ITEM 1. BUSINESS
SEDA Specialty Packaging Corp. ("SEDA" or "the Company") develops, manufactures and sells specialty plastic packaging products to the personal care, food and beverage, household and industrial chemical and pharmaceutical industries. The Company's products include various types of plastic containers (including flexible plastic tubes, single- and double-wall stock and custom jars, bottles and vials), plastic closures (including lined and linerless standard screw caps, tamper-evident closures and dispensing closures), and other stock and custom plastic products. SEDA manufactures these products using injection molding, extrusion and stretch-blow molding processes and decorates many of its products using offset printing, hot stamping and other labeling processes to satisfy customer requirements. The Company focuses on customers who require superior product quality, uniform appearance, customized service, shorter lead times and flexible delivery schedules. The Company's strategy is designed to respond to these key factors in order to position the Company as a preferred supplier in the highly competitive industries in which it operates.
On June 22, 1995, the Company acquired a majority interest in American Safety Closure Corp. ("ASC") and on July 15, 1996 the Company acquired the remaining minority interest in ASC. The acquisition of ASC broadened the Company's family of products for both containers and closures.
The Company's executive offices are located at 2501 West Rosecrans Avenue, Los Angeles, California 90059-3510 and its telephone number is (310) 635-4444.
GENERAL
The Company was founded as a California corporation in 1984 by Shapour Sedaghat who had extensive experience in the specialty plastics packaging industry. Initially operated as a family business, the Company focused on manufacturing standard plastic screw caps for various types of containers. The rapid growth of the Company's plastic closure business from 1984 to 1990 provided the foundation for the addition of flexible plastic squeeze tubes as a second product line in 1990. The Company also added a limited number of custom injection molded products that same year, and a family of tamper-evident closures for the vitamin industry was introduced in 1993.
The Company completed its initial public offering in October 1993, raising net proceeds of approximately $23 million, primarily to finance a capacity expansion program for the Company's tube operations in 1993 and 1994, which in turn provided the foundation for future expansion. In 1994, the Company's shareholders approved a reincorporation in the state of Delaware.
The acquisition of a majority interest in ASC in 1995 added plastic jars, vials, additional tamper-evident closures, child-resistant closures, additional styles of standard screw caps and other custom products to the Company's family of products, as well as an east coast presence from ASC's location in Plattsburgh, New York. Also in 1995, the Company began manufacturing PET bottles for the specialty water industry.
Shapour Sedaghat retired in 1995, but remains a consultant to the Company for special projects. Shawn Sedaghat, Shapour's son, was named Chairman and Chief Executive Officer of the Company in 1995. Prior to that time, Shawn Sedaghat was the President and Chief Operating Officer of the Company and had been actively involved in the management
of the Company since its inception. Other members of the Company's current management team also have had substantial experience in the specialty plastic packaging industry which provides the Company with valuable experience in the industries in which it competes.
Management continually evaluates the Company's product lines in an effort to capture higher market share while maintaining or increasing gross margins. Examples include the ongoing development of new products such as tamper-evident/child-resistant closures and dispensing closures.
Plastic closures are used to cap primarily plastic containers which store a wide variety of cosmetic, food, chemical and other commercial and industrial products. Each closure and container must be designed and engineered to meet specific use requirements mandated by the type of container and nature of its contents. Over the years, rigid and flexible plastic containers have experienced significant growth in market share at the expense of other materials such as glass and metal. Advantages of plastic containers include durability, resistance to denting and breakage, and compatibility with many products. Furthermore, they are lightweight, an important factor in the transportation-sensitive packaging industry, and can be produced in a variety of colors.
Plastic closures for plastic containers have distinct advantages over other materials such as metal and metal composite closures. Market surveys indicate that the performance advantages, design flexibility, value added characteristics (e.g., aesthetics, convenience, protective features) and lower overall costs of plastic closures and reduced applications of other materials as a result of the widespread market penetration of plastic containers have driven the demand for plastic closures. Since the manufacturing process required to produce plastic closures substantially differs from that used to produce plastic containers, many manufacturers of plastic products have focused on one but not both areas of this market. Therefore, as the market for plastic containers has grown, demand for products provided by plastic closure manufacturers has also risen.
