
price of the Company's common stock 1996 Plan -0- -0-
1997 Plan 63% 63%
Average life 1996 Plan 1 to 5 Years 1 to 5 Years
1997 Plan 3 to 5 Years 3 to 5 Years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the options. The Company's
pro forma information follows:
For the For the
Four Weeks Fifty-Two Weeks
Ended Ended
October 27, 1996 October 26, 1997
---------------- ----------------
Pro forma net income $159,029 $2,053,520
Pro forma net income per share .04 .53
F-21
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the fifty-two weeks ended October 29, 1995, forty-eight weeks
ended September 27, 1996, four weeks ended October 27, 1996
and for the fifty-two weeks ended October 26, 1997.
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 For the 48 For the 4 For the 52
weeks ended weeks ended weeks ended weeks ended
October 29, 1995 September 27, 1996 October 27, 1996 October 26, 1997
---------------- ------------------ ---------------- ----------------
(Consolidated) (Consolidated)
<S> <C> <C> <C> <C>
Sales to Major Customers $38,614,539 $30,293,400 $2,707,845 $36,164,912
=========== =========== ========== ===========
Accounts Receivable from Major Customers $5,083,781 $5,781,803 $5,048,887 $4,290,752
=========== =========== ========== ===========
</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
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 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
The Company completed an initial public offering ("IPO") of
1,650,000 shares of its common stock in September 1997, of which 1.2 million
shares were sold by the Company and 450,000 shares were sold by existing
shareholders. The sale provided net proceeds to the Company of approximately
$7,873,000. In October 1997, the underwriters' purchased 123,750 additional
shares of common stock from the Company pursuant to their over-allotment option.
The net proceeds to the Company were $871,200. The Company retired a $4.0
million subordinated loan to Sirron Investments, Inc. and temporarily repaid the
entire principal balance of the Company's revolving credit facility. Had the IPO
occurred as of October 28, 1996, net income would have been $2,445,045 (or $0.63
per share) reflecting lower interest cost.
F-22
<PAGE>
COMPASS PLASTICS & TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the fifty-two weeks ended October 29, 1995, forty-eight weeks
ended September 27, 1996, four weeks ended October 27, 1996
and for the fifty-two weeks ended October 26, 1997.
SUBSEQUENT EVENTS
Loan to finance capital expenditures
On November 19 ,1997, AB Plastics borrowed approximately $3.0 million from
General Electric Capital Corporation to finance the purchase of certain
equipment located at AB Plastics' plant in Tijuana. The loan is secured by
that equipment and is guaranteed by the Company. The loan bears interest at
9.47% per annum and is repayable in 59 monthly installments of principal and
interest.
Purchase of Gridshield technology
On January 2, 1998, AB Plastics acquired all the intellectual property,
development contracts related to the grid shield process and all rights in and
to the "Gridshield" trade name. The Gridshield process, whereby a metal grid
is implanted in plastic during the molding process to act as an integrated
EMI/RFI shield, was created by Paul Burton to solve manufacturing problems for
both the electronics and injection molding industries. The initial price paid
to Mr. Burton was $1,000 with earn-out clauses based on performance criteria.
In connection with the purchase agreement, Paul Burton signed an employment
agreement with AB Plastics through December 31, 2001.
F-23
<PAGE>
MASTER SECURITY AGREEMENT
THIS MASTER SECURITY AGREEMENT, made as of November 20, 1997 (the
"Agreement"), by and between General Electric Capital Corporation, a New York
corporation with an address at 7700 Irvine Center Drive, Suite 400, Irvine, CA
("Secured Party"), and AB Plastics Corporation, a corporation organized and
existing under the laws of the state of with its chief executive office
located at 15730 S. Figuera St., Gardena, CA 90248 ("Debtor").
In consideration of the promises herein contained and of certain
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Debtor and Secured Party hereby agree as follows:
1. CREATION OF SECURITY INTEREST.
Debtor hereby gives, grants and assigns to Secured Party, its
successors and assigns forever. a security interest in and against any and all
property listed on any collateral schedule now or hereafter annexed hereto or
made a part hereof ("Collateral Schedule"), and in and against any and all
additions, attachments. accessories and accessions thereto, any and all
substitutions. replacements or exchanges therefor, and any and all insurance
and/or other proceeds thereof (all of the foregoing being hereinafter
individually and collectively referred to as the "Collateral"). The foregoing
security interest is given to secure the payment and performance of any and
all debts, obligations and liabilities of any kind, nature or description
whatsoever (whether primary. secondary. direct, contingent. sole, joint or
several. or otherwise. and whether due or to become due) of Debtor to Secured
Party. now existing or hereafter arising, including but not limited to the
payment and performance of certain Promissory Notes from time to time
identified on any Collateral Schedule (collectively "Notes" and each a
"Note"). and any renewals. extensions and modifications of such debts,
obligations and liabilities (all of the foregoing being hereinafter referred
to as the "Indebtedness"). Notwithstanding the foregoing, and notwithstanding
anything to the contrary contained elsewhere in this Agreement. to the extent
that Secured Party asserts a purchase money security interest in any items of
Collateral ("PMSI Collateral"): (i) the PMSI Collateral shall secure only that
portion of the Indebtedness which has been advanced by Secured Party to enable
Debtor to purchase, or acquire rights in or the use of such PMSI Collateral
(the "PMSI Indebtedness"), and (ii) no other Collateral shall secure the PMSI
Indebtedness.
2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF DEBTOR.
