ITEM 1. BUSINESS
Precise Technology, Inc. ("Precise," and together with its direct and indirect subsidiaries, the "Company," unless the context otherwise requires), was founded in 1964 and incorporated in 1969. The Company operates in two segments: Injection Molding and Mold Making. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately based on the fundamental differences in their operations.
The Injection Molding segment produces precision plastic products, focusing on three broad markets: healthcare, packaging and consumer/industrial products. These markets are characterized by high volume requirements, long product life cycles, limited vulnerability to recessionary trends and relatively low susceptibility to off-shore competition. The Company differentiates itself by providing total project management, including value-added services, for the manufacture of highly engineered, close tolerance products, such as disposable medical devices, thin-wall consumer product containers and electrical connectors. The Company currently serves a diverse base of original equipment manufacturers ("OEMs"), including Fortune 500 companies such as Abbott Laboratories ("Abbott Labs"), The Gillette Company ("Gillette") and The Procter & Gamble Company ("Procter & Gamble"). The Company is the sole or primary source supplier of the products that it manufactures for many of its customers.
The Mold Making segment provides customers in the same markets as the Injection Molding segment with extensive product design, prototype development, mold design and mold manufacturing. The Company focuses on high cavitation, close tolerance molds for the healthcare, packaging and consumer/industrial markets. The Company performs, or expects to perform, the injection molding for a majority of the products for which it makes molds. Plastic products for which the Company built the mold but which are not injection molded by the Company are typically molded in-house by the customer.
Information attributable to each of the Company's segments is as follows:
For further information on the Company's segments see Footnote 13 to the Financial Statements.
Injection Molding
The Company operates approximately 175 molding machines in ten strategically located facilities throughout the eastern and midwestern United States. The Company is capable of providing its customers with close tolerance injection molding and value-added finishing services such as packaging, assembly and decoration. The Company's technologically advanced, computer-aided manufacturing facilities and equipment enable it to engineer custom solutions to technically demanding customer requirements, which are generally characterized by close tolerances and high speed, volume and durability parameters. The high level of automation in many of the Company's manufacturing facilities minimizes both direct labor input and scrap loss. The Company believes that its leading technical capabilities and reputation for high quality products, on-time deliveries and reliability have enabled it to both obtain new customers and further penetrate existing customers.
Injection molding is one of the most widely used plastic processing methods in the world. Management believes the plastic injection molding industry will grow due to the relative design and production versatility offered by injection molding versus other manufacturing processes and the continued substitution of plastic for materials such as metal, glass and paper. The Company believes that this substitution is primarily the result of plastic's unique physical product attributes such as recyclability, durability, cosmetic appeal, flexibility of form and cost and weight advantages.
Mold Making
The Company operates three facilities with mold making capabilities, including one of the largest facilities in the United States. These facilities offer a full range of services, including conceptual part and mold design, building and testing. The mold making facilities are able to produce a variety of production molds from stack molds and unscrewing molds to prototype and hot runner molds. Management views the Company's mold designing and building operations not simply as supportive of its manufacturing business, but as an independent profit center.
Competitive Strengths
Management believes that the Company is well positioned to capitalize on the favorable trends in the plastics injection molding industry and to enhance its position in its target markets. The following are, in management's view, the Company's principal competitive strengths:
Full-service Capabilities. The Company's two business segments offer comprehensive services ranging from product design, product development and mold making through molding, decorating and assembly. As one of a limited number of injection molders in the United States capable of offering such comprehensive services, management believes that the Company is well positioned to benefit from the consolidation currently taking place in the injection molding industry and the trend among high volume OEMs to increasingly rely upon custom injection molders for total project management.
Advanced Manufacturing Capabilities. The Company uses state-of-the-art computer-aided design/ computer-aided manufacturing ("CAD/CAM") technology in the design and manufacture of its molds and subjects each mold to extensive testing to ensure that it meets high quality standards. The Company has also made substantial investments in advanced high speed molding machines and significantly expanded its use of automation and robotics in its manufacturing and assembly operations. As a result of its efforts, the Company has received numerous quality awards, including Gillette's OmniMark Award, the Lexmark International Prestige Supplier Award, the SC Johnson Partners in Quality Award and the bioMerieux Vitek World Class Supplier Award. In addition, the Company has achieved "ship-to-stock" status with many of its customers, whereby the Company's products are not subject to quality inspections by such customers prior to being stocked. Management believes that the Company's mold making capabilities and the high quality of its molding have been integral in the Company's strategy of focusing on highly engineered products.
Continuous Improvement. The Company has been successful in reducing costs by improving manufacturing efficiency, introducing advanced molding technology and realigning facilities and production to increase facility utilization. In addition, as one of the largest manufacturers in the plastics injection molding industry, the Company is able to realize significant economies of scale in raw material purchasing.
Multiple Plant Locations. Management believes that the Company's ten plants, located throughout the eastern and midwestern United States, provide it with the opportunity to effectively compete for new product contracts that require large volume runs and multiple distribution points. The Company's multiple plant locations enable it to allocate production to the facility best suited for a job in view of its relative capabilities and proximity to the customer. As a result, the Company provides its customers with a broad range of injection molding capabilities and better service through improved responsiveness, timely delivery and reduced freight costs. In addition, by operating numerous plants, the Company can mitigate customer sourcing risks associated with single facility production.
Business Strategy
The Company's objective is to enhance its position as a leading supplier of plastic molded products to leading OEMs in the healthcare, packaging and consumer/industrial markets. The key elements of the Company's business strategy to achieve this objective are as follows:
Focus on Target Markets. The Company focuses its marketing efforts on potential high margin accounts in the healthcare, packaging and consumer/industrial markets. These markets are characterized by high volume requirements, long product life cycles, limited vulnerability to recessionary trends, and relatively low susceptibility to off-shore molding competition. By focusing on high volume, long run manufacturing for products in these markets, management believes that the Company will be able to maximize its profitability and best utilize its resources.
Further Penetrate Existing Customer Base. Substantially all of the Company's sales are to major consumer product and healthcare companies. In most cases, the Company manufactures plastic products for specific applications required by one or more divisions of a single customer. The trend by OEMs to reduce their supplier base and outsource their injection molding needs provides the Company with the opportunity to increase sales to its existing customers and participate in their domestic and international growth. The Company seeks to capitalize on these favorable industry trends and growth opportunities by expanding its sales presence, emphasizing its full-service capabilities and developing close working relationships with its customers by improving communication and coordination between the Company's marketing, product design and production personnel and its customers' counterpart employees. The Company has designated key account specialists for each of its largest customers whose sole responsibility will be to serve the diverse injection molding needs of that customer. By pursuing these and other strategies, management believes that the Company can capitalize on its full-service capabilities and customer relationships.
Invest in Technology and Quality Improvements. The Company continues to improve productivity through an on-going program of upgrading equipment and facilities and investing in automation, robotics and other technological improvements. Since 1991, the Company has made substantial investments in new mold making equipment and injection molding machines which have led to improved cycle times, lower operating expenses and higher quality products. In addition, nine of the Company's twelve facilities are currently ISO 9000 registered, and the Company is
actively pursuing ISO certification of the three remaining facilities. Management believes that by continuing to invest in new technology and focusing on quality, the Company is well positioned to increase sales to existing customers, develop new customer relationships and improve its profit margins through increased operating efficiencies.
Reduce Costs and Increase Productivity. The Company focuses on simultaneously reducing costs while meeting the high quality standards of its customers. Each of the Company's facilities utilizes total quality management techniques, including the use of statistical process control and extensive employee involvement. The Company's employees receive training each year which is designed to increase productivity, safety and manufacturing quality and to foster the concept of "continuous improvement." Through an innovative Performance Sharing Program, the Company's employees focus on cost of goods sold and receive incentives to maximize gross margins by minimizing costs. Management also continues to improve asset utilization and increase manufacturing productivity by consolidating underperforming facilities and streamlining the Company's workforce. These initiatives have resulted in an increase in the Company's net sales per employee from $87,000 in 1991 to $127,000 in 1998.
Further Develop Partnerships with Key Customers. Management believes that its partnerships enable suppliers and OEMs to focus on long-term strategy and often result in faster product development, design flexibility, lower costs and improved product quality. For example, The Company currently has two state-of-the-art Customer-Aligned-Production ("CAP") facilities. One is located in Newark, Delaware (the "Delaware CAP Facility") which is specifically designed to serve the needs of Procter & Gamble and other customers in the thin-wall packaging market. At this facility, using state-of-the-art molding machines, highly engineered stack molds and high speed automation, the Company currently is the sole source manufacturer of polypropylene containers for Baby Fresh((TM)) baby wipes for Procter & Gamble and Softkins((TM)) moist tissues for Kimberly-Clark Corporation ("Kimberly-Clark"). The Company's second CAP facility is located in Holden, Massachusetts (the "Holden CAP Facility") which is dedicated solely to the production of the Gillette Mach3((TM)) razor base tray. The Company is currently the sole source manufacturer of trays for Gillette. Production at this facility includes precision injection molding as well as sputter coating (the process used to make compact discs). Other downstream automation in the production process includes pad printing, automatic vision inspection, hot melt assembly and packing into cartons. The Company intends to continue to pursue CAP opportunities and similar partnerships with these and other customers.
Selectively Pursue Acquisition Opportunities. Strategic acquisitions have been, and management believes will continue to be, an important element in the Company's growth and in its efforts to capitalize on favorable industry trends. The Company's acquisitions have expanded its OEM customer base, complemented its existing technological and manufacturing capabilities, presented substantial cost savings opportunities and provided significant growth opportunities. The Company will consider future acquisition opportunities that are attractively priced and that it believes will strengthen its customer base, broaden its geographic presence, enhance its production capabilities and/or provide significant operating synergies.
Industry
Injection molding is one of the most widely used plastic processing methods in the world due to the high-quality properties of the finished product and its cost effectiveness. Despite increased demand for plastic injection molded products, the United States injection molding industry remains highly fragmented. The United States injection molding industry is currently comprised of over 7,000 molders, a substantial majority of which are small operators or captive divisions of larger companies. The capabilities of these molders vary widely, as do their end markets.
In recent years, plastic injection molders have benefited from technology improvements that have enabled plastic to replace other materials (most notably metal, glass and paper) in a variety of applications. Plastic has been substituted for these materials primarily because of its disposability, ease of manufacture, durability, aesthetic appeal, flexibility of form and weight. Additionally, plastic often provides significant cost savings over other materials due to design and fabrication advantages. By successfully substituting plastic for other materials, manufacturers can significantly reduce the amount of necessary parts, manufacturing steps, labor costs, energy costs and transportation expenses associated with producing their products. As a result, management believes that substantial growth potential exists for plastics through further materials substitution.
In addition to the growth projected for the plastics industry as a whole, growth for larger injection molders such
as the Company is driven by industry consolidation and the trend among OEMs to outsource their injection molding needs. Management believes that the consolidation of the highly fragmented plastics injection molding industry has accelerated in recent years as a result of customer preferences toward larger, full-service independent molders that are able to provide total project management. As OEMs place increasing emphasis on minimizing the "time to market" for their new products and ensuring that their requirements for production, quality and timely delivery are satisfied, they are increasingly relying on one full-service supplier for each new product launch. In many cases, the combination of increasingly complex applications for plastic molded parts, the limited number of qualified molders and the desire of OEMs to reduce sourcing costs has resulted in the creation of partnerships between OEMs and molders who have proven their ability to provide effective total project management, high quality products and timely delivery. These partnerships enable OEMs and molders to focus on long-range strategy and often result in faster product development, greater design flexibility, lower costs and improved product quality.
The industry-wide trend toward OEM consolidation of suppliers has created significant opportunities for injection molders such as the Company who possess full-service capabilities. Given the capital investment required to successfully compete as a full-service injection molder, management believes that an increasingly limited number of injection molders will be capable of providing the breadth of services increasingly being demanded by high volume OEMs. Furthermore, management believes that the trend among OEMs to develop closer relationships with injection molders mitigates the potential threat of foreign competition. Inconsistent product quality, weak tooling capabilities and significant distance from customers' manufacturing locations have traditionally hindered foreign competitors from competing effectively for projects that require full-service capabilities, outstanding quality and quick response time.
Markets and Products
The Company is a leading supplier of plastic injection molded products and one of the largest mold makers in the United States, producing a wide variety of products for the healthcare, packaging and consumer/industrial markets. The following is a description of the principal markets served by the Company as well as the products the Company produces for those markets.