Flexible plastic tubes encase a variety of products including lotions, creams, shampoos, foodstuffs, adhesives and household chemicals. The non-corrosive and lightweight nature of these products and the ease in product dispensing provide distinct competitive advantages over other types of tube materials. The tubes can be produced in a variety of colors, can be attractively decorated and do not require lining or interior surface treatment to contain most products.
Single- and double-wall plastic jars also encase a variety of creams, lotions and other products, primarily for the personal care industry, that require a rigid container. Plastic vials are used by the pharmaceutical industry for prescription or over-the-counter medications. PET bottles are used by the specialty drinking water market and can be used for a variety of other products.
STRATEGY
In general, end users of specialty plastic packaging products evaluate potential vendors according to factors such as product quality, responsiveness, customer service and price. The Company's strategy is designed to respond to these factors, thus positioning the Company as a preferred supplier in the highly competitive industries in which it operates. The key elements of the Company's strategy are as follows:
- - High Quality and Uniform Products. The Company believes that its commitment to quality is a key component of its success to date. Management believes that its customers typically expect a low product defect rate and high quality product aesthetics. In the specialty plastic packaging industry, a high defect rate can mean a delay in product shipment and higher production costs while poor product aesthetics may depress product sales. The Company believes it differentiates itself from its competitors through the utilization of production and training techniques designed to produce a high quality product conforming to a customer's design specifications. The Company is able to maintain product quality, reduce defects and thereby increase demand for its products by (i) utilizing technologically advanced machinery and production techniques, (ii) employing advanced testing equipment and methods, (iii) offering an in-house graphics capability that ensures that the product's printing and graphics comply with its customer's aesthetic demands and (iv) promoting a total quality management program.
- - Flexible and Customized Service. Management has structured the Company's operations in a manner that promotes rapid responsiveness to constantly changing client needs by providing customers with direct access to key operations personnel within the Company. Since many specialty plastic packaging product companies market similar product lines, management believes that customers often select suppliers on the basis of service factors. Management's experience indicates that as the plastics industry has grown, some plastic packaging product manufacturers have
demonstrated an unwillingness or inability to react quickly and responsively to the varying demands of many customers. This has created opportunities for the Company to increase market share by catering to the service expectations of these customers. The Company has developed the ability to adjust production delivery schedules to meet the needs of those customers who have in turn made aggressive delivery commitments for their goods. The Company's in-house graphics capability affords it the ability to generally incorporate a customer's last-minute printing changes and still meet its production needs.
- - Reliable and Timely Delivery. The Company believes its low lead times (the period from customer order to delivery) provide it with a competitive advantage in customer service. Intense efforts are made to provide the customer with high quality products by the designated delivery date. The Company seeks to maintain this level of service through careful evaluation of its production process and the cultivation of close relationships with actual and potential customers. By working closely with a customer, the Company attempts to ensure that design specifications and delivery schedules are met without the cost and loss of reputation associated with the initial production of nonconforming product. Furthermore, utilization of automated high quality production lines helps maintain lead times and low defect rates.
- - Low Delivered Cost. The Company strives to achieve low delivered costs to its customers. The Company has located its manufacturing operations in areas with high-quality and relatively low-cost labor and has equipped its facilities with technologically advanced, cost-effective machinery. In an effort to control costs, the Company's engineering staff carefully evaluates the Company's production processes and often makes technical modifications and adjustments to reduce costs and improve production speed. Examples include mold dedication and maximization of mold output; the Company generally dedicates one mold to one machine which reduces machine downtime, and over time it has been able to add molds with higher cavity capacity, thus improving yield, gross margins and lead times. Additionally, the Company's technical staff has improved the automated nature of its machines, which reduces the number of employees required to operate them, thus decreasing costs and improving margins. The Company's in-house scrap recycling program and the resulting savings from reduced scrap and rework exemplifies the Company's ability to control its costs.