Debtor hereby represents. warrants and covenants as of the date
hereof and as of the date of execution of each Collateral Schedule hereto
that:
(a) Debtor is, and will remain, duly organized, existing and in
good standing under the laws of the State set forth in the first paragraph of
this Agreement, has its chief executive offices at the location set forth in
such paragraph, and is, and will remain, duly qualified and licensed in every
jurisdiction wherever necessary to carry on its business and operations;
<PAGE>
(b) Debtor has adequate power and capacity to enter into, and to
perform its obligations, under this Agreement, each Note and any other
documents evidencing, or given in connection with, any of the Indebtedness
(all of the foregoing being hereinafter referred to as the "Debt Documents");
(c) This Agreement and the other Debt Documents have been duty
authorized, executed and delivered by Debtor and constitute legal, valid and
binding agreements enforceable under all applicable laws in accordance with
their terms, except to the extent that the enforcement of remedies may be
limited, under applicable bankruptcy and insolvency laws;
(d) No approval, consent or withholding of objections is required
from any governmental authority or instrumentality with respect to the entry
into, or performance by, Debtor of any of the Debt Documents, except such as
may have already been obtained;
(e) The entry into, and performance by, Debtor of the Debt
Documents will not (i) violate any of the organizational documents of Debtor
or any judgment, order, law or regulation applicable to Debtor, or (ii) result
in any breach of, constitute a default under, or result in the creation of any
lien, claim or encumbrance on any of Debtor's property (except for liens in
favor of Secured Party) pursuant to, any indenture mortgage, deed of trust.
bank loan, credit agreement, or other agreement or instrument to which Debtor
is a party;
(f) There are no suits or proceedings pending or threatened in
court or before any commission, board or other administrative agency against
or affecting Debtor which could, in the aggregate, have a material adverse
effect on Debtor, its business or operations, or its ability to perform its
obligations under the Debt Documents;
(g) All financial statements delivered to Secured Party in
connection with the Indebtedness have been prepared in accordance with
generally accepted accounting principles, and since the date of the most
recent financial statement, there has been no material adverse change;
(h) The Collateral is not. and will not be. used by Debtor for
personal, family or household purposes;
(i) The Collateral is. and will remain. in good condition and repair
and Debtor will not be negligent in the care and use thereof;
(j) Debtor is, and will remain, the sole and lawful owner, and in
possession of, the Collateral, and has the sole right and lawful authority to
grant the security interest described in this Agreement; and
(k) The Collateral is, and will remain, free and clear of all liens,
claims and encumbrances of every kind. nature and description. except for (i)
liens in favor of Secured Party, (ii) liens for taxes not yet due or for taxes
being contested in good faith and which do not involve, in the reasonable
judgment of Secured Party. any risk of the sale, forfeiture or loss of any of
the Collateral, and (iii) inchoate materialmen's. mechanic's. repairmen's and
similar liens arising by operation of law in the normal course of business for
amounts which arc not delinquent (all of such permitted liens being
hereinafter referred to as "Permitted Liens").
2
<PAGE>
3. COLLATERAL.
(a) Until the declaration of any default hereunder. Debtor shall
remain in possession of the Collateral: provided. however. that Secured Party
shall have the right to possess (i) any chattel paper or instrument th3(
constitutes a part of the Collateral. and (ii) any other Collateral which
because of its nature may require that Secured Party's security interest
therein be perfected by possession. Secured Party, its successor and assigns,
and (heir respective agents, shall have the right to examine and inspect any
of the Collateral at any time during normal business hours. Upon any request
from Secured Party. Debtor shall provide Secured Party with notice of the then
current location of the Collateral.
(b) Debtor shall (i) use the Collateral only in its trade or
business. (ii) maintain all of the Collateral in good condition and working
order, (iii) use and maintain the Collateral only in compliance with all
applicable laws. and (iv) keep all of the Collateral free and clear of all
liens. claims and encumbrances (except for Permitted Liens).
(c) Debtor shall not. without the prior written consent of Secured
Party. (i) part with possession of any of the Collateral (except to Secured
Party or for maintenance and repair), (ii) remove any of the Collateral from
the continental United States, or (iii) sell, rent. lease, mortgage. grant a
security interest in or otherwise transfer or encumber (except for Permitted
Liens) any of the Collateral.
(d) Debtor shall pay promptly when due all taxes, license fees,
assessments and public and private charges levied or assessed on any of the
Collateral. on the use thereof, or on this Agreement or any of the other Debt
Documents. At its option, Secured Party may discharge taxes, liens, security
interests or other encumbrances at any time levied or placed on the Collateral
and may pay for the maintenance. insurance and preservation of the Collateral
or to effect compliance with the terms of this Agreement or any of the other
Debt Documents. Debtor shall reimburse Secured Party, on demand, for any and
all costs and expenses incurred by Secured Party in connection therewith and
agrees that such reimbursement obligation shall be secured hereby.
(e) Debtor shall, at all times. keep accurate and complete records of
the Collateral. and Secured Party, its successors and assigns, and their
respective agents, shall have the right to examine. inspect, and make extracts
from all of Debtor's books and records relating to the Collateral at any time
during normal business hours.
(f) If agreed by the parties, Secured Party may, but shall in no
event be obligated to, accept substitutions and exchanges of property for
property. and additions to the property, constituting all or any part of the
Collateral. Such substitutions, exchanges and additions shall be accomplished
at any time and from time to time, by the substitution of a revised Collateral
Schedule for the Collateral Schedule now or hereafter annexed. Any property
which may be substituted, exchanged or added as aforesaid shall constitute a
portion of the Collateral and shall be subject to the security interest
granted herein. Additions to. reductions or exchanges of, or substitutions
for, the Collateral, payments on account of any obligation or liability
secured hereby, increases in the obligations and liabilities secured hereby,
or the creation of additional obligations and liabilities secured hereby. may
from time to time be made or occur without affecting the provisions of this
Agreement or the provisions of any obligation or liability which this
Agreement secures.