Healthcare
Plastic molded components for healthcare applications represented approximately 13.5% and 16.2% of the Company's net sales and injection molding net sales in 1998, respectively. The Company's primary healthcare products in 1998 included disposable diagnostic cards, syringes, sample systems and surgical components. During 1998, the Company's four largest healthcare market customers were Abbott Labs, bioMerieux Vitek, Ethicon Endo-Surgery, a division of Johnson & Johnson ("Ethicon") and Mallinckrodt, with bioMerieux Vitek having entered into primary source supply agreements with the Company.
Demand for injection molded plastics within the healthcare market is driven by both the aging population and the overall demand for new medical products. In addition, heightened cost consciousness on the part of the United States government and private insurers has increased demand for medical devices and supplies that can reduce labor costs, improve productivity and/or facilitate patient care in a more cost-effective manner. Plastics are being used more widely in medical devices as customers increasingly recognize the value of reduced breakage, the ability to manufacture consistent parts in a cost-effective manner and the infection control benefits of disposable products.
Packaging
Plastic molded components for packaging applications represented approximately 60.7% and 72.5% of the Company's net sales and injection molding net sales in 1998, respectively. The Company's primary packaging products in 1998 included caps and cap liners, closures and packaging for shaving cream, deodorant and feminine products. During 1998, in the packaging market, the Company's four largest customers were Procter & Gamble, Gillette, The Dial Corporation ("Dial") and Chesebrough-Pond's USA Co., a division of Unilever United States, Inc. The Company has entered into sole or primary source supply agreements with Procter & Gamble and Dial.
The Company's packaging sales are primarily related to personal care and household products. Given the intense competition among consumer products companies, consumer goods marketers are increasingly focusing on packaging as a relatively inexpensive method of creating brand differentiation.
Consumer/Industrial
Plastic molded components for consumer/industrial applications represented approximately 8.5% and 10.1% of the Company's net sales and injection molding net sales in 1998, respectively. The Company's primary consumer/industrial products in 1998 included printer components, electrical connectors and air freshener components. During 1998, the Company's four largest consumer/industrial market customers were Lexmark, AMP, Incorporated, Eaton Corporation and Rayovac Corporation.
The consumer/industrial markets the Company serves primarily include consumer containers and audio/electronics components. The consumer containers market has been growing rapidly due in part to the conversion of many products from metal, glass and paper to plastic. Plastic is the preferred material for many applications due to its low cost, functional performance, reusability and recyclability. Demand for plastic audio/electronic components is driven by both the overall demand for audio/electronic products and the percentage of those products composed of plastic. Strong projected growth for increased use of plastics is fueled by long product life cycles and consumer demand for more durable, lightweight and low-cost products.
Mold Making
Mold making operations represented approximately 16.3% of the Company's total net sales in 1998. Products produced with the molds manufactured by the Company in 1998 included deodorant dispensers, personal care products, medical disposables and containers. The Company performs, or expects to perform, the injection molding for a majority of the products for which it makes molds. Plastic products for which the Company built the mold but which are not injection molded by the Company are typically molded in-house by the customer. During 1998, the Company's four largest mold making customers were Procter & Gamble, Abbott Labs, Pass & Seymour Legrand ("Pass & Seymour") and Spalding Sports Worldwide.
Customers
Substantially all of the Company's injection molding sales are made to major OEMs in the healthcare, packaging and consumer/industrial markets. During 1998, the Company produced a wide variety of products for over 100 customers, with the Company's ten largest customers accounting for approximately 74.7% of its injection molding net sales. The Company's largest injection molding customers are Procter & Gamble, Gillette, Dial and Lexmark, which represented approximately 24.8%, 18.8%, 7.4% and 6.9%, respectively, of the Company's injection molding net sales in 1998.
Like the injection molding segment, substantially all of the Company's mold making sales are made to major OEMs in the healthcare, packaging and consumer/industrial markets. During 1998, the Company's ten largest mold making customers accounted for approximately 80.6% of its mold making net sales. The Company's largest mold making customers are Procter & Gamble, Abbott Labs, Pass & Seymour and Spalding, which represented approximately 20.7%, 16.2%, 11.8% and 8.3%, respectively of the Company's mold making net sales in 1998.
As one of a limited number of full-service injection molders increasingly relied upon by OEMs to provide total project management, the Company seeks to develop lasting relationships with its customers by working closely with them in the early stages of product design and development. Management believes that the Company's use of state-of-the-art CAD/CAM technology and robotics in mold making and molding and its advanced facilities and equipment are integral to its ability to meet customer requirements. While OEMs are generally reluctant to change suppliers due to the high switching costs associated with reengineering, requalifying and restarting production, the plastic injection molding industry is highly competitive.
Sales and Marketing
Substantially all of the Company's sales are made through the Company's direct sales force which is located throughout the regions in which the Company operates. The Company's sales and marketing team's in the injection molding segment are organized according to the Company's target markets: healthcare, packaging and consumer/industrial. In addition, the Company has a direct sales force concentrating in the mold making segment. Management believes this is the most efficient and effective way to develop and maintain customer relationships, stay
abreast of technical and other developments that may result in changing customer or consumer preferences and take advantage of new business opportunities. Sales and marketing personnel emphasize the Company's full-service injection molding capabilities to customers and focus on improving communication and coordination between the Company's marketing, production and product design personnel and customers' counterpart employees to develop customized products that enhance customer product differentiation and improve functional performance. In addition, the Company has designated key account specialists to serve its largest customers. By providing dedicated support, the Company believes it can better serve these customers, who, in many cases, have a variety of different product applications or production requirements in multiple locations. The Company's marketing approach will continue to remain focused on meeting the integrated needs of OEMs that require full-service injection molding capabilities.
Customer service is also a critical component of the Company's marketing efforts. The Company's customers operate high speed, high volume production lines. In order to operate their production lines efficiently and avoid costly line stoppages, customers rely on the Company's ability to provide reliable, on-time delivery of high quality products. Customer service representatives are located at each of the Company's facilities. Management believes that this decentralized approach, which provides primary support closer to the customer and the production process, is efficient and best suited to serve customer needs.
Manufacturing and Operations
The Company seeks to differentiate itself in the marketplace by being a full-service injection molder capable of meeting the integrated needs of leading OEMs from product design, development and mold making (mold making segment) through molding, decorating and assembly (injection molding segment). Large OEMs increasingly rely on molders for total project management to enhance quality, streamline production processes and to ensure timely completion of programs.
Injection Molding
The Company manufactures its products using the plastic injection molding process. The molding operation processes are comparable at each of the Company's facilities. Raw material arrives at each facility where it is inventoried in silos or boxes in the plant (depending upon the volume requirements). In conventional and clean room molding, raw material in the form of pellets is blended to ensure a homogenous mix, dried when necessary, and conveyed through a pneumatically controlled material handling system to the molding presses. The raw material enters the heating chamber where it is melted to a fluid state. Coloring agents are added as appropriate and a reciprocating screw pushes the fluid raw material at high pressure through a nozzle into a closed temperature-controlled mold. At the end of each molding cycle (ranging from six to twenty-eight seconds), the mold opens and the finished parts are ejected from the mold into automated handling systems from which they are packaged for further processing or shipment.
The Company operates approximately 175 conventional injection molding presses ranging in capacity from 44 to 725 tons. These presses are located in nine strategically located plants, allowing production to be allocated so that the customer's needs are met in a cost-effective and timely manner. The Company also operates eight presses used in the qualification and testing of new molds. The Company's molding operations also include white room and Class 100,000 clean room environments that offer a controlled manufacturing environment for the molding of components used in medical devices. The Company's molds and molding machines are continuously monitored through process and manufacturing systems, which include a preventative maintenance program. Molds in need of repair or scheduled for maintenance are sent to the plant tool shop for cleaning and repairs. If significant repairs are required, the molds are sent to one of the Company's three mold making facilities.
In order to produce high quality products while containing costs, the Company utilizes the most advanced molding capabilities available in the industry. For example, the Company operates two-by-two "stack" molds, which allow twice the molding capacity of conventional molding systems. For customer specific projects, the Company has developed engineering and automation systems resulting in improved manufacturing efficiencies and lower costs. In addition to its molding capabilities, the Company has significant experience with commodity and engineered thermoplastic polymers.
Each of the Company's plants is managed by a local plant manager and is treated as a profit center. The Company seeks to be a low-cost producer by using high speed molding machines, modern multi-cavity hot runner, cold
runner and insulated runner molds and extensive material handling automation. Many of the Company's products are packaged and delivered to OEMs in a manner which allows them to be integrated directly into the production process, minimizing inventories and fixed costs for both the Company and the customer. Each of the Company's injection molding plants has complete tool maintenance capability to support molding operations.
The Company's state-of-the-art Delaware CAP facility, demonstrates its injection molding capabilities as well as its commitment to developing strategic partnerships with key customers. This facility was specifically designed to produce Baby Fresh((TM)) polypropylene containers for Procter & Gamble and serve other customers in the thin-wall packaging market. This facility using state-of-the-art molding machines, highly engineered stack molds and high-speed automation is able to maintain short cycle times seven days a week. This type of production demands high levels of accuracy and repeatability. To maintain this level of shot-to-shot consistency, the Company uses in-line process control software to monitor critical molding parameters. The success of the Delaware CAP Facility is enhanced through computerization and close customer communication. A bar-coding system automatically tracks inventories and shipments and provides product traceability. The Company's investment in highly automated equipment enables the entire facility to be operated on average by only 24 employees, keeping labor costs to a minimum.
The Company's second CAP facility, the Holden CAP facility, which began production in 1998, also demonstates the Company's commitment to partnering with key customers. At this facility, the Company is currently the sole source manufacturer of razor base trays for Gillette's triple edge Mach3((TM)) shaver. Production at this facility includes precision injection molding as well as sputter coating (the process used to make compact discs). Other downstream automation in the production process includes pad printing, automatic vision inspection, hot melt assembly and packing into cartons. The Company intends to continue to pursue CAP opportunities and similar partnerships with these and other customers.
Secondary Processes
The Company further seeks to differentiate itself in the market by offering a variety of secondary processes at most plant facilities. These secondary processes typically include assembly and the lining of caps, as well as other services, including various decorating techniques, such as hot stamping, pad printing and labeling.
Mold Making and Technical Capabilities
The Company's three mold making facilities, which include one of the largest facilities in the United States, offer a full range of services, including conceptual part and mold design, building and testing. In addition, the Company's mold manufacturing facilities provide mold and technical consulting for troubleshooting, repair and preproduction evaluation of parts or drawings. The Company's target markets, selected for their relatively long product life cycles, demand durable molds which can be produced only with the highest-quality mold making equipment. The Company's mold making and technical operations serve this demand by combining craftsmanship with technologically advanced computer-aided design and Computer Numerical Control ("CNC") machining. As a result, the Company can deliver molds that are produced to the proper specifications and delivered on-time. Management views the Company's mold making operations not simply as supportive of its manufacturing business, but as an independent profit center.
The mold making process is generally initiated with the Company's engineers analyzing a customer's production requirements. Based on that analysis, a design is created or optimized for the part in question. This design is downloaded into the Company's computer database and serves as the foundation for the mold that will be built utilizing state-of-the-art CAD/CAM technology. The Company's mold design database is linked via a data communications network to the production floor, which allows for CNC machining of mold bases and components directly from the original design. The use of CNC technology and constant in-process monitoring enhances the Company's ability to create high-tolerance molds and deliver its molds on time. Moreover, after final assembly each of the Company's molds is tested for performance.
The Company's St. Petersburg, Florida mold making facility is one of the largest and most technologically advanced in the injection molding industry. The facility employs mold makers with extensive experience in designing and manufacturing high cavitation production molds and stack molds. The facility contains advanced mold testing and design centers and has five injection molding presses to provide qualification and testing of new molds. The Company's two other mold manufacturing facilities, one of which is located at Company headquarters near Pittsburgh, Pennsylvania and
the other of which is located outside Chicago, Illinois, are smaller than the St. Petersburg facility, specialize in molds for smaller, close tolerance plastic parts and have product design and testing capabilities.
Quality Assurance Programs
A commitment to consistently producing high-quality products is critical to the success of custom injection molders serving the Company's target markets. With packaging playing an ever-increasing role in the functionality and aesthetics of new product launches within the consumer products industry, OEMs demand high quality products from their injection molding suppliers. Similarly, given the applications for which their products are used, healthcare companies demand the highest quality products from their suppliers.