To further allow it to price competitively, the Company utilizes a low overhead internal marketing program. Direct selling activities, because of the higher cost-per-sale and personnel requirements, are generally reserved for large established accounts and prospective customers with strong sales potential. By utilizing more economical means of marketing such as telemarketing and distributors, the Company supports field selling activities by prescreening prospective customers and identifying potential accounts that warrant direct sales calls.
- - Focus on Market Opportunities. The Company's advanced technological design capabilities, manufacturing techniques and industry experience afford it the ability to develop a wide variety of specialty plastic packaging products. The Company evaluates customer demand in an effort to apply its expertise to introduce selected new products designed to meet consumer needs in instances where the Company's margins are improved or sustained. For example, recognizing that the largest growth opportunities in plastic closures are expected to be in the markets for dispensing closures and tamper-evident closures, the Company has introduced a line of dispensing closures for its tubes and a family of tamper-evident closures for use in pharmaceutical and food and beverage applications. This flexibility extends beyond plastic closures and tubes - the Company produces and supplies a number of custom products for selected customers such as pizza trays and plastic lid supports for pizza boxes, lipstick cases, nail enamel caps and marking pen components.
PRODUCTS
Plastic Closures
The Company's primary plastic closure product is a plastic screw cap which is fabricated in a wide variety of sizes and is adaptable to glass and metal as well as plastic containers. With specialized liners or inner seals, the Company's screw caps are also capable of sealing containers to prevent leakage, spoilage and product tampering. For the year ended December 31, 1996, over 80% of the Company's screw caps were manufactured with liners or seals. The Company offers these closures with diverse choices of styles, in a broad variety of colors and sizes ranging in diameter from 28 millimeters to 120 millimeters.
The Company also produces two types of tamper-evident caps, a drop-ring cap (when the cap is twisted off, the
lower portion of the cap - the ring - breaks away, drops down and remains on the bottle neck) and a proprietary tear-band cap (a narrow plastic band must be removed before the container can be opened). The Company believes its tamper-evident caps have technical, economic, and aesthetic advantages over alternative temper-evident systems because of increased safety for the consumer and significant cost savings for the bottler. The tamper-evident band, in the Company's tear-band closure, must be literally torn off the cap before it can be opened. The person opening the container protected by this closure can see, feel and hear the tamper-evident bands breaking or tearing away from the container, indicating that it has not been opened previously. The Company believes that plastic caps are easier for the bottler to apply since they are either pre-threaded and need only to be screwed on during the bottling process or, as with the tear-band cap, they are threadless and can be snapped on during the bottling process. The Company's tamper-evident closures do not require secondary parts or operations such as a shrink procedure to make them tamper-evident. By eliminating secondary operational processes requiring the closure and container to pass through a heating tunnel to either shrink the tamper-evident band around the neck of the container or to shrink a plastic wrap around the cap and container, the processor's costs are reduced. There is no need for heat shrinking and band equipment, plastic wrap and storage space for ancillary materials and power costs are also reduced.
The Company also manufactures certain specialty closures for specific customer applications, introduced a line of dispensing closures for its flexible plastic tubes in 1996 and is developing a line of child-resistant closures and additional dispensing closures. Mandatory governmental regulations aimed at preventing access by children to potentially dangerous consumer substances have been the major impetus behind a steadily increasing market for child-resistant closures. Currently, these packaging safeguards must be incorporated on all containers holding certain prescription drugs, over-the-counter medicines and toxic household chemicals. Management believes that the demand for such closures should continue to rise due to the expanding use of plastic bottles for toxic household and automotive chemicals and a rising use of pharmaceuticals.
Plastic Containers
The Company's flexible plastic tubes can be processed in a variety of diameters and lengths and can be fitted with a number of plastic closures, such as flip-top or screw caps. Generally, the capacity of these tubes ranges from 0.5 to 9.5 fluid ounces. The finished tubes are printed with the customer's labeling on-site at SEDA's facility. The Company can manufacture its own printing plates pursuant to the customer's design specifications and all requested printing, hot stamping and labeling is done on-site. As a result, design modifications or additions can be quickly made as opposed to subcontracting these changes. This improves lead times and customer relations and provides the Company with what it believes is a distinct competitive advantage. SEDA continually examines new applications for its tube products. For example, the Company has recently introduced a line of co-extruded, multi-layered tubes designed to provide greater product protection and barrier capabilities. These tubes are designed to be used in applications such as toothpaste and certain foods and medicinal products. The Company believes that these tubes may provide additional market opportunities.