3
<PAGE>
(g) Any third person at any time and from time to time holding all or
any portion of the Collateral shall be deemed to, and shall, hold the
Collateral as the agent of. and as pledge holder for. Secured Party. At any
time and from time to time. Secured Party may give notice to any third person
holding all or any portion of the Collateral that such third person is holding
the Collateral as the agent of and as pledge holder for the Secured Party.
4. INSURANCE.
The Collateral shall at all times be held at Debtor's risk, and
Debtor shall keep it insured against loss or damage by fire and extended
coverage perils, theft, burglary, and for any or all Collateral which are
vehicles, for risk of loss by collision, and where requested by Secured PV,
against other risks as required thereby, for the full replacement value
thereof, with companies, in amounts and under policies acceptable to Secured
Party. Debtor shall, if Secured Party so requires, deliver to Secured Party
policies or certificates of insurance evidencing such coverage. Each policy
shall name Secured Party as loss payee thereunder, shall provide for coverage
to Secured Party regardless of the breach by Debtor of any warranty or
representation made therein, shall not be subject to co-insurance, and shall
provide for thirty (30) days written notice to Secured Party of the
cancellation or material modification thereof. Debtor hereby appoints Secured
Party as its attorney in fact to make proof of loss, claim for insurance and
adjustments with insurers. and to execute or endorse all documents. checks or
drafts in connection with payments made as a result of any such insurance
policies. Proceeds of insurance shall be applied. at the option of Secured
Party, to repair or replace the Collateral or to reduce any of the
Indebtedness secured hereby.
5. REPORTS.
(a) Debtor shall promptly notify Secured Party in the event of (i)
any change in the name of Debtor, (ii) any relocation of its chief executive
offices, (iii) any relocation of any of the Collateral, (iv) any of the
Collateral being lost, stolen, missing, destroyed, materially damaged or worn
out, or (v) any lien, claim or encumbrance attaching or being made against any
of the Collateral other than Permitted Liens.
(b) Debtor agrees to furnish its annual financial statements and such
interim statements as Secured Party may require in form satisfactory to
Secured Party. Any and all financial statements submitted and to be submitted
to Secured Party have and will have been prepared on a basis of generally
accepted accounting principles, and are and will be complete and correct and
fairly present Debtor's financial condition as at the date thereof. Secured
Party may at any reasonable time examine the books and records of Debtor and
make copies thereof.
4
<PAGE>
6. FURTHER ASSURANCES.
(a) Debtor shall. upon request of Secured Party, furnish to Secured
Party such further information, execute and deliver to Secured Party such
documents and instruments (including, without limitation, Uniform Commercial
Code financing statements) and do such other acts and things, as Secured Party
may at any time reasonably request relating to the perfection or protection of
the security interest created by this Agreement or for the purpose of carrying
out the intent of this Agreement. Without limiting the foregoing, Debtor shall
cooperate and do all acts deemed necessary or advisable by Secured Party to
continue in Secured Party a perfected first security interest in the
Collateral. and shall obtain and furnish to Secured Party any subordinations,
releases, landlord, lessor, or mortgagee waivers. and similar documents as may
be from time to time requested by, and which are in form and substance
satisfactory to Secured Party.
(b) Debtor hereby grants to Secured Party the power to sign Debtors
name and generally to act on behalf of Debtor to execute and rile applications
for title. transfers of title, financing statements. notices of lien and other
documents pertaining to any or all of the Collateral. Debtor shall. if any
certificate of title be required or permitted by law for any of the
Collateral. obtain such certificate showing the lien hereof with respect to
the Collateral and promptly deliver same to Secured Party.
(c) Debtor shall indemnify and defend the Secured Party. its
successors and assigns. and their respective directors, officers and
employees, from and against any and all claims. actions and suits (including,
without limitation, related attorneys' fees) of any kind, nature or
description whatsoever arising, directly or indirectly, in connection with any
of the Collateral.
7. EVENTS OF DEFAULT.
Debtor shall be in default under this Agreement and each of the other
Debt Documents upon the occurrence of any of the following "Event(s) of
Default":
(a) Debtor fails to pay any installment or other amount due or coming
due under any of the Debt Documents within ten (10) days after its due date;
(b) Any attempt by Debtor. without the prior written consent of
Secured Party, to sell. rent. lease. mortgage. grant a security interest in.
or otherwise transfer or encumber (except for Permitted Liens) any of the
Collateral;
(c) Debtor fails to procure, or maintain in effect at all times. any
of the insurance on the Collateral in accordance with Section 4 of this
Agreement;
(d) Debtor breaches any of its other obligations under any of the
Debt Documents and fails to cure the same within thirty (30) days after
written notice thereof;
(e) Any warranty, representation or statement made by Debtor in any
of the Debt Documents or otherwise in connection with any of the Indebtedness
shall be false or misleading in any material respect;
5
<PAGE>
(f) Any of the Collateral being subjected to. or being threatened
with, attachment. execution, levy, seizure or confiscation in any legal
proceeding or otherwise;
(g) Any default by Debtor under any other agreement between Debtor
and Secured Party;
(h) Any dissolution, termination of existence, merger, consolidation,
change in controlling ownership, insolvency, or business failure of Debtor or
any guarantor or other obligor for any of the Indebtedness (collectively
"Guarantor"), or if Debtor or any Guarantor is a natural person, any death or
incompetency of Debtor or such Guarantor;
(i) The appointment of a receiver for all or of any part of the
property of Debtor or any Guarantor, or any assignment for the benefit of
creditors by Debtor or any Guarantor; or
(j) The filing of a petition by Debtor or any Guarantor under any
bankruptcy, insolvency or similar law, or the filing of any such petition
against Debtor or any Guarantor if the same is not dismissed within thirty
(30) days of such Filing.