In recognition of these customer demands, the Company has centered its manufacturing philosophy on being the highest quality custom injection molder in its targeted end markets. Each of the Company's facilities utilizes total quality management techniques, including the use of statistical process control and the extensive involvement of employees to increase productivity. As a result, the Company has been recognized as a leading supplier of quality injection molded parts to the majority of its key customers. The Company has received numerous quality awards, including Gillette's OmniMark Award, the Lexmark International Prestige Supplier Award, the SC Johnson Partner in Quality Award and the bioMerieux Vitek World Class Supplier Award. "Ship-to-stock" status has been achieved with many customers, including the diagnostic division of Abbott Labs, bioMerieux Vitek, Chesebrough-Pond's and Johnson & Johnson. In addition, nine of the Company's facilities are ISO 9000 registered, and the Company is actively pursuing ISO certification in its remaining three facilities. ISO 9000-series registration certifies compliance by a company with a set of shipping, trading and technology standards promulgated by the International Standardization Organization.
Competition
The Company faces intense competition throughout its product lines from numerous competitors, a number of whom have greater financial resources than the Company. Competitive factors include product quality, service and the ability to supply products to customers in a timely manner. The Company faces competition from well-established independent molders operating nationally, smaller independent molders operating regionally and captive divisions of larger companies. In most instances, small regional competitors lack the production and technological capabilities to service national consumer product and healthcare companies.
The plastic injection molding industry is highly fragmented. In all three of its target markets the Company competes with Nypro, Inc., which is headquartered in Clinton, Massachusetts, and The Tech Group, Inc. ("The Tech Group"), which is headquartered in Scottsdale, Arizona. The Company competes with Erie Plastics Corp. in both the consumer/industrial and the packaging markets. In addition, in the healthcare market, the Company competes with Tenax Corporation, a primary supplier of surgical devices, and Courtesy Corporation, one of four major suppliers to Abbott Labs. In the packaging market, the Company also competes with The West Company, Inc. and Plastek Industries Incorporated.
Raw Materials and Suppliers
The principal raw materials utilized by the Company's molding processes are commodity and engineered thermo-plastic polymers, primarily polypropylene, polyethylene and polycarbonate. The selection of raw material is developed between the customer and the Company and specified to provide optimum processing, efficient handling, dimensional stability, end use and pricing requirements. Raw materials are purchased either from distributors or directly from polymer producers. Larger volumes are generally acquired from producers while smaller volumes are secured from large distributors that carry a wide variety of raw material types and manufacturers.
The Company's purchasing strategy is to deal with high quality, dependable suppliers. The Company's largest resin suppliers in 1998 were Huntsman and General Polymers, two of the largest plastic resin manufacturers/distributors in North America. In an effort to improve quality and reduce costs, the Company has implemented a "preferred supplier" program which requires the Company's suppliers to adhere to strict performance criteria, including satisfaction of high quality standards, commitment to continuous improvement and participation in the Company's quality assurance and cost improvement initiatives. The "preferred supplier" program also requires supply agreements to incorporate transactional reduction initiatives and include extended and/or discounted payment terms, performance rebates and price protection
provisions with respect to commodities that can be effected by changing market conditions. The Company has agreements in place with its primary suppliers pursuant to the program and will generally require that its other suppliers achieve "preferred supplier" status as a condition to future orders.
The Company does not anticipate having any material difficulties obtaining raw materials in the foreseeable future. With respect to raw material pricing, the Company has experienced price fluctuations comparable to industry trends over the last 18 months. Pursuant to the terms of multi-year supply agreements and purchase orders, the Company historically has had the ability to pass through a substantial portion of resin price increases. Other than typical price protection clauses within its supply agreements, the Company does not otherwise hedge its exposure to increases in raw material prices.
Regulation and Legislation
The past and present operations of the Company, including its past and present ownership of real property, are subject to extensive and changing federal, state and local environmental laws and regulations pertaining to the discharge of materials into the environment, the handling and disposition of wastes or otherwise relating to the protection of the environment. The Company believes that it is in substantial compliance with applicable environmental laws and regulations. However, the Company cannot predict with any certainty that it will not in the future incur liability under environmental statutes and regulations with respect to contamination of sites formerly or currently owned or operated by the Company (including contamination caused by prior owners and operators of such sites) and the off-site disposal of hazardous substances.
Sampling in 1995 at Tredegar Molded Products Company's ("Tredegar") South Grafton, Massachusetts facility revealed the presence of contaminants in the soil and groundwater at the facility. The concentration of certain substances in the soil exceeded minimum reportable concentrations under Massachusetts environmental regulations; none of the substances detected in groundwater exceeded minimum reportable concentrations. In connection with the acquisition of Tredegar in 1996, the seller agreed, at its cost, to determine the extent of the onsite and off-site contamination resulting from these reportable releases and to perform the clean-up activities necessary to achieve a permanent remediation under the applicable Massachusetts regulations. In December 1996, the seller's consultant issued its final report, which concluded that a condition of "no significant risk" to safety, health, public welfare or the environment had been achieved by remediation activities at the site and stated that no further response actions were recommended for the site. Remediation of the South Grafton site in accordance with the Massachusetts program, however, will not necessarily ensure that the Company might not be subject to further state or federal cleanup orders with respect to the site or claims by adjacent landowners and/or other third parties allegedly impacted by releases at the site, and no assurance can be given that the Company will not incur or elect to assume any liabilities for such remediation as a result of subsequent negotiations, by operation of law or otherwise.
The operations at the Company's facilities require permits and approvals from certain federal, state and local authorities. In addition, the Company's operations are heavily dependent upon its continued ability, under applicable laws, regulations, policies, permits, licenses or contractual arrangements, to operate its facilities, and otherwise to conduct its operations. The Company believes it has all permits, licenses and approvals from governmental authorities material to the operation of the facilities as currently configured. In addition, the Company has not received any notice of material non-compliance with permits, licenses or approvals necessary for the operation of its properties. However, there can be no assurance that new applications of existing laws, regulations and policies, or changes in such laws, regulations and policies will not occur in a manner that could have such an effect, or that important permits, licenses or agreements will not be canceled, non-renewed, or renewed on terms materially less favorable to the Company. Although the Company has no reason to believe that it will not be successful in implementing its operations and development plans, no assurance can be given that necessary permits and approvals will be obtained.
The plastics industry in general, and the Company in particular, is also subject to existing and potential federal, state, local and foreign legislation designed to reduce solid wastes by requiring, among other things, plastics to be degradable in landfills, minimum levels of recycled content, various recycling requirements, disposal fees and limits on the use of plastic products. In addition, various consumer and special interest groups have lobbied from time to time for the implementation of these and other similar measures. The principal resins used in the Company's products are recyclable, and, accordingly, the legislation promulgated to date and such consumer interest group initiatives to date have not had a material adverse effect on the Company. There can be no assurance that any such future legislative or regulatory
efforts or future initiatives would not have a material adverse effect on the Company.
Employees
As of December 31, 1998, the Company employed 739 individuals, of which 176 were salaried and 563 were hourly. Approximately 558 were in the injection molding segment, 122 in the mold making segment and 59 were corporate employees. Approximately 40 employees at the Company's Pittsburgh, Pennsylvania facility, or 5.4% of the Company's total employees, are members of a union and are covered by a collective bargaining agreement which expires in February 2002. The Company believes that its relationship with its employees is generally good.
ITEM 2.
ITEM 2. PROPERTIES
The Company operates ten facilities located in the eastern and midwestern United States. Management believes that these facilities are adequate for its present needs. A summary of the Company's facilities is presented in the chart below.
(1) Lease expires in December 1999. (2) This facility is partially owned and partially leased. Leased portion expires in July 1999. (3) This facility is partially owned and partially leased. Leased portion expires in June 1999. (4) Lease expires in June 2001. (5) Lease expires in December 2002.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company does not believe that it or any of its facilities are presently involved in any litigation that will, individually or in the aggregate, have a material adverse effect on its financial condition or future results of operations. The Company maintains liability insurance that the Company considers adequate to insure claims related to usual and customary risks associated with the operation of its facilities.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the forth quarter of 1998.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established trading market for any class of equity securities of Company.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial data of the Company for the five-year period ended December 31, 1998. The selected historical consolidated financial data for the five-year period ended December 31, 1998 were derived from audited consolidated financial statements of the Company. The audited consolidated financial statements of the Company for each of the years in the three-year period ended December 31, 1998 are included elsewhere in this Report. The selected historical consolidated financial data for the years ended December 31, 1995 and 1994 were derived from audited consolidated financial statements of the Company that are not included herein. The following table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company, and the accompanying notes thereto, included elsewhere in this Report.
(1) The statement of income data, cash flow and other financial data for 1996 reflect the results of operations of Unity Mold Corporation (Unity) and Tredegar Molded Products Company (Tredegar) since they were acquired
by the Company on January 25, 1996 and March 29, 1996, respectively.
(2) Includes (i) a non-recurring charge of $555,000 representing financial advisory fees and out-of-pocket expenses paid to Mentmore and (ii) a $300,000 charge representing legal fees paid to the law firm of Michael D. Schenker Co., LPA, whose principal is an officer of Mentmore Holdings Corporation ("Mentmore"). Both charges were related to the Refinancing Transactions (as defined below).
(3) The Company recorded an extraordinary loss of $4,841,000, net of tax benefits, for the year ended December 31, 1997, due to the early extinguishment of indebtedness resulting from the repayment of the Retired Notes (as defined below) and the termination of the Prior Credit Agreement in connection with the Refinancing Transactions.
(4) During 1996 net cash used in the Unity acquisition was $3,308,000 and net cash used in the Tredegar acquisition was $60,493,000.
(5) Includes capital expenditures financed through capital leases of $2,328,000 in 1994, $536,000 in 1995, $4,201,000 in 1996, $4,810,000 in 1997 and $2,576,000 in 1998, respectively.
(6) In calculating the ratio of earnings to fixed charges, earnings consist of income before taxes plus fixed charges. Fixed charges consist of interest expense and amortization of deferred financing costs, whether expensed or capitalized, plus the portion of operating lease expense attributable to interest. For the year ended December 31, 1998, the Company's earnings were inadequate to cover fixed charges by $1,591,000. Adjusted to eliminate non-cash charges of depreciation and amortization of $7,769,000 for the year ended December 31, 1998, such earnings would have exceeded fixed charges by $6,178,000. For the year ended December 31, 1997, the Company's earnings were inadequate to cover fixed charges by $2,081,000. Adjusted to eliminate non-cash charges of depreciation and amortization of $6,716,000 for the year ended December 31, 1997, such earnings would have exceeded fixed charges by $4,635,000.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is a leading full-service, custom injection molder of precision plastic products, focusing on three broad markets: healthcare, packaging and consumer/industrial products. The Company is capable of providing its customers with comprehensive custom manufacturing services, including extensive product design and prototype development, mold design and manufacturing, close tolerance injection molding and value-added finishing services such as packaging, assembly and decoration. The Company operates in two segments: Injection Molding and Mold Making.
In January and March of 1996, the Company completed the acquisitions of Unity and Tredegar, respectively, more than tripling the Company's net sales on a pro forma basis. Management believes that the acquisitions significantly enhanced the Company's prospects for future growth by expanding its manufacturing capabilities, enlarging its customer base, strengthening its relationships with certain existing customers and broadening its geographic presence.
In June 1997, the Company completed a $75.0 million offering of senior subordinated notes due 2007 (the "Notes"), and used the proceeds in part to repay indebtedness incurred in connection with the Tredegar acquisition. In connection with the Offering, the Company entered into a $30 million Credit Agreement with a financial institution. Borrowings under the Credit Agreement may be used to fund the Company's working capital requirements, finance certain permitted acquisitions and general corporate requirements collectively, the Refinancing Transactions. The Credit Agreement expires in June 2002.
The Company experienced a 2.7% decrease in net sales during the year ended December 31, 1998, compared to the year ended December 31, 1997. The decrease in net sales from $100.7 million in 1997 to $98.0 million in 1998 was primarily due to (i) customer insourcing, (ii) the loss of two customers to competitors with closer "ship-to" points, (iii) lower than anticipated volume requirements of certain customers' end product lines due to product maturity and (iv) two customers' being involved with business combinations that have slowed the volume requirements. These decreases were partially offset by increased volumes to certain customers due to higher demand for the customers' end product line and the addition of a significant new product line for one of the Company's largest customers.
Since the Tredegar acquisition, the Company's management has focused on reorganizing and strengthening its sales and marketing efforts to obtain new business. The Company began to realize the benefits of these efforts in the second half of 1998 and expects to continue to realize these benefits into 1999.