The Company manufactures various styles and sizes of single- and double-wall plastic jars with matching closures that are either lined or linerless. Jars can be offset printed and closures can be silk screened or hot stamped based on customer requirements. The Company also manufactures a line of prescription vials and closures which can be decorated to customer specifications. The Company entered the plastic bottle market in 1995 with a line of PET bottles designed for specialty water products. The bottles are produced in 0.5, 1.0 and 1.5 liter sizes.
Custom Products
The Company's technological design capabilities and production techniques are applicable to a wide range of custom plastic products. Current custom products include nail enamel caps, lipstick cases, marking pen components, pizza trays and plastic lid supports for pizza boxes and other specialty plastic parts which the Company manufactures for use by end-user customers to their specifications. The Company also provides design assistance to customers in connection with the production of their custom products. The Company's technical specialists work closely with customers in structuring initial production, labeling and delivery specifications for the introduction of new product lines. Management believes this production assistance is an important feature of the Company's customer support program and helps attract customers seeking custom product manufacturing.
INDUSTRIES SERVED
The Company's plastic containers and its plastic closures are used to package a wide variety of products, such as personal care items, foods and beverages, household and industrial chemicals and pharmaceuticals. The Company's containers, closures and custom products are sold directly through the Company's in-house sales force and indirectly through
distributors. During the year ended December 31, 1996, the Company sold products through a national distribution network which included over 70 distributors; approximately 80% of closures and 20% of containers during the same period were sold through distributors. Since the Company decorates most containers it manufactures it is able to specifically identify the industry in which the containers are to be used. However, since many closures are not printed and distributors buy closures for a variety of users, the Company is unable to identify with certainty which industries are served by those distributors.
Personal Care
The Company's closures and containers are used for personal care products such as shampoos, lotions, creams, sunscreens, hair gels and facial scrubs. Demand for plastic containers in the personal care industry is driven by considerations of safety, cost, convenience, product aesthetics and lower weight.
Food and Beverage
Uses of the Company's products in the food and beverage area include products such as specialty waters, ketchup, vegetable oil and other food products. As consumers become more reliant on easy-open, easy-handling food containers, the Company expects that the use of plastic dispensing closures and flexible containers will increase. Recognizing that the largest growth is expected to be in the market for tamper-evident, tear-away plastic closures, and other dispensing closures the Company currently has under development a family of dispensing closures which the Company expects will contribute to sales growth. The Company also produces custom plastic products for use in the pizza industry.
Household and Industrial Chemical
The Company's products are used in applications such as detergents, soaps, cleaning preparations and automotive additives. Studies indicate that this segment of the Company's business has exhibited a dramatic change-over to plastic containers in recent years as products traditionally packaged in paper boxes, aerosol cans and glass and metal containers are now being sold in plastic containers.
Pharmaceutical
The Company's products are used for such medicinal and pharmaceutical preparations as skin ointments, vitamins, prescription drugs, and medicinal oils and creams. According to industry studies, the demand for plastics in medical packaging is driven in large part by the overall aging of the population. As people become older, they suffer from an increased number of diseases and medical conditions requiring advanced drug therapy, translating into an increased demand for packaging. Based on market data, management believes that plastic closures with tamper evident safeguards and child-resistant characteristics will provide the best opportunities in this segment. As a result, the Company has a family of tamper evident closures and is developing a line of child resistant closures.
MANUFACTURING
The manufacture of plastic closures, jars and vials involves conversion of a plastic raw material (polypropylene, polystyrene or polyethylene) into a closure or container through an injection molding process. The raw material is heated to the melting point, injected into several cavities within a mold and cooled to become a finished product. Operating efficiencies and costs are affected by the cycle time, the number of cavities within the mold and the product defect rate. These products can be decorated to customer specifications through offset printing or silk screening processes.