8. REMEDIES ON DEFAULT.
(a) Upon the occurrence of an Event of Default under this Agreement,
the Secured Party, at its option, may declare any or all of the Indebtedness,
including without limitation the Notes, to be immediately due and payable,
without demand or notice to Debtor or any Guarantor. The obligations and
liabilities accelerated thereby shall bear interest (both before and after any
judgment) until paid in full at the lower of eighteen percent (18%) per annum
or the maximum rate not prohibited by applicable law.
(b) Upon such declaration of default, Secured Party shall have all of
the rights and remedies of a Secured Party under the Uniform Commercial Code,
and under any other applicable law. Without limiting the foregoing, Secured
Party shall have the right to (i) notify any account debtor of Debtor or any
obligor on any instrument which constitutes part of the Collateral to make
payment to the Secured Party, (ii) with or without legal process, enter any
premises where the Collateral may be and take possession and/or remove said
Collateral from said premises, (iii) sell the Collateral at public or private
sale, in whole or in part. and have the right to bid and purchase at said
sale, and/or (iv) lease or otherwise dispose of all or part of the Collateral,
applying proceeds therefrom to the obligations then in default. If requested
by Secured Party, Debtor shall promptly assemble the Collateral and make it
available to Secured Party at a place to be designated by Secured Party which
is reasonably convenient to both parties. Secured Party may also render any or
all of the Collateral unusable at the Debtor's premises and may dispose of
such Collateral on such premises without liability for rent or costs. Any
notice which Secured Party is required to give to Debtor under the Uniform
Commercial Code of the time and place of any public sale or the time after
which any private sale or other intended disposition of the Collateral is to
be made shall be deemed to constitute reasonable notice if such notice is
given to the last known address of Debtor at least five (5) days prior to such
action.
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<PAGE>
(c) Proceeds from any sale or lease or other disposition shall be
applied: first. to all costs of repossession, storage, and disposition
including without limitation attorneys', appraisers', and auctioneers' fees;
second, to discharge the obligations then in default; third. to discharge any
other Indebtedness of Debtor to Secured Party, whether as obligor, endorsor,
guarantor, surety or indemnitor; fourth, to expenses incurred in paying or
settling liens and claims against the Collateral; and lastly, to Debtor, if
there exists any surplus. Debtor shall remain fully liable for any deficiency.
(d) In the event this Agreement, any Note or any other Debt Documents
are placed in the hands of an attorney for collection of money due or to
become due or to obtain performance of any provision hereof, Debtor agrees to
pay all reasonable attorneys' fees incurred by Secured Party, and further
agrees that payment of such fees is secured hereunder. Debtor and Secured
Party agree that such fees to the extent not in excess of twenty percent (20%)
of subject amount owing after default (if permitted by law, or such lesser sum
as may otherwise be permitted by law) shall be deemed reasonable.
(e) Secured Party's rights and remedies hereunder or otherwise
arising are cumulative and may be exercised singularly or concurrently.
Neither the failure nor any delay on the part of the Secured Party to exercise
any right, power or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any right. power or privilege preclude
any other or further exercise thereof or the exercise of any other right.
power or privilege. Secured Party shall not be deemed to have waived any of
its rights hereunder or under any other agreement. instrument or paper signed
by Debtor unless such waiver be in writing and signed by Secured Party. A
waiver on any one occasion shall not be construed as a bar to or waiver of any
right or remedy on any future occasion.
(f) DEBTOR HEREBY UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL
OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR
INDIRECTLY. THIS AGREEMENT. ANY OF THE OTHER DEBT DOCUMENTS ANY OF THE
INDEBTEDNESS SECURED HEREBY. ANY DEALINGS BETWEEN DEBTOR AND SECURED PARTY
RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED
TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN DEBTOR
AND SECURED PARTY. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING
OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING. WITHOUT
LIMITATION. CONTRACT CLAIMS. TORT CLAIMS. BREACH OF DUTY CLAIMS. AND ALL OTHER
COMMON LAW AND STATUTORY CLAIMS). THIS WAIVER IS IRREVOCABLE. MEANING THAT IT
MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING. AND THE WAIVER SHALL APPLY TO
ANY SUBSEQUENT AMENDMENTS. RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS
AGREEMENT. ANY OTHER DEBT DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS
RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. IN THE EVENT OF
LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE
COURT.
7
<PAGE>
9. MISCELLANEOUS.
(a) This Agreement, any Note and/or any of the other Debt Documents
may be assigned, in whole or in part, by Secured Party without notice to
Debtor. and Debtor hereby waives any defense, counterclaim or cross-complaint
by Debtor against any assignee, agreeing that Secured Party shall be solely
responsible therefor.
(b) All notices to be given in connection with this Agreement shall
be in writing, shall be addressed to the parties at their respective addresses
set forth hereinabove (unless and until a different address may be specified
in a written notice to the other party), and shall be deemed given (i) on the
date of receipt if delivered in hand or by facsimile transmission, (ii) on the
next business day after being sent by express mail, and (iii) on the fourth
business day after being sent by regular, registered or certified mail. As
used herein, the term "business day" shall mean and include any day other than
Saturdays, Sundays, or other days on which commercial banks in New York, New
York are required or authorized to be closer.
(c) Secured Party may correct patent errors herein and fill in all
blanks herein or in any Collateral Schedule consistent with the agreement of
the parties.
(d) Time is of the essence hereof. This Agreement shall be binding,
jointly and severally, upon all parties described as the "Debtor" and their
respective heirs, executors, representatives. successors and assigns. and
shall inure to the benefit of Secured Party, its successors and assigns.
(e) This Agreement and its Collateral Schedules constitute the en6re
agreement between the parties with respect to the subject matter hereof and
supercede all prior understandings (whether written, verbal or implied) with
respect thereto. This Agreement and its Collateral Schedules shall not be
changed or terminated orally or by course of conduct, but only by a writing
signed by both parties hereto. Section headings contained in this Agreement
have been included for convenience only, and shall not affect the construction
or interpretation hereof.