Operating income for the year ended December 31, 1998 increased from $7.7 million, to $8.6 million, or 11.8%, compared to the operating income for fiscal 1997. This increase resulted primarily from higher gross profit margin which was partially offset by higher selling, general and administrative expenses and lower sales volume.
The Company's operating data for fiscal years ended December 31, 1996, 1997 and 1998 are set forth below as percentages of net sales:
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales. The Company's net sales decreased to $98.0 million for the year ended December 31, 1998, a decrease of $2.7 million, or 2.7%, from the year ended December 31, 1997. The decrease was caused by decreased injection molding sales which were partially offset by increased mold making sales.
Injection molding sales for the year ended December 31, 1998 decreased $5.9 million, or 6.7%, to $82.1 million due to (i) customer insourcing, (ii) the loss of two customers to competitors with closer "ship-to" points, (iii) lower than anticipated volume requirements of certain customers' end product lines due to product maturity and (iv) two customers' being involved with business combinations that have slowed their volume requirements. These decreases were partially offset by increased volumes to certain customers due to higher demand for the customers' end product line and the addition of a significant new product line for one of the Company's largest customers.
Mold making sales for the year ended December 31, 1998 increased $3.2 million, or 25.3%, to $15.9 million. The increase is primarily attributable to an increase in mold making projects with one of the Company's largest customers.
Gross profit. The Company's gross profit increased to $20.6 million for the year ended December 31, 1998, an increase of $2.6 million, or 14.2%, over the year ended December 31, 1997. The increase is primarily due to increased gross profits at both the injection molding and mold making segments. Gross profit margin increased to 21.0% for the year ended December 31, 1997 from 17.9% in the year ended December 31, 1997.
Injection molding's gross profit increased to $19.3 million for the year ended December 31, 1998, an increase of $1.0 million, or 5.2%, over the prior year. The increase in gross profit was primarily attributable to (i) increased employee utilization, (ii) lower raw material costs from aggressive purchasing tactics and (iii) a favorable change in product mix.
Mold making's gross profit increased to $1.3 million, an increase of $1.6 million over the year ended December 31, 1997. The primary reason for the increase in gross profit is due to increased expenses in 1997 that related to cost overruns on certain projects.
Selling, general and administrative. Selling, general and administrative expenses increased to $10.7 million for the year ended December 31, 1998, an increase of $1.8 million, or 19.6%, over the year ended December 31, 1997. The increase in selling, general and administrative expenses was primarily attributable to (i) increased expenses due to a pursuit of potential acquisitions, (ii) increased salaries, wages and fringe benefits associated with merit increases and the hiring of additional corporate personnel, (iii) costs associated with the implementation of a new Enterprise Resource Planning system and (iv) additional fees for various management services and other corporate activities.
Amortization. The Company's amortization of intangible assets decreased slightly to $1.15 million for the year ended December 31, 1998 from $1.22 million in the year ended December 31, 1997. This decrease resulted primarily from the expiration of three non-compete agreements during 1998.
Operating income. Operating income increased to $8.6 million for the year ended December 31, 1998, from $7.7 million for the year ended December 31, 1997, representing an increase of 11.8%. Operating income as a percentage of net sales increased to 8.8% for the year ended December 31, 1998 from 7.7% in the year ended December 31, 1997. The increase is due primarily to the increase in gross profit margin which was partially offset by the increase in selling, general and administrative expenses.
Interest expense. Interest expense increased to $10.3 million for the year ended December 31, 1998, an increase of $1.5 million, or 17.6% over the comparable period in the prior year. This increase is primarily a result of interest due on an increased level of indebtedness outstanding as a result of the change in the Company's capital structure, which included the issuance of the Notes.
Other expenses/(income). Other expenses decreased to $(51,000) for the year ended December 31, 1998 from $873,000 in the year ended December 31, 1997. During 1997, the Company incurred (i) non-recurring charges of approximately $555,000 representing financial advisory fees and out-of-pocket expenses paid to Mentmore and (ii) $300,000 of legal fees paid to the law firm of Michael D. Schenker Co. LPA, whose principal is an officer of Mentmore. Both of these charges were related to the change in the Company's capital structure.
Provision for income tax. The Company's effective tax rates differed from the applicable statutory rates for the years ended December 31, 1998 and 1997 primarily due to nondeductible goodwill amortization. At December 31, 1998, the Company had approximately $10.0 million and $24.1 million of federal and state net operating losses, respectively. The deferred tax benefit of these net operating losses is $5.2 million. This loss carryforward is subject to limitations as to the amount and timing of its use. Accordingly, a valuation allowance of $1.8 million was provided.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales. The Company's net sales increased to $100.7 million for the year ended December 31, 1997, an increase of $7.4 million, or 8.0%, over the year ended December 31, 1996. The primary reason for the increase is due to a full year contribution from the Tredegar facilities in 1997 as compared to nine months of contribution in 1996. 1997 sales were lower than comparable 1996 sales due to delays in certain molding and mold making programs, customer insourcing, the loss of a molding program to a competitor with a closer customer "ship-to" point and discontinuance of a low margin, proprietary manufacturing process.
Injection molding sales for the year ended December 31, 1998 increased $4.3 million, or 5.2%, to $88.0 million due to a full year contribution from the Tredegar facilities in 1997 as compared to nine months of contribution in 1996. 1997 sales were lower than comparable 1996 sales due to (i) delays in certain injection molding programs, (ii) customer insourcing, (iii) the loss of a customer to a competitor with closer "ship-to" point and (iv) a discontinuance of a low margin, proprietary manufacturing process.
Mold making sales for the year ended December 31, 1997 increased $3.1 million, or 32.4%, to $12.7 million. The increase is primarily attributable to a full year contribution from the Tredegar facilities in 1997 as compared to nine
months of contribution in 1996.
Gross profit. The Company's gross profit increased to $18.0 million for the year ended December 31, 1997, an increase of $1.2 million, or 7.1%, over the year ended December 31, 1996. The increase in gross profit was primarily attributable to higher net sales volume resulting from the Tredegar acquisition. Gross profit margin declined to 17.9% for the year ended December 31, 1997 from 18.0% in the year ended December 31, 1996.
Injection molding's gross profit increased to $18.4 million for the year ended December 31, 1997, an increase of $2.2 million, or 13.8%, over the prior year. The increase in gross profit was primarily attributable to a full year of contribution from the Tredegar acquisition and increased employee utilization.
Mold making's gross profit decreased to $(0.3) million, a decrease of $1.0 million from the year ended December 31, 1996. The primary reason for the increase in gross profit is due to increased expenses in 1997 that related to cost overruns on certain projects.
Selling, general and administrative. Selling, general and administrative expenses increased to $9.0 million for the year ended December 31, 1997, an increase of $1.7 million, or 23.7%, over the year ended December 31, 1996. The increase in selling, general and administrative expenses was primarily attributable to the addition of six salespersons and certain costs related to the implementation of the new Enterprise Resource Planning System. See "--Year 2000 Disclosure."
Amortization. The Company's amortization of intangible assets increased to $1.2 million for the year ended December 31, 1997 from $1.0 million in the year ended December 31, 1996. This increase resulted primarily from a full year of amortization in 1997 compared to nine months of operations in 1996.
Operating income. Operating income decreased to $7.7 million for the year ended December 31, 1997, from $7.8 million for the year ended December 31, 1996, representing a decrease of 1.3%. Operating income as a percentage of net sales declined to 7.7% for the year ended December 31, 1997 from 8.4% in the year ended December 31, 1996, due primarily to higher amortization and selling, general and administrative costs.
Interest expense. Interest expense increased to $8.8 million for the year ended December 31, 1997 from $6.1 million in the year ended December 31, 1996, due primarily to the Refinancing Transactions.
Other expenses/(income). Other expenses increased to $874,000 for the year ended December 31, 1997 from ($25,000) in the year ended December 31, 1996, due primarily to (i) non-recurring charges of approximately $555,000 representing financial advisory fees and out-of-pocket expenses paid to Mentmore and (ii) $300,000 of legal fees paid to the law firm of Michael D. Schenker Co. LPA, whose principal is an officer of Mentmore. Both of these charges were related to the Initial Offering, the application of the net proceeds therefrom, the consummation of the New Credit Agreement and the incurrence of $8.2 million of indebtedness thereunder upon the closing of the Initial Offering (collectively, the "Refinancing Transactions").
Provision for income tax. The Company's effective tax rates differed from the applicable statutory rates for the years ended December 31, 1996 and 1997 primarily due to nondeductible goodwill amortization. At December 31, 1997, the Company had approximately $7.9 million and $16.0 million of federal and state net operating losses, respectively. The deferred tax benefit of these net operating losses is $3.9 million. This loss carryforward is subject to limitations as to the amount and timing of its use. Accordingly, a valuation allowance of $1.2 million was provided.
Extraordinary item. The Company recorded an extraordinary loss of $4.8 million, net of tax benefits, for the year ended December 31, 1997, due to the early extinguishment of indebtedness resulting from the repayment of the Company's 12.25% Senior Subordinated Notes due 2006 (the "Retired Notes") and the termination of that certain Credit Agreement dated as of March 28, 1996 (the "Prior Credit Agreement") among Parent, Precise and the lenders named therein in connection with the Refinancing Transactions.
Liquidity and Capital Resources
The Company completed the $75.0 million offering of the Notes in June 1997 (the "Offering") and used the
proceeds in part to repay indebtedness incurred in connection with the Tredegar acquisition. In connection with the Offering, the Company entered into a Credit Agreement dated as of June 13, 1997, among Precise Holding Corporation, Precise Technology, Inc., the subsidiary guarantors party thereto, the lenders party thereto and Fleet National Bank, as Agent and Issuing Bank (the "New Credit Agreement"). The Offering, the application of the net proceeds therefrom, the consummation of the New Credit Agreement and the other transactions entered into in connection therewith are hereinafter collectively referred to as the "Refinancing Transactions".
The New Credit Agreement provides for revolving loans to, and the issuance of letters of credit on behalf of Precise, in an aggregate amount not to exceed $30.0 million, of which approximately $7.0 million was outstanding on December 31, 1998. The New Credit Agreement matures in 2002, and contains certain covenants customary for a financing of this nature. The New Credit Agreement requires prepayments and concurrent reductions of the total commitments thereunder in the amount of certain portions of the net proceeds from certain asset sales, capital contributions or issuances of debt or equity.
The Company generated cash flows from operations totaling $9.6 million, $6.5 million and $7.6 million in 1996, 1997 and 1998, respectively. The increase in cash flows from operations during the year ended December 31, 1998 compared to the year ended December 31, 1997 resulted primarily from the increase in operating income. During 1996, $0.5 million was expended to satisfy the cash requirements for employee termination benefits, non-cancelable operating lease accruals, equipment relocation costs and other costs associated with the closure of the Company's plant in Graham, North Carolina. As of December 31, 1998, the balance of costs associated with plant closures, which have been accrued, are expected to require cash payouts of approximately $350,000 through March 2000.
The Company's cash flows used in investing activities totaled $65.6 million, $3.5 million and $2.8 million, excluding capital lease agreements for equipment totaling $4.2 million, $4.8 million and $2.6 million in 1996, 1997 and 1998, respectively. During 1996, the Company implemented a replacement program for molding machines in its Pittsburgh plant which involved capital lease agreements for 17 machines totaling $2.8 million. Additionally, $63.8 million was attributed to the net cash used in the acquisitions during the first quarter of 1996. During 1997, the Company expended $4.9 million on cash capital expenditures which were partially offset by proceeds received from the sale of its Rochester, New York facility in the amount of $1.3 million, which proceeds were subsequently used to repay indebtedness outstanding under the Prior Credit Agreement. During 1998, the Company expended $3.0 million on cash capital expenditures which were primarily for certain expenditures associated with a new Enterprise Resource Planning system, plant refurbishment, leasehold improvements at the Holden facility and various other capital items.
The Company's cash flows provided by (used in) financing activities totaled $57.3 million, $(3.7) million and $(5.1) million in 1996, 1997 and 1998, respectively. During 1996, cash financing activities for the Tredegar acquisition, as described above, contributed significantly to resulting cash provided. During 1997, the Refinancing Transactions contributed to the cash used in financing activities. During 1998, cash flows were used to repay indebtedness on capital leases and the revolving line of credit.