The manufacture of flexible plastic tubes involves three steps: (i) extrusion, (ii) heading and (iii) custom decoration. Plastic extrusion is the process in which continuous shapes are formed by forcing viscous plastic resin through a die. Plastic resins are heated and pushed through a die by the extruder, which melts and mixes the material. The tube is then cooled and cut to predetermined lengths. The tubes are then "headed," a process where molten plastic is compression molded to the end of the hollow tube. Heading is a complex process and production capacity can be limited by the technical capability of a manufacturer's heading equipment. The Company has invested in advanced heading machines which the Company believes are state-of-the-art lines. Management believes that the use of these machines provides it with a distinct advantage over the flexible tube manufacturers utilizing less sophisticated equipment.
The final step in the manufacture of flexible tubes is the printing of the customers' labeling which is done on-site at the Company's facility. The Company works closely with the customers in the printing process, utilizing its own printing
plates to ensure quality and consistency. Tubes can also be decorated using hot stamping, silk screening or pressure sensitive labeling technologies. Though SEDA currently uses subcontractors for silk screening, the Company plans to install its own silk screening equipment in 1997 to bring this process in house. By performing the entire flexible tube manufacturing process in-house, the Company can better meet the design and manufacturing specifications of its customers.
The manufacture of PET bottles involves the conversion of the plastic raw material polyethylene terephthalate (PET) into a bottle through a combined injection molding and stretch-blow molding process using state-of-the-art equipment that creates injection molded preforms for each bottle, heats the preform to precise temperature requirements and then "blows" the bottle using air pressure in one continuous manufacturing process.
The conversion of raw materials into finished plastic components is a highly capital equipment intensive process. Recognizing that faster production capacity, low scrap rates and lower defect rates are critical to competing in these segments of the plastics industry, the Company has made substantial investment in state-of-the-art automated machinery. When evaluating the purchase of new machinery, the Company examines the machines specifications and thereafter provides the manufacturer with a list of design modifications if required. With these adjustments, the machine becomes "custom" in nature and thereby further differentiates the Company from its competitors. This redesign process is based on knowledge and information gained by the Company's founders and engineering department from their years of experience.
The Company's manufacturing processes incorporate quality control, testing and engineering procedures to assure compliance with customer requirements. These procedures commence with certification of raw materials and include in-process measurement and control and performance testing of finished products. Product quality is controlled with an on-line testing process coupled with spot checking of finished goods prior to shipment. The production process is carefully scrutinized to determine if technical changes must be made or further capital expenditures are required. In addition, the Company conducts extensive training of its personnel to ensure that a high level of technical competence is maintained.
The Company maintains product liability and errors and omissions insurance against the possibility of defective product claims.
MARKETING
The Company's line of plastic closures and custom products are sold directly through its in-house sales staff and indirectly through a network of over 70 distributors located throughout the United States. The majority of its standard closures are sold through distributors and a small in-house telemarketing group because such products are generally considered to be commodity items. SEDA is placing a greater emphasis in 1997 on selling a broader range of products, including stock items of its jars and bottles, through its distributor base. SEDA's containers are primarily sold directly through its in-house sales force and a few manufacturing representatives. Containers are sold more through a direct sales effort than closures, as containers require a greater level of customization. Management expects that over time a higher percentage of the Company's sales will be made by the Company's in-house sales force. SEDA's sales force is geographically dispersed with salespeople located on the east coast, in the mid-west and on the west coast. SEDA has customer service personnel at its California and New York manufacturing plants in addition to a New Jersey sales office which services the New York City metropolitan area.
In order to allow the Company to price competitively, the Company has utilized a low overhead internal marketing program where possible. Direct selling activities, because of the high cost and extensive manpower requirements, are generally reserved to large established accounts and prospective customers with good sales potential. By utilizing more economical means of marketing such as telemarketing, authorized representatives and distributors, the Company can support field selling activities by prescreening prospective customers and identifying potential accounts that warrant in-person visits.
RAW MATERIALS
The primary raw materials used by the Company in the manufacture of its products are various plastic resins, primarily polyethylene and polypropylene, and various closure lining materials. Because plastic resins are commodity products, the Company selects its suppliers primarily on the basis of price. Consequently, the Company's sources for plastic resins tend to vary from year to year. All of the Company's suppliers of plastic resins manufacture their plastic resins in the United States and most of the Company's suppliers of plastic resins produce the full range of plastic resins used by the Company. Shortages of plastic resins have, historically, been infrequent.