(f) This Agreement shall continue in full force and effect until all
of the Indebtedness has been indefeasibly paid in full to Secured Party. The
surrender, upon payment or otherwise, of any Note or any of the other
documents evidencing any of the Indebtedness shall not affect the right of
Secured Party to retain the Collateral for such other Indebtedness as may then
exist or as it may be reasonably contemplated will exist in the future. This
Agreement shaft automatically be reinstated in the event that Secured Party is
ever required to return or restore the payment of all or any portion of the
Indebtedness (all as though such payment had never been made).
8
<PAGE>
IN WITNESS WHEREOF, Debtor and Secured Party, intending to be legally
bound hereby, have duly executed this Agreement or more counterparts, each of
which shall be deemed to be an original, as of the day and year first
aforesaid.
SECURED PARTY: DEBTOR:
General Electric Capital Corporation AB Plastics Corporation
By: /s/ W. Muramoto By: /s/ Paul J. Iacono
--------------------------------- ----------------------------------
Title: Regional Credit Analyst Title: Vice President-Finance and CFO
------------------------------ -------------------------------
9
<PAGE>
AMENDMENT TO
MASTER SECURITY AGREEMENT
DATED NOVEMBER 20, 1997
THIS AMENDMENT is made as of the 20th day of November 1997 between General
Electric Capital Corporation and AB Plastics Corporation in connection with
that certain Master Security Agreement dated November 20, 1997 ("Agreement").
The terms of this Amendment are hereby incorporated into the Agreement as
though fully set forth therein. The Agreement is hereby amended as follows:
SECTION 1. CREATION OF SECURITY INTEREST.
In the second sentence after the word arising, delete "including, but
not limited to" and replace with "arising" out of or relating "
SECTION 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF DEBTOR.
(a) After Debtor is delete " and will remain"
(b) After laws add ", and subject to general principles of equity."
(c) After principles add "and subject to no-material audit
adjustments with respect to unaudited statements," and after
change add "in Debtor's financial condition;"
(e) After Secured Party add "and Debtor's working capital lender"
(i) After repair add ", ordinary wear and tear from proper use
excepted."
SECTION 3. COLLATERAL.
(a) After time, add "upon 24 hours notice and" and after hours add
"and without undue disruption of Debtor's business."
(b)(ii) after order add "(ordinary wear and tear from proper use
excepted.)"
(e) After time add "upon 24 hours notice and" and after hours add
"and without undue disruption of Debtor's business."
SECTION 4. INSURANCE.
Delete last sentence and replace with: "Debtor appoints Secured Party
during the continuance of an Event of Default, as its attorney in
fact to make proof of loss, claim for insurance and adjustments with
insurers, and to execute or endorse all documents, checks, or drafts
in connection with payments made as a result of any such insurance
policies. Unless an Event of Default shall be continuing, proceeds of
insurance shall be made available to Debtor to be applied to repair
or replace the Collateral; and during the continuance of an Event of
Default, Secured party shall either make such proceeds available to
Debtor as aforesaid or apply same to the indebtedness. "
<PAGE>
SECTION 5. REPORTS.
(b) In the second sentence after thereof add "subject to
non-material audit adjustments with respect to unaudited
statements."; in the last sentence after may add "at its
expense" and after time add "upon 24 hours notice and
without undue disruption of Debtor's business."
SECTION 6. FURTHER ASSURANCES.
(c) After related add "reasonable"
SECTION 7. EVENTS OF DEFAULT.
In the first sentence after occurrence add "and during the continuance"
(g) After Secured Party add "after expiration of any cure period
provided therein."
(h) Replace sentence with: "Any dissolution, termination or
existence, insolvency or business failure of Debtor or any
guarantor or other obligor for any of the Indebtedness
(collectively, "Guarantor"), or if Debtor or any Guarantor is a
natural person, any death or incompetency of Debtor or such
Guarantor, or any merger or consolidation of Debtor into another
entity, or of another entity into Debtor, that results in a
material adverse change in the surviving entity's financial
condition as compared to Debtor's financial condition immediately
before such mercer or consolidation." (i ) After Guarantor add
"which is not dismissed within sixty (60) days."
SECTION 8. REMEDIES OF DEFAULT.
(a) After occurrence add "and during the continuance"
(b)(i) After Debtor add " to the extent that accounts owed by such
account debtor are part of the Collateral"
(b)(iii) After least change five to "ten ( 10)"
(c) After disposition add "of Collateral" and after limitation add
"reasonable"
(d) Delete the last sentence
(f) Delete the word Debtor starting the paragraph and replace with
"Each Party"
SECTION 9. MISCELLANEOUS.
(a) Delete without and replace with "with written"
(f) In the second sentence after exist end with a period and delete
the remainder of the sentence.
TERMS USED, BUT NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS GIVEN TO
THEM IN THE AGREEMENT. EXCEPT AS EXPRESSLY AMENDED HEREBY, THE AGREEMENT SHALL
REMAIN IN FULL FORCE AND EFFECT.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
by signature of their respective authorized representative set forth below.