Since the consummation of the Refinancing Transactions, the Company's liquidity requirements have consisted primarily of capital expenditures, required debt service under the Notes, the New Credit Agreement and various capital lease obligations and working capital needs. The Company currently estimates that its cash requirements to service debt will total $3.7 million and $2.6 million in each of the next two fiscal years, respectively. The Company estimates that its capital expenditures during 1999 will total $5.2 million, of which approximately $3.2 million is expected to be in the form of capital leases. Of the $5.2 million of total anticipated capital expenditures during 1999, $3.0 million is for the injection molding segment primarily for molding press replacements and auxiliary equipment, $1.9 million is for the mold making segment for machine and shop upgrades and $0.3 million for general corporate expenditures. The Company is in a capital-intensive business and will have significant ongoing requirements for capital which management believes will be satisfied through cash flow from operations, borrowing under the New Credit Agreement and capital leases. Management believes that due to the capital expenditures anticipated for 1999, the Company will be required to incur additional indebtedness under the New Credit Agreement or through capital leases. However, certain equipment refurbishment programs could be delayed, if necessary. The New Credit Agreement and the Indenture place significant restrictions on the Company's ability to, among other things, incur additional indebtedness, grant liens or sell assets.
Capital leases are used extensively by the Company to finance new molding presses and certain ancillary equipment. Capital lease obligations totaled $8.0 million as of December 31, 1998, and current maturities relating to these
obligations totaled $3.0 million.
Management believes that the Company's cash flow from operations, together with borrowings under the New Credit Agreement and capital leases, provide it with sufficient liquidity necessary to fund capital improvements, service indebtedness and meet working capital requirements for the Company's existing operations. However, the Company is highly leveraged and, as a result, funds available for working capital, capital expenditures, and other purposes may be limited or unavailable in the event the Company does not generate cash flow at or above expected levels, which could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company's 1996 Federal tax return is currently under examination with the Internal Revenue Service, however, no assurances can be given as to the effect the examination will have on the Company's results of operations.
Year 2000 Disclosure
The Company is currently working to resolve the potential impact of the year 2000 on the processing of time-sensitive information by the Company's computerized information systems. The year 2000 ("Y2K") issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar business activities.
State of Readiness. In 1997, the Company began a program to assess the impact of the Y2K issue on the software and hardware used in the Company's operations and has identified various areas to focus its Y2K compliance efforts. They include business computer systems, manufacturing and warehousing systems, end-user computing, technical infrastructure, and supplier and service provider systems. The program's phases include assessment and planning, remediation, testing and implementation.
The Company's management has begun a program to prepare the Company's computer systems and related applications for the Y2K. The Company believes that a majority of its Y2K issues will be addressed by the installation of an Enterprise Resource Planning ("ERP") system software package by Baan. The ERP system, which is Y2K compliant and will be used for the Company's primary business application at its headquarters and manufacturing facilities, currently is being installed. All of the Company's facilities are expected to be using the ERP system by October 1999. The Company has developed a comprehensive plan to assist all departments and manufacturing facilities in working towards compliance with Y2K issues for all other systems beyond those being addressed by the ERP system. The Company expects to have identified and performed procedures to make compliant those other systems beyond the ERP system by the fourth quarter of 1999. If the Company's systems or the systems of other companies on whose services the Company depends or with whom the Company's systems interface are not Y2K compliant, it could have a material adverse effect on the Company's business, financial condition and results of operations.
Y2K Costs. Total costs for the Company's Y2K compliance efforts are currently estimated to be approximately $3.0 to $3.5 million. The majority of these costs relates to the ERP system installations and upgrades of which a portion has, and will be capitalized and charged to expense over the estimated useful life of the associated software and hardware. The remaining costs have been, and will be charged directly to expense. Amounts capitalized for the years ended December 31, 1998 and 1997 were approximately $0.5 million and $1.0 million, respectively. Amounts charged to expense for the years ended December 31, 1998 and 1997 were $0.5 million and $0.2 million, respectively.
Y2K Risks. The reasonable worst-case scenario for the Company with respect to the Y2K problem is the failure of a key system or supplier system that causes shipments of the Company's products to customers to be temporarily interrupted. This could result in the Company not being able to produce one or more product lines for a period of time, which in turn could lead to lost sales and profits for the Company and its customers. The Company is in the process of conducting a Y2K assessment survey for all of its suppliers and customers. Favorable risk assessments for Y2K compliance have been received by a number of the Company's suppliers and customers.
Contingency Plans. As a part of the Company's Y2K strategy, contingency plans have been developed and any systems requiring remediation have one or more contingency plans. The Company's staff, independent accountants and the Board of Directors are updated on a regular basis as to the Y2K status. In addition, supplier site audits, where appropriate, are to be performed in 1999.
Recent Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting of Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The implementation of SFAS No. 133 is not expected to have a significant impact on the Company's financial statements. The standard will be effective for the Company for the year ended December 31, 2000.
Inflation and Changing Prices
The Company's sales and costs are subject to inflation and price fluctuations. However, because a significant portion of changes in the cost of plastic resins, the Company's principal raw materials, are passed through to customers, such changes historically have not, and in the future are not expected to have, a material effect on the Company's results of operations.
Environmental Matters
The Company's operations are subject to a range of environmental requirements in the various jurisdictions in which it operates. These environmental requirements relate to, among other things, air emissions, wastewater discharges and waste management. The Company can be expected to incur capital and operating expenses to maintain compliance with applicable environmental requirements and to meet new regulatory requirements. Based upon the underlying facts giving rise to its environmental regulatory obligations and technical reports prepared on the Company's facilities, the Company does not anticipate that any such capital and operating expenses will have a material adverse effect on the Company's results of operations. There can be no assurance, however, that unanticipated, future regulatory programs or previously unidentified environmental conditions will not impose material capital operating expenses.
The Company has been identified as one of the several hundred Potentially Responsible Parties ("PRPs") in connection with the shipment of hazardous wastes to the Envirotek II State Superfund site in Tonawanda, New York. Because of the Company's status as a PRP at the Envirotek II site, the New York State Department of Environmental Conservation ("NYSDEC") identified the Company as a PRP at the related Roblin Steel Complex, also a state cleanup site, which surrounds the Envirotek II site. The Company has records of having shipped 20 drums of waste to Envirotek II and accordingly has participated in the various proceedings at both of these sites as a de minimis party. The Company entered into an Administrative Order on Consent with the United States Environmental Protection Agency ("EPA") with respect to a removal action undertaken at Envirotek II, and paid $7,700 to settle EPA's claims for removal costs. The NYSDEC subsequently assumed the lead at both of these sites, now commonly referred to as the Envirotek II/Roblin Steel site. In July 1997, the Company entered into a Consent Order with NYSDEC and a De Minimis Settlement Agreement with the other PRPs, whereby the Company made an $11,626 lump-sum de minimis "buyout" payment in exchange for a release from further liability for past costs by the NYSDEC and an indemnity and covenant not to sue, from the other PRPs, for future response costs at the Envirotek II/Roblin Steel site. Accordingly, management believes that the Company will have no further liability at these sites.
Forward-Looking Statements
This annual report on Form 10-K, including Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that any forward-looking statements, including statements regarding the intent, belief, or current expectations of the Company or its management, are not guarantees of future performance and involve risks, uncertainties, and other factors, some of which are beyond the Company's control, and that actual results may differ materially from those in forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to: (i) general economic conditions in the markets in which the Company operates, (ii) reliance on key customers and supply contracts, (iii) volatility of customer demand, (iv) exposure to fluctuations in resin cost and supply, (v) customer outsourcing decisions, (vi) reliance on key manufacturing facilities, (vii) the impact of significant competition from companies of varying sizes including divisions or subsidiaries of larger companies and (viii) other risks detailed from time to time in the Company's Securities and Exchange Commission filings. The Company does not intend to update these forward-looking statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. The Company's primary interest rate risk relates to its long-term debt obligations. At December 31, 1998, the Company had total long-term obligations, including the current portion of those obligations, of $90,224,000. Of that amount, $83,224,000 was in fixed rate obligations and $7,000,000 was in variable rate obligations. Assuming a 10% increase in interest rates on the Company's variable rate obligations (i.e., an increase from the December 31, 1998 weighted average interest rate of 7.79% to a weighted average interest rate of 8.56%), annual interest expense would be approximately $55,000 higher based on the December 31, 1998 outstanding balance of variable rate obligations. The Company has no interest rate swap or exchange agreements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information that are required to be included pursuant to this Item 8 are listed in Item 14 of this Report under the caption "(a) 1." and follow Item 14. The financial statements and supplementary financial information specifically referenced in such list are incorporated in this Item 8 by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors, Executive Officers and Key Employees
The following table sets forth information with respect to the directors, executive officers and other key employees of the Company. All directors and executive officers of the Company hold office until the annual meeting of stockholders next following their election, or until their successors are elected and qualified.
Richard L. Kramer became the Chairman of the Board and a director of the Company in April 1990 and Secretary of the Company in August 1991. Mr. Kramer is also Chairman and a director of Mentmore Holdings Corporation, Texfi Industries Inc., a textile and apparel manufacturing firm, CPT Holdings, Inc., a manufacturer of specialty structural steel profiles, Weldotron Corporation, a packaging equipment manufacturer, Orion Acquisition Corp. II, an investment company, Stellex Industries, Inc., a manufacturer of highly engineered subsystems and components for the aerospace, defense and space industries, and Republic Properties Corporation. Mr. Kramer is a director of J&L Structural, Inc., Precise Holding Corporation and Sunderland Industrial Holdings Corporation.
William L. Remley became the Vice Chairman of the Board and a director of the Company in April 1990 and Treasurer of the Company in August 1991. Mr. Remley is also President, Chief Executive Officer and a director of Mentmore Holdings Corporation and Weldotron Corporation, Vice-Chairman, Chief Executive Officer and a director of Texfi Industries Inc., and Stellex Industries, Inc. and President and a director of CPT Holdings, Inc. Mr. Remley is a director of J&L Structural, Inc., Orion Acquisition Corp. II, Republic Properties Corporation, Precise Holding Corporation and Sunderland Industrial Holdings Corporation.
John R. Weeks became President and Chief Executive Officer of the Company in August 1990. Prior to joining Precise, from 1986 to 1990 Mr. Weeks was employed as a Vice President of Corporate Development for The Tech Group, a custom molder for the medical, electronic, packaging and consumer product markets. Previously, from 1977 to 1986 Mr. Weeks was Vice President of Sales with Nypro Inc. Mr. Weeks began his career with Arco Polymers in 1968.
Michael M. Farrell became Executive Vice President, Mergers and Acquisitions of the Company in 1998. Mr. Farrell previously held the position of Vice President, Sales & Marketing from 1991 to 1998. Prior to joining Precise, from 1987 to 1991 Mr. Farrell was employed as the Director of Sales for Medical Products for The Tech Group. Mr. Farrell began his career at Nypro Inc. in 1984.
Ronald A. Seegers became Vice President, Mold Manufacturing in 1998. Previously he held the position of Vice President, Engineering of the Company since 1993. Prior to joining Precise, from 1984 to 1993, Mr. Seegers was employed as Director of New Business with The Tech Group. Prior to joining The Tech Group, Mr. Seegers worked for 16 years at Major Tools in Chicago.
Clarence E. Stevens, Jr. became Chief Operating Officer and Vice President, Manufacturing of the Company in 1998. Previously he held the position of Vice President, Manufacturing of Precise since 1994. Prior thereto, he served as
Director of Continuous Improvement of Precise since 1991. Prior to joining Precise, from 1988 to 1991, Mr. Stevens was employed as Manager of Process Improvement for The Tech Group. Prior to joining The Tech Group, Mr. Stevens worked at Carlisle Syntec, a synthetic roofing company, as a plant manager for 10 years.
Gregory R. Conley became Vice President and Chief Financial Officer of the Company in February 1998. Prior to joining Precise, from June 1990 to February 1998, Mr. Conley was employed with The Barrington Consulting Group where most recently he served as a Vice President. Mr. Conley began his career with Ernst & Young, LLP in 1983. Mr. Conley is a certified public accountant.
Raymond J. Veno became the Company's Vice President, Continuous Improvement in 1998. Prior to that Mr. Veno was Director of Continuous Improvement and Product Development since September 1996. Prior to joining Precise, from June 1986 to February 1995, Mr. Veno was employed as Manager of Plastics Technology and Development Group for Digital Equipment Corporation. Prior to joining Digital Equipment Corporation, Mr. Veno was employed at Nypro, Inc. as Business Manager for seven years.
Gerald F. Duggan became Vice President, Sales & Marketing in July 1998. Prior to joining Precise, Mr. Duggan from 1991 to July 1998, Mr. Duggan was employed as Director of Market Development for Nypro, Inc. Prior to joining Nypro, Mr. Duggan was employed as General Manager, Bioproducts Division for Bio Technica International, Inc.