SECURED PARTY: DEBTOR:
General Electric Capital Corporation AB Plastics Corporation
By: /s/ W. Muramoto By: /s/ Paul J. Iacono
--------------------------------- ----------------------------------
Title: Regional Credit Analyst Title: Vice President-Finance and CFO
------------------------------- ------------------------------
3
<PAGE>
FORM OF
PROMISSORY NOTE
---------------------
(Date)
15730 S. Figueroa St., Gardena, Los Angeles County, CA 90248
- - --------------------------------------------------------------------------------
(Address of Maker)
FOR VALUE RECEIVED, AB Plastics Corporation ("Maker") promises, jointly and
severally if more than one, to pay to the order of General Electric Capital
Corporation or any subsequent holder hereof (each, a "Payee") at its office
located at 7700 Irvine Center Drive, Suite 400, Irvine, CA 92713 or at such
other place as Payee or the holder hereof may designate. the principal sum of
Three Million Eleven Thousand Four Hundred Thirty-Seven and 16/100 Dollars
($3,011,437.16), with interest thereon. from the date hereof through and
including the dates of payment, at a fixed interest rate of Nine and 47/100
percent (9.47%) per annum. to be paid in lawful money of the United States, in
Fifty-nine (59) consecutive monthly installments of principal and interest of
Sixty-Three Thousand Two Hundred One and 64/100 Dollars ($63.201.64) each
("Periodic Installment") and a final installment which shall be in the amount
of the total outstanding principal and interest. The first Periodic
Installment shall be due and payable on _________________ and the following
Periodic Installments and the final installment shall be due and payable on
the same day of each succeeding month (each, a "Payment Date"). Such
installments have been calculated on the basis of a 360 day year of twelve
30-day months. Each payment may, at the option of the Payee, be calculated and
applied on an assumption that such payment would be made on its due date.
The acceptance by Payee of any payment which is less than payment in full of
all amounts due and owing at such time shall not constitute a waiver of
Payee's right to receive payment in full at such time or at an prior or
subsequent time.
The Maker hereby expressly authorizes the Payee to insert the date value is
actually given in the blank space on the face hereof and on all related
documents pertaining hereto.
This Note may be secured by a security agreement, chattel mortgage, pledge
agreement or like instrument (each of which is hereinafter called a "Security
Agreement").
Time is of the essence hereof. If any installment or any other sum due under
this Note or any Security Agreement is not received within ten (10) days after
its due date, the Maker agrees to pay, in addition to the amount of each such
installment or other sum, a late payment charge of five percent (5%) of the
amount of said installment or other sum, but not exceeding any lawful maximum.
If (i) Maker fails to make payment of any amount due hereunder within ten (10)
days after the same becomes due and payable; or (ii) Maker is in default
under, or fails to perform under any term or condition contained in any
Security Agreement, then the entire principal sum remaining unpaid, together
with all accrued interest thereon and any other sum payable under this Note or
any Security Agreement, at the election of Payee, shall immediately become due
and payable, with interest thereon at the lesser of eighteen percent (18%) per
annum or the highest rate nor prohibited by applicable law from the date of
such accelerated maturity until paid (both before and after any judgment).
<PAGE>
The Maker may prepay in full, but not in part, its entire indebtedness
hereunder upon payment of an additional sum as a premium equal to the
following percentages of the original principal balance for the indicated
period:
Prior to the first annual anniversary date of this Note: three percent (3%)
Thereafter and prior to the second annual anniversary zero percent (0%)
date of this Note:
Thereafter and prior to the third annual anniversary zero percent (0%)
date of this Note:
Thereafter and prior to the fourth annual anniversary zero percent (0%)
date of this Note:
Thereafter and prior to the fifth annual anniversary zero percent (0%)
date of this Note:
and zero percent (0%) thereafter, plus all other sums due hereunder or under
any Security Agreement.
It is the intention of the parties hereto to comply with the applicable usury
laws: accordingly, it is agreed that, notwithstanding any provision to the
contrary in this Note or any Security Agreement, in no event shall this Note
or any Security Agreement require the payment or permit the collection of
interest in excess of the maximum amount permitted by applicable law. If any
such excess interest is contracted for, charged or received under this Note or
any Security Agreement, or if all of the principal balance shall be prepaid,
so that under any of such circumstances the amount of interest contracted for,
charged or received under this Note or any Security Agreement on the principal
balance shall exceed the maximum amount of interest permitted by applicable
law, then in such event (a) the provisions of this paragraph shall govern and
control, (b) neither Maker nor any other person or entity now or hereafter
liable for the payment hereof shall be obligated to pay the amount of such
interest to the extent that it is in excess of the maximum amount of interest
permitted by applicable law, (c) any such excess which may have been collected
shall be either applied as a credit against the then unpaid principal balance
or refunded to Maker, at the option of the Payee, and (d) the effective rate
of interest shall be automatically reduced to the maximum lawful contract rate
allowed under applicable law, as now or hereafter construed by the courts
having jurisdiction thereof. It is further agreed that without limitation of
the foregoing, all calculations of the rate of interest contracted for,
charged or received under this Note or any Security Agreement which are made
for the purpose of determining whether such rare exceeds the maximum lawful
contract rate. shall be made, to the extent permitted by applicable law, by
amortizing, prorating, allocating and spreading in equal parts during the
period of the full stated term of the indebtedness evidenced hereby, all
interest at any time contracted for, charged or received from Maker or
otherwise by Payee in connection with such indebtedness: provided, however,
that if any applicable state law is amended or the law of the United States of
America preempts any applicable state law, so that it becomes lawful for the
Payee to receive a greater interest per annum rate than is presently allowed,
the Maker agrees that, on the effective date of such amendment or preemption,
as the case may be, the lawful maximum hereunder shall be increased to the
maximum interest per annum rate allowed by the amended state law or the law of
the United States of America.
2
<PAGE>
The Maker and all sureties, endorsers, guarantors or any others (each such
person. other than the Maker, an "Obligor") who may at any time become liable
for the payment hereof jointly and severally consent hereby to any and all
extensions of time, renewals, waivers or modifications of, and all
substitutions or releases of, security or of any party primarily or
secondarily liable on this Note or any Security Agreement or any term and
provision of either, which may be made, granted or consented to by Payee, and
agree that suit may be brought and maintained against any one or more of them,
at the election of Payee without joinder of any other as a party thereto, and
that Payee shall not be required first to foreclose, proceed against, or
exhaust any security hereof in order to enforce payment of this Note. The
Maker and each Obligor hereby waives presentment, demand for payment, notice
of nonpayment, protest, notice of protest, notice of dishonor, and all other
notices in connection herewith, as well as filing of suit (if permitted by
law) and diligence in collecting this Note or enforcing any of the security
hereof. and agrees to pay (if permitted by law) all expenses incurred in
collection, including Payee's actual fees. Maker and each Obligor agrees that
fees not in excess of twenty percent (20%) of (he amount then due shall be
deemed reasonable attorneys
THE MAKER HEREBY UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY,
THIS N0TE, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN MAKER AND PAYEE
RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED
TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN MAKER
AND PAYEE. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY
AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING. WITHOUT
LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW AND STATUT0RY CLAIMS.) THIS WAIVER IS IRREVOCABLE MEANING THAT IT
MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO
ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS
NOTE, ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING
TO THIS TRANSACTION OR ANY RELATED TRANSACTION. IN THE EVENT OF LITIGATION,
THIS NOTE MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
This Note and any Security Agreement constitute the entire agreement of the
Maker and Payee with respect to the subject matter hereof and supercedes ill
prior understandings, agreements and representations, express or implied.
3
<PAGE>
No variation or modification of this Note, or any waiver of any of its
provisions or conditions, shall be valid unless in writing and signed by an
authorized representative of Maker and Payee. Any such waiver, consent,
modification or change shall be effective only in the specific instance and
for the specific purpose given.
Any provision in this Note or any Security Agreement which is in conflict with
any statute, law or applicable rule shall be deemed omitted, modified or
altered to conform thereto.
AB PLASTICS CORPORATION
________________________________________ By:__________________________________
(Witness) (Signature)
________________________________________ _____________________________________
(Print name) (Print name and title, if applicable)
________________________________________ _____________________________________
(Address) (Federal tax identification number)
4
<PAGE>
FORM OF
CORPORATE GUARANTY
Date: ________________, 19__
General Electric Capital Corporation
7700 Irvine Center Drive, Suite 400
Irvine, CA 92718
To induce you to enter into, purchase or otherwise acquire, now or at
any time hereafter, any promissory notes, security agreement, chattel
mortgages, Pledge agreements, conditional Sale contracts. lease agreements.
and/or any other documents or instruments evidencing. or relating to, any
lease, loan, extension of credit or other financial accommodation
(collectively "Account Documents" and each an "Account Document") to AB
Plastics Corporation, a corporation organized and existing under the laws of
the State of Delaware ("Customer"), but without in any way binding you to do
so, the undersigned, for good and valuable consideration. the receipt and
sufficiency of which is hereby acknowledged, doe hereby guarantee to you. your
successor and assigns, the due regular and punctual payment of any sum or sums
of money which the Customer may owe to you now or at any time hereafter.
whether evidenced by an Account Document, on open account or otherwise, and
whether it represents principal, interest, rent late charges, indemnities, an
original balance, an accelerated balance, liquidated damages, a balance
reduced by partial payment, a deficiency after sale or other disposition of
any leased equipment, collateral or security, or any other type of sum of any
kind whatsoever that the Customer may owe to you now or at any time hereafter
other than unsecured trade payables, and does hereby further guarantee to you.
your successors and assigns, the due, regular and punctual performance of any
other duty or obligation of any kind or character whatsoever that the Customer
may owe to you now or at any time hereafter other than unsecured trade
payables (all such payment and performance obligations being collectively
referred to as "Obligations"). Undersigned does hereby further guarantee to
pay upon demand all losses, costs, attorneys' fees and expenses which may be
suffered by you by reason of Customer's default or default of the undersigned.
This Guaranty is a guaranty of prompt payment and performance (and
not merely a guaranty of collection). Nothing herein shall require you to
first seek or exhaust any remedy against the Customer, its successors and
assigns, or any other person obligated with respect to the Obligations, or to
first foreclose, exhaust or otherwise proceed against any leased equipment,
collateral or security which may be given in connection with the Obligations.
It is agreed that you may, upon any breach or default of the Customer beyond
any written cure period, or at any time thereafter during the continuance of
such uncured breach, make demand upon the undersigned and retrieve payment and
performance of the Obligations. with or without notice or demand for payment
or performance by the Customer. its successors or assigns, or any other
person. Suit may be brought and maintained against the undersigned, at your
election. without joinder of the Customer or any other person as parties
thereto. The obligations of each signatory to this Guaranty shall be joint and
several.
<PAGE>
The undersigned agrees that its obligations under this Guaranty shall
be primary, absolute. continuing and unconditional, irrespective of and
unaffected by any of the following actions or circumstances (regardless of any
notice to or consent of the undersigned): (a) the genuineness. validity,
regularity and enforceability of the Account Documents or any other document;
(b) any extension, renewal, amendment, change, waiver or other modification of
the Account Documents or any other document; (c) the absence of, or delay in,
any action to enforce the Account Documents, this Guaranty or any other
document; (d) your failure or delay in obtaining any other guaranty of the
Obligations (including, without limitation, your failure to obtain the
signature of any other guarantor hereunder); (e) the release of, extension of
time for payment or performance by, or any other indulgence granted to the
Customer or any other person with respect to the Obligations by operation of
law or otherwise; (f) the existence, value, condition, loss, subordination or
release (with or without substitution) of or failure to have title to or
perfect and maintain a security interest in. or the time, place and manner of
any sale or other disposition of any leased equipment, collateral or security
given in connection with the Obligations, or any other impairment (whether
intentional or negligent, by operation of law or otherwise) of the rights of
the undersigned; (g) the Customer's voluntary or involuntary bankruptcy,
assignment for the benefit of creditors, reorganization, or similar
proceedings affecting the Customer or any of its assets; or (h) any other
action or circumstances which might otherwise constitute a legal or equitable
discharge or defense of a surety or guarantor, other than payment of the
Obligations.