Richard C. Hoffman became a director of the Company in January 1996. Mr. Hoffman has been President and Principal of Richard C. Hoffman, P.C., a law firm with offices in Greenwich, Connecticut, since 1988. From January 1995 to March 1997, Mr. Hoffman served as Vice President and General Counsel of Mentmore Holdings Corporation. From 1985 to 1992 Mr. Hoffman was a partner at Freytag, LaForce, Rubinstein & Teofan, a law firm in Dallas, Texas. Mr. Hoffman is a director of Orion Acquisition Corp. II, Texfi Industries, Inc., Precise Holding Corporation and Weldotron Corporation.
Elaine E. Healy became a director of Precise Holding Corporation and of Precise in 1997. Ms. Healy has been a Vice President of Pecks Management Partners Ltd., an investment management firm, since May 1993. Prior to joining Pecks Management Partners Ltd., Ms. Healy was a General Partner of Quantum Partners, Ltd., a venture capital partnership with which she was associated for eight years. During that time Ms. Healy also served as Vice President of The Revere Fund, Inc., a public closed-end investment company. Ms. Healy is also a director of Dolan Media Company, Inc.
Directors
Pursuant to the Warrant Purchase Agreement (as defined), the Pecks Funds (as defined) are entitled to designate one member of the Company's board of directors. Ms. Healy currently serves on the Company's board of directors as a designee of the Pecks Funds.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers
The following table sets forth the compensation paid by the Company to (i) its Chairman of the Board and Chief Executive Officer and (ii) each of the four other most highly compensated individuals who served as executive officers of the Company during fiscal 1998 and received annual compensation in excess of $100,000 (collectively, the "Named Executives"), for services rendered in all capacities to the Company during the periods indicated.
___________________
(a) Below amounts which would require disclosure under Commission rules and regulations. (b) Included in such amount is $10,000 representing an employer matching contribution under the 401(k) Plan (as defined), $1,485 in net premiums for a life insurance policy on behalf of Mr. Weeks and $4,807 representing a profit sharing bonus. (c) Included in such amount is $11,458 representing an employer matching contribution under the 401(k) Plan (as defined), $1,328 in net premiums for a life insurance policy on behalf of Mr. Weeks and $4,026 representing a profit sharing bonus. (d) Included in such amount is $8,375 representing an employer matching contribution under the 401(k) Plan and $2,885 representing a profit sharing bonus. (e) Included in such amount is $8,159 representing an employer matching contribution under the 401(k) Plan and $2,266 representing a profit sharing bonus. (f) Included in such amount is $7,801 representing an employer matching contribution under the 401(k) Plan and $2,500 representing a profit sharing bonus. (g) Included in such amount is $7,696 representing an employer matching contribution under the 401(k) Plan and $2,006 representing a profit sharing bonus. (h) Included in such amount is $7,672 representing an employer matching contribution under the 401(k) Plan and $2,506 representing a profit sharing bonus. (i) Included in such amount is $6,810 representing an employer matching contribution under the 401(k) Plan and $1,777 representing a profit sharing bonus. (j) Included in such amount is $2,025 representing an employer matching contribution under the 401(k) Plan and $974 representing a profit sharing bonus.
Compensation Committee Interlocks and Insider Participation
The Company's compensation policies are determined and executive officer compensation decisions are made by the Board of Directors. No member of the Board of Directors received director fees in 1998. - ------------------------------------------------------------------------------
401(K) Pension Plan
Precise sponsors a defined contribution savings plan (the "401(k) Plan") whereby eligible employees of the Company may (under current administrative rules) elect to defer a portion of their compensation each year and may also make after-tax contributions to the 401(k) Plan. Employee and Company contributions are paid by the Company to the trustee under the 401(k) Plan. The Company has a policy of (i) making an annual discretionary contribution on behalf of each eligible employee in an amount equal to 3.5% of such employee's total annual compensation, regardless of such employee's actual contribution to the 401(k) Plan, and (ii) making matching contributions equal to 50% of the first 5% of compensation deferred by employees. The Company's contributions are subject to vesting and forfeiture. The Company's contributions to the accounts of the Named Executive Officers during 1998 are included in the Summary Compensation Table.
1997 Stock Option Plan
In April 1997, Sunderland established the Sunderland Industrial Holdings Corporation 1997 Key Employee Nonqualified Stock Option Plan (the "1997 Stock Option Plan") to provide incentives to, encourage stock ownership by and retain the services of certain of, its key employees and those of its subsidiaries. The Board of Directors of Sunderland (the "Sunderland Board") administered the 1997 Stock Option Plan, which provided for the grant of options with respect to a maximum of 15% of the issued and outstanding shares of common stock, par value $0.01 per share, of Sunderland ("Sunderland Common Stock"). Each option granted under the 1997 Stock Option Plan was to have been evidenced by a written option agreement between the optionee and Sunderland, which agreement could have contained additional terms not inconsistent with the 1997 Stock Option Plan.
Under Nonqualified Stock Option Agreements (the "Option Agreements") entered into in April 1997 pursuant to the 1997 Stock Option Plan, John R. Weeks, President and Chief Executive Officer of Precise, and Michael M. Farrell, Vice President, Marketing & Sales of Precise, received options to purchase 1,200 and 400 shares of Sunderland Common Stock, respectively (the "First Options"), and additional options to purchase 225 and 75 shares of Sunderland Common Stock, respectively (the "Second Options," and together with the First Options, the "Options"). The Options were exercisable at a price of $1,500 per share of Sunderland Common Stock. The First Options were to become exercisable over a three-year period following the grant date. The Second Options were to become exercisable in 25% increments upon the 90th day following each successful annual determination by the Sunderland Board that Sunderland's EBITDA (as defined in the Option Agreements) for the years ended December 31, 1997 through 2000 exceeded certain annual targets. In addition, the Options were to have been exercisable during the one year period following the optionee's retirement at or above age 65, or upon his or her death or disability, and all of the First Options and the then exercisable portions of the Second Options were to have been exercisable during the ten business day period following notice of a Change of Control (as defined in the Option Agreements). Once exercisable, the Options were to have been exercisable at any time, in whole or in part, prior to the earlier of (i) the termination of the optionee's employment with Sunderland or any of its subsidiaries or (ii) January 31, 2005. It was intended that the Options should not constitute "incentive stock options," as that term is used in Section 422 of the Internal Revenue Code of 1986, as amended.
Pursuant to the Option Agreements, Sunderland had the right to repurchase Sunderland Common Stock purchased pursuant to the Options upon the occurrence of a Call Event (as defined in the Option Agreements) at a repurchase price of either 75% or 100% of the Fair Market Value (as defined in the Option Agreements) of such stock depending on the reason underlying the Call Event, subject to adjustment under certain specified circumstances. In addition, pursuant to the Option Agreements, Sunderland had a right of first refusal prior to the sale to any third party of any Sunderland Common Stock purchased pursuant to the Options. On October 8, 1998, the Option Agreements were amended to further clarify and modify certain provisions of the Option Agreements.
By Assignment and Assumption Agreement dated as of December 14, 1998, Sunderland assigned, and SIHC II LLC, a Delaware limited liability company ("SIHC II"), assumed, Sunderland's rights and obligations under the 1997 Stock Option Plan. Pursuant to such agreement, Mr. Weeks and Mr. Farrell agreed to substitute the Options for the right to acquire an identical percentage of the membership interests in SIHC II, the owner of 97% of the issued and outstanding Shares of Parent Common Stock.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Precise is a wholly owned subsidiary of Precise Holding Corporation ("Parent"). The following table sets forth information concerning the beneficial ownership of the common stock of Parent ("Parent Common Stock") as of March 1, 1999 by (i) each person known to the Company to own beneficially more than 5% of the outstanding Parent Common Stock, (ii) by each Named Executive Officer and (iii) all directors and executive officers of the Company as a group. All shares are owned with sole voting and investment power, unless otherwise indicated.
(Footnotes on following page)
(Footnotes from previous page)
(1) According to information supplied to the Company by SIHC I LLC ("SIHC I"), SIHC I is a Delaware limited liability company whose managing member is Sunderland, which owns a 1% membership interest in SIHC I. The other members of SIHC I are the Abington Settlement ("Abington"), which owns an 89.1% non-managing membership interest in SIHC I, and Blackhill Settlement ("Blackhill"), which owns a 9.9% non-managing membership interest in SIHC I. The principal beneficiaries of the Abington and Blackhill Settlements (i.e., trusts) are certain relatives of Richard L. Kramer and William L. Remley. According to information supplied to the Company by Sunderland, Biscayne Trust, The Sunderland I Trust and The Remley 1990 Trust own beneficially 72%, 18% and 10%, respectively, of the outstanding shares of common stock of Sunderland. The beneficiaries of these trusts are certain relatives of Richard L. Kramer and William L. Remley. The trustees of Biscayne Trust and The Sunderland I Trust are Lewis H. Ferguson III and Gary R. Siegel. All powers with respect to investment or voting of securities owned by Biscayne Trust and The Sunderland I Trust are exercisable by Messrs. Ferguson and Siegel jointly. The trustee of The Remley 1990 Trust is F. Richard Remley, who exercises all voting and investment power with respect to securities held by such trust. The business address of Sunderland, Biscayne Trust, The Sunderland I Trust, The Remley 1990 Trust, Lewis H. Ferguson III, Gary R. Siegel and F. Richard Remley is c/o Mentmore Holdings Corporation, 1430 Broadway, 13th Floor, New York, New York 10018-3308. Richard L. Kramer, Chairman of the Board of Directors of the Company, and William L. Remley, Vice Chairman of the Board of Directors of the Company, are directors and executive officers of Parent and Sunderland. F. Richard Remley, the trustee of The Remley 1990 Trust, is the brother of William L. Remley. Mentmore provides management services to the Company. Messrs. Kramer and William L. Remley are the sole executive officers and directors of Mentmore. SIHC I owns a 100% membership interest in SIHC II LLC. See footnote (2) below.
(2) According to information supplied to the Company by SIHC II LLC ("SIHC II"), SIHC II is a Delaware limited liability company whose non-member manager is Sunderland. SIHC I owns a 100% membership interest in SIHC II. See footnote (1) above.
(3) Comprised of Warrants to purchase 570 shares of Parent Common Stock held by each of John Hancock Mutual Life Insurance Company ("John Hancock") and Rice Partners II, L.P. ("Rice"). The business address of John Hancock is John Hancock Place, 200 Clarendon Street, Boston, Massachusetts 02117. The business address of Rice is c/o Rice Capital Management, 5847 San Felipe, Suite 4350, Houston, Texas 77057.
(4) Pecks Management Partners, Ltd. serves as the investment advisor to The Delaware State Employees' Retirement Fund, the Declaration of Trust for Defined Benefit Plans of Zeneca Holdings Inc. and the Declaration of Trust for Defined Benefit Plans of ICI American Holdings Inc. (collectively, the "Pecks Funds") and, in such capacity, exercises voting and investment control with respect to the Parent Common Stock beneficially owned by the Pecks Funds. The business address of Pecks Management Partners, Ltd. and the Pecks Funds is One Rockefeller Plaza, New York, New York 10020.
(5) Comprised of 167.67 shares of Parent Common Stock and Warrants to purchase 385 shares of Parent Common Stock.
(6) Comprised of 33.33 shares of Parent Common Stock and Warrants to purchase 77 shares of Parent Common Stock.
(7) Comprised of 49 shares of Parent Common Stock and Warrants to purchase 113 shares of Parent Common Stock.
(8) Comprised of 250 shares of Parent Common Stock and Warrants to purchase 575 shares of Parent Common Stock held of record by the Pecks Funds. Pecks Management Partners, Ltd. disclaims beneficial ownership of the Parent Common Stock and Warrants held of record by the Pecks Funds.
(9) Mr. Kramer is a director and executive officer of Parent and Sunderland. See footnote (1) above. Mr. Kramer disclaims beneficial ownership of the Parent Common Stock held of record by SIHC II.
(10) Mr. Remley is a director and executive officer of Parent and Sunderland. See footnote (1) above. Mr. Remley disclaims beneficial ownership of the Parent Common Stock held of record by SIHC II.
(11) Ms. Healy is a Vice President of Pecks Management Partners, Ltd. See footnote (4) above. Ms. Healy disclaims beneficial ownership of the Parent Common Stock and Warrants held of record by the Pecks Funds.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Tredegar Financing Transactions
In connection with the Tredegar Acquisition, (i) the Company and Parent entered into a Securities Purchase Agreement dated March 29, 1996 (as amended, the "Securities Purchase Agreement") with Delaware State Employees' Retirement Fund, Declaration of Trust for Defined Benefit Plans of Zeneca Holdings Inc. and Declaration of Trust for Defined Benefit Plans of ICI American Holdings Inc. (each advised by Pecks Management Partners Ltd. and collectively referred to herein as the "Pecks Funds") pursuant to which the Pecks Funds purchased (a) 575 shares of the Company's Cumulative Exchangeable Preferred Stock having an aggregate liquidation preference equal to $5,750,000 (the "Exchangeable Preferred Stock") for an aggregate consideration of $5,750,000 and (b) 250 shares of Parent Common Stock for an aggregate consideration of $750,000; (ii) the Company entered into a Note Purchase Agreement dated March 29, 1996 (the "Note Purchase Agreement") with John Hancock Mutual Life Insurance Company ("John Hancock") and Rice Partners II, L.P. ("Rice") pursuant to which John Hancock and Rice purchased $20.0 million aggregate principal amount of the Company's 12.25% Senior Subordinated Notes due 2006 (the "Retired Notes"); (iii) Parent entered into a Warrant Purchase Agreement dated March 29, 1996 (as amended, the "Warrant Purchase Agreement") with Rice, John Hancock and the Pecks Funds pursuant to which, in connection with their purchase of the Retired Notes, Rice and John Hancock each acquired warrants ("Warrants") to purchase 570 shares of Parent Common Stock and, in connection with its purchase of the Exchangeable Preferred Stock, the Pecks Funds acquired Warrants to purchase 575 shares of Parent Common Stock; and (iv) Parent entered into a Shareholder Agreement dated March 29, 1996 (as amended, the "Shareholder Agreement") with Sunderland, Hamilton Holdings Ltd. Corporation ("Hamilton Holdings"), the Pecks Funds, Rice and John Hancock. In addition, Precise and Parent entered into the Prior Credit Agreement, under which Precise incurred approximately $44.0 million of indebtedness to finance the Tredegar Acquisition, and Precise issued 250 shares of its Series B Cumulative Redeemable Preferred Stock (the "Seller Preferred Stock" and, together with the Exchangeable Preferred Stock, the "Redeemable Preferred Stock"), having a liquidation preference of $10,000 per share, to the former owners of Tredegar. In connection with the consummation of the Refinancing Transactions, the Company entered into certain consents and amendments to the Securities Purchase Agreement, the Warrant Purchase Agreement and the Shareholder Agreement to, among other things, approve the terms of the Refinancing Transactions and to modify certain covenants contained therein.
The Warrants are exercisable, in whole or in part, at a per share price of $0.01 at any time prior to March 29, 2006. The Warrant Purchase Agreement contains customary anti-dilution protection, restrictions on the transfer of Warrants and shares of Parent Common Stock issuable thereunder ("Warrant Shares") and provisions requiring that Warrants and Warrant Shares be offered to Parent prior to any sale to a third party. In addition, the Warrant Purchase Agreement contains certain covenants pertaining to Parent and its subsidiaries which, among other things, give the holders of Warrants the right to consent to certain corporate actions, including certain sales of assets, acquisitions, issuances of capital stock, amendments to corporate organizational documents, affiliate transactions and investments. The Warrant Purchase Agreement also provides Hancock and Rice with Parent Board of Director observation rights and the Pecks Funds, for so long as the Pecks Funds own 15% or more of the sum of all Warrant Shares and Parent Common Stock owned by the Pecks Funds on March 29, 1996, with the right to designate one member of the Board of Directors of each of Parent and Precise.
Precise used a portion of the net proceeds from the Offering to (i) redeem the Exchangeable Preferred Stock and the Seller Preferred Stock and (ii) repay the indebtedness outstanding under the Prior Credit Agreement and the Retired Notes. In addition, Precise used a portion of the net proceeds from the Offering to repurchase 124 shares of Common Stock of Precise from Parent for $3,315,000, the proceeds of which were used to redeem shares of Parent Preferred Stock held by Hamilton Holdings. Richard L. Kramer and William L. Remley are executive officers and directors of Hamilton Holdings, and the holders of record of the capital stock of Hamilton Holdings are trusts established for the benefit of certain relatives of Messrs. Kramer and Remley.
Shareholder Agreement
In connection with the Tredegar acquisition, Parent, Sunderland, Parent's other shareholders (collectively, the
"Shareholders") and the holders of the Warrants (collectively, the "Warrantholders") entered into the Shareholder Agreement. Pursuant to the Shareholder Agreement, the Warrantholders have the right to require Parent to purchase (a "Put Option") their Warrant Shares and certain other shares of capital stock of Parent held by the Shareholders (collectively, the "Put Shares"), in whole or in part, at any time after March 29, 2001. In addition, the Warrantholders are entitled to sell their Put Shares to Parent at any time prior to the occurrence of an Initial Public Offering (as defined in the Shareholder Agreement) in the event of (i) a change in control (as defined in the Shareholder Agreement) of Parent, (ii) a merger, consolidation, share exchange or similar transaction involving Parent, (iii) a sale in one or more related transactions of all or a majority of the assets, business or revenue or income generating operations of Parent or (iv) any substantial change in the type of business conducted by Parent. The Shareholder Agreement also provides Parent with an option to purchase (the "Call Option") all outstanding Warrants and Warrant Shares at any time on or after April 1, 2002 and prior to an Initial Public Offering. The price to be paid to the Warrantholders upon the exercise of the Put Option or the Call Option is to be determined in accordance with a formula and procedures set forth in the Shareholder Agreement. In the event Parent is unable to pay the purchase price for the Put Shares in cash after exercise of the Put Option, it may be required to execute and deliver a promissory note or notes to the Warrantholders in satisfaction of all or part of its purchase price obligation. Such promissory notes would mature on April 1, 2006 and bear interest at rates ranging from 14% to 18% during the term of the notes. The Shareholder Agreement further provides, under certain circumstances, John Hancock, Rice and the Pecks Funds with certain co-sale rights upon the sale or other transfer of capital stock of Parent by the Shareholders. In addition, subject to certain conditions, if prior to an Initial Public Offering holders of at least 66 2/3% of the issued and outstanding shares of Parent Common Stock and Common Stock Equivalents (as defined in the Shareholder Agreement) elect to sell their shares to a bona fide third party (other than in connection with a registered offering under the Securities Act), then all holders shall be obligated to sell any shares of Parent Common Stock and Common Stock Equivalents then owned by such holders in such sale.
Pursuant to the Shareholder Agreement, John Hancock, Rice and the Pecks Funds also have certain demand registration rights, which become effective after the date Parent has consummated an Initial Public Offering, and incidental registration rights. These rights are subject to customary cut-back provisions.
Management Agreement with Mentmore
Mentmore provides management services to Precise and its subsidiaries pursuant to the Management Agreement dated March 15, 1996, as amended (the "Management Agreement"), between Precise and Mentmore. Pursuant to the Management Agreement, Mentmore provides the Company with general management, advisory and consulting services with respect to Precise's business and with respect to such other matters as Precise may reasonably request from time to time, including, without limitation, strategic planning, financial planning, business acquisition and general business development services. Under the terms of the Management Agreement, the Company provides customary indemnification, reimburses certain costs and pays Mentmore an annual management fee of $300,000 (subject to adjustment), which is payable monthly. In addition, pursuant to the Management Agreement, Mentmore is entitled to customary investment banking fees for services rendered in connection with the Company's financing transactions and acquisitions. The Management Agreement had an original term of ten years and is automatically extended for one additional year on each April 1 during the term of the agreement unless either party shall have previously notified the other in writing of its desire not to further extend the term. In addition, Mentmore may terminate the Management Agreement at any time upon 90 days prior written notice to Precise, and Precise may terminate the Management Agreement "for cause" (as defined in the Management Agreement). The sole executive officers and directors of Mentmore are Richard L. Kramer and William L. Remley.
The Company has paid Mentmore fees of $300,000, $675,000, and $450,000 in 1998, 1997, and 1996 respectively, for management and other advisory services and has reimbursed Mentmore for certain expenses incurred in connection with the rendering of such services.
Fees Paid to Michael D. Schenker
The Company paid the law firm of Michael D. Schenker Co. L.P.A., whose principal is an officer of Mentmore, a total of approximately $300,000 in legal fees in 1997 in connection with the Refinancing Transactions.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
(a) List of documents filed as part of this Report:
1. The financial statements listed on page 32 are filed as part of this Report
2. Financial Statement Schedules:
All schedules are omitted because they are not applicable, not required or the information is included elsewhere in the Consolidated Financial Statements or Notes thereto.
3. List of Exhibits:
* Filed with Registration No. 333-32041 and incorporated herein by reference.
+ Confidential treatment requested for a portion of this exhibit previously filed with Registration No. 333-32041 and incorporated herein by reference.
PRECISE TECHNOLOGY, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
Board of Directors Precise Technology, Inc.
We have audited the accompanying consolidated balance sheets of Precise Technology, Inc. (a wholly owned subsidiary of Precise Holding Corporation) as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholder's equity (deficit) and comprehensive income and cash flows for each of three years in the period then ended. Our audit also includes the financial statement schedule listed in the index at item 14(a). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Precise Technology, Inc. as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania March 19, 1999
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) COSOLIDATED BALANCE SHEETS
See accompanying notes
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) AND COMPREHENSIVE INCOME
See accompanying notes
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) CONSOLIDATED STATEMENTS OF CASH FLOWS
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) CONSOLIDATED STATEMENTS OF CASH FLOWS-(CONTINUED)
See accompanying notes
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Accounting Policies
Organization and Activities
The accompanying consolidated financial statements include the accounts of Precise Technology, Inc. ("Company") and its wholly owned subsidiaries. Significant intercompany transactions have been eliminated.
The Company is a wholly owned subsidiary of Precise Holding Corporation ("Precise Holding") which is a majority-owned subsidiary of SIHC II LLC ("SIHC II"). In December 1998, Sunderland Industrial Holdings Corporation ("Sunderland") contributed 100% of its shares in Precise Holding to SIHC II. SIHC I LLC ("SIHC I") owns a 100% maembership interest in SIHC II. Sunderland owns a 1% membership interest and is the managing member of SIHC I.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of 90 days or less at the time of original purchase to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO) method. Market is net realizable value.
Revenue Recognition
Finished Products--Revenue from product sales is recognized at the time products are shipped.
Tooling and Dies--Cost of tooling and dies purchased or produced are included in inventory. Tooling deposits represent progress billings related to the manufacture of tools and dies for customers. Income from contracts for the manufacture of customer tooling is accounted for under the completed-contract method of accounting, which recognizes revenue upon substantial completion of contracts. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Contracts are considered substantially complete upon acceptance by the customer.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided on the straight-line method based on estimated useful lives, as follows:
Building and improvements 5-40 years Machinery and equipment 3-10 years
Leasehold improvements are amortized over the shorter of the useful life of the asset or the term of the lease. Expenses for repairs, maintenance and renewals are charged to operations as incurred. Expenditures which improve an asset or extend its useful life are capitalized.
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. Organization and Summary of Accounting Policies--(continued)
Intangible Assets
Goodwill--Goodwill represents the excess of amounts paid and liabilities assumed over the fair value of identifiable tangible and intangible assets acquired. This amount is amortized using the straight-line method over a period of 25 years. The Company evaluates the carrying value of goodwill for potential impairment on an ongoing basis. Such evaluation considers projected future operating results, trends and other circumstances.
When factors indicate that goodwill could be impaired, the Company uses an estimate of the related business' undiscounted future cash flows over the remaining life of the goodwill in measuring whether the goodwill is recoverable. If such an analysis indicates that impairment has occurred, the Company adjusts the book value of the goodwill to fair value.
Deferred Financing Cost--Deferred financing costs relate to the costs of obtaining financing. These costs are being amortized over the period related to the debt outstanding.
Noncompete Agreements--Noncompete agreements relate to contracts executed in conjunction with the acquisitions. Such agreements are being amortized over the life of the contracts.
Income Taxes
The Company is a member of a controlled group of companies. As such, annual elections are made to share credits and exemptions as allowed under federal income tax laws. Deferred taxes are provided for the tax consequences of temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
2. Accounts Receivable and Significant Customers
Accounts receivable are presented net of allowance for doubtful accounts of approximately $166,000 and $85,000 as of December 31, 1998 and 1997, respectively. Management continually evaluates its accounts receivable and adjusts its allowance for doubtful accounts for changes in potential credit risk. The Company does not require collateral for its trade accounts receivable.