This Guaranty may be terminated upon delivery to you (at your address
shown above) of a written termination notice from the undersigned. However, as
to all Obligations (whether matured, unmatured. absolute. contingent or
otherwise) incurred by the Customer prior to your receipt of such written
termination notice (and regardless of any subsequent amendment, extension or
other modification which may be made with respect to such Obligations), this
Guaranty shall nevertheless continue and remain undischarged until all such
Obligations are indefeasibly paid and performed in full.
The undersigned agrees that this Guaranty shall remain in full force
and effect or be reinstated (as the case may be) if it any time payment or
performance of any of the Obligations (or any part thereof) is rescinded.
reduced or must otherwise be restored or returned by you, all as though such
payment or performance had not been made. If. by reason of any bankruptcy,
insolvency or similar laws effecting the rights of creditors, you shall be
prohibited from exercising any of your rights or remedies against the Customer
or any other person or against any property, then, as between you and the
undersigned. such prohibition shall be of no force and effect, and you shall
have the right to make demand upon. and receive payment from, the undersigned
of all amounts and other sums that would be due to you upon a default with
respect to the Obligations.
Notice of acceptance of this Guaranty and of any default by the
Customer or any other person is hereby waived. Presentment. protest demand.
and notice of protest, demand and dishonor of any of the Obligations. and the
exercise of possessory, collection or other remedies for the Obligations. are
hereby waived. The undersigned warrants that it has adequate means to obtain
from the Customer on a continuing basis financial data and other information
regarding the Customer and is not relying upon you to provide any such data or
other information. Without limiting the foregoing, notice of adverse change in
the Customer's financial condition, or of any other fact which might
materially increase the risk of the undersigned is also waived. All
settlements, compromises, accounts stated and agreed balances made in good
faith between the Customer. its successors or assigns. and you shall be
binding upon and shall not affect the liability of the undersigned.
2
<PAGE>
Payment of all amounts now or hereafter owed to the undersigned by
the Customer or any other obligor for any of the Obligations is hereby
subordinated in right of payment to the indefeasible payment in full to you of
all Obligations and is hereby assigned to you a.% a security therefor.
THE UNDERSIGNED HEREBY UNCONDITIONALLY WAIVES ITS RIGHT TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY
OR INDIRECTLY. THIS GUARANTY. THE OBLIGATIONS GUARANTEED HEREBY. ANY OF THE
RELATED DOCUMENTS. ANY DEALINGS BETWEEN US RELATING TO THE SUBJECT MATTER
HEREOF OR THEREOF. AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN
US. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL
DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING. WITHOUT LIMITATION,
CONTRACT CLAIMS, TORT CLAIMS. BREACH OF DUTY CLAIMS. AND ALL OTHER COMMON LAW
AND STATUTORY CLAIMS). THIS WAIVER IS IRREVOCABLE MEANING THAT MAY NOT BE
MODIFIED EITHER ORALLY OR IN WRITING. AND SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTY, THE
OBLIGATIONS GUARANTEED HEREBY, OR ANY RELATED DOCUMENTS. IN THE EVENT OF
LITIGATION. THIS GUARANTY MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE
COURT.
As used in this Guaranty, the word "person" shall include any
individual, corporation, partnership, joint venture, association, joint-stock
company unincorporated organization, or any government or any political
subdivision thereof.
This Guaranty is intended by the parties as a final expression of the
guaranty of the undersigned and is also intended as a complete and exclusive
statement of the terms thereof. No course of dealing. course of performance or
trade usage, nor any paid evidence of any kind. shall be used to supplement or
modify any of the terms hereof. Nor are there any conditions to the full
effectiveness of this Guaranty. This Guaranty and each of its provisions may
only be waived, modified, varied, released, terminated or surrendered, in
whole or in part, by a duly authorized written instrument signed by you. No
failure by you to exercise your rights hereunder shall give rise to any
estoppel against you, or excuse the undersigned from performing hereunder.
Your waiver of any right to demand performance hereunder shall not be a waiver
of any subsequent or other right to demand performance hereunder.
This Guaranty shall bind the undersigned's successors and assigns and
the benefits thereof shall extend to and include your successors and assigns.
In the event of default hereunder, you may at any time inspect undersigned's
records, or at your option, undersigned shall furnish you with a current
independent audit report.
3
<PAGE>
If any provisions of this Guaranty are in conflict with any
applicable statute. rule or law, then such provisions shall be deemed null and
void to the extent that they may conflict therewith, but without invalidating
any other provisions hereof.
Each signatory on behalf of a corporate guarantor warrants that he
had authority to sign on behalf of such corporation and by so signing, to bind
said guarantor corporation hereunder.
IN WITNESS WHEREOF, this Guaranty is executed the day and year above
written.
Compass Plastics & Technologies, Inc.
By:__________________________________
(Signature)
Title:_______________________________
(Officer's Title)
ATTEST:____________________________
Secretary/Assistant
4
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-26-1997
<PERIOD-END> OCT-26-1997
<CASH> 412
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<RECEIVABLES> 5,762
<ALLOWANCES> 12
<INVENTORY> 3,899
<CURRENT-ASSETS> 11,155
<PP&E> 19,058
<DEPRECIATION> 947
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<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 13,648
<TOTAL-LIABILITY-AND-EQUITY> 31,391
<SALES> 43,980
<TOTAL-REVENUES> 43,980
<CGS> 35,759
<TOTAL-COSTS> 35,759
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 995
<INCOME-PRETAX> 4,468
<INCOME-TAX> 1,749
<INCOME-CONTINUING> 2,719
<DISCONTINUED> 0
<EXTRAORDINARY> 585
<CHANGES> 0
<NET-INCOME> 2,134
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.55
</TABLE>