3. Inventories
The major components of inventories were as follows:
December 31, -------------------------------------- 1998 1997 ---- ---- (In thousands) Finished products $1,309 $1,679 Raw materials 2,085 2,349 Tooling and dies 3,116 1,828 ----------------- ----------------- Total inventories $6,510 $5,856 ================= =================
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
4. Property, Plant and Equipment
Depreciation and amortization expense on property, plant and equipment was approximately $6,614,000, $5,513,000 and $4,213,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
5. Intangible and Other Assets
Intangible and other assets consisted of the following:
6. Long-Term Debt
(a) 11 1/8% Senior Subordinated Notes due 2007 ("Notes")
On June 13, 1997, the Company issued $75,000,000 of Notes. The Notes accrue interest at the rate of 11-1/8% per annum and are payable semi-annually in arrears on June 15 and December 15, commencing on December 15, 1997.
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. Long-Term Debt--(continued)
The Notes are subordinate in right of payment to all existing and future senior indebtedness of the Company and are guaranteed on a senior subordinated basis by all of the Company's subsidiaries.
The Notes are redeemable at the option of the Company on or after June 15, 2002 at prices decreasing from 105.563% of the principal amount thereof to par on June 15, 2005 and thereafter. The Company is required to redeem the outstanding notes based upon certain events as described in the Note Indenture.
The Note Indenture requires the Company and its subsidiaries to comply with certain restrictive covenants, including a restriction on dividends and limitations on the incurrence of indebtedness and the issuance of preferred stock.
(b) Credit Agreement
On June 13, 1997, the Company entered into a $30,000,000 Credit Agreement with a financial institution, which expires in 2002. Borrowings under the Credit Agreement may be used to fund the Company's working capital requirements, finance certain permitted acquisitions and general corporate requirements of the Company and pay fees and expenses related to the foregoing. Up to $2,000,000 of the total Credit Agreement commitment is available for the issuance of standby letters of credit, which borrowings reduce amounts available under the Credit Agreement. The Company is required to pay a .50% fee on the average daily unused portion of the Credit Agreement. The Company is also subject to mandatory prepayment terms as described in the Credit Agreement.
Borrowings under the Credit Agreement accrue interest, at the option of the Company, at either LIBOR (varying from 5.07% to 5.54% at December 31, 1998) plus 2.5% or the financial institution's prime rate (7.75% at December 31, 1998) plus 1.5%.
The Credit Agreement is guaranteed on a senior basis by the Company's Parent and by all of the Company's subsidiaries and is collateralized by substantially all of the Company's and its subsidiaries' assets. The Credit Agreement contains certain covenants which require the Company to maintain leverage ratios, fixed charge and interest coverage ratios and minimum net worth. The Credit Agreement further limits capital expenditures, declaration of dividends and other restricted payments, and additional indebtedness. The Credit Agreement also restricts the sale or transferring of the Company's assets or capital stock.
(c) Other Notes
The Company has various other notes of approximately $214,000 at December 31, 1998. The notes are payable in monthly installments ranging from $3,756 to $7,697 through March 2, 2000. The notes accrue interest at rates varying from 4.8% to 8.15%.
Five-year maturities of long-term debt are as follows (dollars in thousands):
Debt Obligations --------------------
1999 $10,193 2000 2,263 2001 1,367 2002 1,063 2003 338 Thereafter 75,000 -------------------- $90,224 ====================
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. Fair Values of Financial Instruments
The Company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:
Cash and cash equivalents--The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value.
Long-term debt--The carrying amounts of the Company's borrowings under its short-term revolving credit agreements approximate their fair value. The fair values of the Company's Notes are determined using quoted market prices.
The carrying amounts and fair values of the Company's financial instruments at December 31, 1998 and 1997 are as follows:
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
8. Employee Benefit Plans
The Company sponsors a noncontributory defined benefit pension plan. The following sets forth the funded status of the Companys defined benefit plan and amounts recognized in the accompanying balance sheet as of December 31:
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.0% and 7.5%, respectively, at December 31, 1998 and 1997. The expected long-term rate of return on plan assets was 8.0% for both 1998 and 1997.
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
8. Employee Benefit Plans-(continued)
The Company's pension expense for its defined benefit pension plan consists of the following components for the years ended December 31, 1998, 1997 and 1996:
In addition, the Company sponsored a defined contribution 401(k) plan which covered substantially all non-union employees at the Tredegar and Unity facilities. Under the terms of the 401(k), the Company matched 25% of employees' contributions up to 6% of employees' salaries. Contributions made by the Company to the defined contribution 401(k) plan were approximately $0, $146,000 and $69,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Effective January 1, 1998, this plan was terminated and merged into the Corporate Plan (see below).
The Company also sponsors a defined contribution 401(k) plan ("Corporate Plan") which covers substantially all non-union employees at the other Company facilities. Under the terms of the 401(k) plan, the Company matches 50% of employees' contributions up to 5% of employee salary, and provides a discretionary contribution of 3.5% of eligible employees' salaries to the plan, for a combined total of up to 6% of eligible employees' earnings. Contributions made by the Company to the defined contribution 401(k) plan were approximately $1,035,000, $343,000, and $329,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
9. Income Taxes
Income tax expense consisted of the following for the years ended December 31:
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
9. Income Taxes-(continued)
A reconciliation of U.S. income tax computed at the statutory rate and actual expense is as follows for the years ending December 31:
The components of net deferred tax assets and liabilities at December 31 are as follows:
The Company had net operating losses for federal income tax purposes at December 31, 1998 of approximately $9,994,000. The Company's net operating losses expire in the years ending 2012 and 2017. The Company also has a significant state net operating loss, the realization of which is less likely than not before expiration.
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. Commitments and Contingencies
(a) Lease Commitments
The Company leases certain production and office equipment and vehicles. These leases are subject to renewal options for varying periods. Future minimum payments under capital leases and noncancelable operating leases with initial or remaining terms of one year or more consisted of the following as of December 31, 1998:
Operating lease expense under such arrangements was approximately $1,859,000, $1,606,000, and $1,220,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company subleases certain property under an agreement which expires on March 31, 2000. Rental income under such agreement was approximately $209,000 and $87,000 for the years ended December 31, 1998 and 1997, respectively. Future minimum rental receipts under the non-cancelable sublease arrangement are approximately $209,000 in 1999 and $52,000 in 2000.
Capital leases are as follows:
Amortization expense related to capitalized leases was approximately $1,518,000, $1,073,000, and $749,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
The Company has a lease line of credit in the amount of approximately $2,000,000, which expires on March 31, 1999. This lease line of credit is available to support the Company's capital expenditures for certain machinery and equipment. As of December 31, 1998, the Company had approximately $1,100,000 of borrowings outstanding under the lease line.
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. Commitments and Contingencies--(continued)
(b) Litigation
The Company is involved from time to time in lawsuits that arise in the normal course of business. The Company actively and vigorously defends all lawsuits. Management believes that there are no lawsuits that will have a material effect on the Company's financial position.
11. Related Party Transaction
The sole executive officers and directors of Mentmore Holdings Corporation ("Mentmore") are Richard L. Kramer and William L. Remley who are also directors of the Company. Mentmore provides management services to Precise and its subsidiaries pursuant to the Management Agreement dated March 15, 1996, as amended (the "Management Agreement"). Pursuant to the Management Agreement, Mentmore provides the Company with general management, advisory and consulting services with respect to the Company's business and with respect to such other matters as the Company may reasonably request from time to time, including, without limitation, strategic planning, financial planning, business acquisition and general business development services. The Company paid Mentmore fees of $300,000, $675,000 and $450,000 for the years ended December 31, 1998, 1997 and 1996, respectively, for management and other advisory services and reimbursed Mentmore for certain expenses incurred in connection with the rendering of such services.
The Company paid the law firm of Richard C. Hoffman, P.C., whose principal is a director of the Company, approximately $0, $5,000 and $257,000 in legal fees for the years ended December 31, 1998, 1997 and 1996, respectively. During this period, Mr. Hoffman served as Vice President and General Counsel of Mentmore.
The Company paid the law firm of Michael D. Schenker, Co. L.P.A. whose principal is an officer of Mentmore, a total of approximately $300,000 in legal fees for the year ended December 31, 1997. No fees were paid to the law firm of Michael D. Schenker, Co. L.P.A. for the year ended December 31, 1998.
In April of 1997, two of the Company's executive officers were granted options to purchase an aggregate of 1,900 shares of Sunderland common stock at an exercise price of $1,500 per share, pursuant to nonqualified stock option agreements (the "Option Agreements"). The exercise price was derived from a formula based upon the fair market value of Sunderland's common stock at the date of the grant. The majority of the options (1,600 shares) are exercisable over a three-year period following the grant date ("First Options"). The remainder of the options ("Second Options") are exercisable in 25% increments based upon the attainment of a certain annual operating target as defined in the Option Agreements, for Sunderland's year ended December 31, 1997 through 2000. On October 8, 1998, the Option Agreements were amended to further clarify and modify certain provisions of the Option Agreements.
By Assignment and Assumption Agreement dated as of December 14, 1998, Sunderland assigned, and SIHC II LLC, a Delaware limited liability company ("SIHC II"), assumed, Sunderland's rights and obligations under the Option Agreements. Pursuant to such agreement, the two executive officers agreed to substitute the options for the right to acquire an identical percentage of the membership interests in SIHC II.
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. Segment Information
The Company has two reportable segments: injection molding and mold making. The Company's injection molding segment produces highly engineered, close tolerance, precision plastic products. The Company's mold making segment has extensive tool and die manufacturing capabilities.
The Company evaluates performance and allocates resources based on gross margin. As a result, the Company does not allocate certain general and administrative expenses to its operating segments including depreciation, amortization and interest expense. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
The Company's reportable segments are business units that offer different products and services. The reportable segments are each managed separately because they manufacture and distribute distinct products or services with different production processes.
Information by industry segment is set forth below:
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
12. Segment Information-(continued)
The Company's marketing focus is to service a diverse base of original equipment manufacturers in the health care, packaging and consumer/industrial markets. The Company has ten facilities located throughout the Eastern and Midwestern United States.
For the year ended December 31, 1998, sales to two customers of the Companys injection molding segment accounting for 10% or more of net sales were $20,326,000 and $15,549,000. For the year ended December 31, 1997, sales to one customer of the Companys injection molding segment accounting for 10% or more of net sales were $21,337,000. For the year ended December 31, 1996, sales to two customers of the Companys injection molding segment accounting for 10% or more of net sales were $14,085,000 and $12,263,000.
13. Financial Information for Subsidiary Guarantors
The Company's payment obligations under the Notes are fully and unconditionally guaranteed on a joint and several basis (collectively, the "Subsidiary Guarantees") by Precise Technology of Delaware, Inc., Precise Technology of Illinois, Inc., Precise TMP, Inc., Precise Polestar, Inc., and Massie Tool, Mold and Die, Inc. each a direct or indirect wholly-owned subsidiary of the Company and each a "Guarantor". These subsidiaries represent substantially all of the operations of the Company conducted in the United States. In accordance with previous positions taken by the Securities and Exchange Commission, the following summarized financial information illustrates the composition of the combined Guarantors. Separate complete financial statements of the respective Guarantors are not presented because management has determined that they would not provide additional material information that would be useful in assessing the financial composition of the Guarantors. No single Guarantor has any significant legal restrictions on the ability of investors or creditors to obtain access to its assets in the event of a default on its Subsidiary Guarantee other than its subordination to senior indebtedness described in Note 6. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
13. Financial Information for Subsidiary Guarantors-(continued)
PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
14. Quarterly Financial Information (unaudited)
The following table sets forth selected financial information for each of the fiscal quarters during years ended December 31, 1998 and 1997 (dollars in thousands):
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of North Versailles, State of Pennsylvania, as of March 31, 1999.
PRECISE TECHNOLOGY, INC.
By: /s/ JOHN R. WEEKS ---------------------------------------
John R. Weeks President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed by the following persons in the capacities and as of the dates indicated.
PRECISE TECHNOLOGY INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(1) Adjustment of allowance as a result of changing circumstances.
S-1
PRECISE TECHNOLOGY INC. AND SUBSIDIARIES RATIO OF EARNINGS TO FIXED CHARGES FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, 1996, 1995, AND 1994 (In thousands)
S-2
LIST OF EXHIBITS ----------------
* Filed with Registration No. 333-32041 and incorporated herein by reference.
+ Confidential treatment requested for a portion of this exhibit previously filed with Registration No. 333-32041 and incorporated herein by reference.