The primary plastic resins used by the Company are produced from petrochemical intermediates derived from products of the natural gas and crude oil refining processes. Natural gas and crude oil markets have in the past experienced substantially cyclical price fluctuations as well as other market disturbances including shortages of supply, changes in OPEC policy and crises in the oil producing regions of the world. The capacity, supply and demand for plastic resins and the petrochemical intermediates from which they are produced are also subject to cyclical and other market factors. Consequently, plastic resin prices may fluctuate as a result of natural gas and crude oil prices and the capacity, supply and demand for resin and petrochemical intermediates from which they are produced. The Company experienced significant price increases for its plastic resins in 1995 as a result of a significant increase in industry demand for such resins. Although demand will continue to influence the cost of plastic resins in the future, the Company has taken steps to protect itself against shortages, to the extent it considers appropriate, through contracted arrangements.
Although the Company is not generally bound by fixed price contracts with its customers, it may not always be able to pass through increases in the cost of its raw materials to its customers in the form of price increases. To the extent that increases in the cost of plastic resin cannot be passed on to its customers, such increases may have a material adverse impact on the profitability of the Company due to decreases in its profit margins.
The Company currently purchases the polyethylene used by it in the manufacture of its flexible plastic tubes and PET for its bottles from a limited number of sources. Although the Company has been able to obtain these materials in the ordinary course of its business and while it believes that it can access alternative sources on reasonable notice, any interruption in deliveries of such materials would have a material adverse effect on the Company's level of sales and its near-term results of operations. Although the Company currently purchases the majority of the polypropylene used in the manufacture of its closures and jars from a single supplier, it believes it can obtain the material from a large number of alternative suppliers. The delay in shipments of such material would have an adverse effect on the Company's ability to deliver products until alternative sources are located.
COMPETITION
Competition in the industries in which the Company operates is intense. Many of the Company's competitors are more established and have greater name recognition and marketing resources than the Company. The Company believes that competition for plastic containers and closures is based primarily on lead times, responsiveness, quality, customer service, and price. The Company believes that it competes favorably with respect to these factors.
With respect to competition in the plastic closure and container markets in general, management believes it competes with over 100 firms in the United States. The market is dominated by several large companies, which the Company believes command over 80% of the market share. With respect to tube sales, the industry is generally characterized by competition from three large companies who command over 80% of market share.
Many of the Company's competitors have greater financial resources than those available to the Company and certain competitors spend substantially greater amounts for advertising and promotion. Furthermore, the standard screw top closure market tends to be more price sensitive than the other markets in which the Company competes. At times in the past the Company has had to lower prices on these products to retain market share which has had an adverse effect on profit margins for these products. There can be no assurance that such price competition will not recur in the future.
REGULATION AND ENVIRONMENTAL CONSIDERATIONS
The Company is not currently subject to any environmental proceedings. During the year ended December 31, 1996, the Company did not make any material expenditures for environmental control facilities, nor does it currently anticipate any such future expenditures. Actions by Federal, state and local governments concerning environmental matters could result in laws or regulations that could increase the cost of producing the products manufactured by the Company or otherwise adversely affect the demand for its products. At present, environmental laws and regulations do not have a material adverse effect upon the demand for the Company's products. The Company is aware, however, that certain local governments have adopted ordinances prohibiting or restricting the use or disposal of certain plastic products that are among the types of products produced by the Company. If such prohibitions or restrictions were widely adopted, such regulatory and environmental measures could have a material adverse effect upon the Company. In addition, a decline in consumer preference for plastic products due to environmental considerations could have a material adverse effect upon the Company. In addition, certain of the Company's operations are subject to Federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and
disposal of solid and hazardous wastes. While the Company has not had to make significant capital expenditures for environmental compliance, the Company cannot predict with any certainty its future capital expenditure requirements relating to environmental compliance because of continually changing compliance standards and technology. The Company does not have insurance coverage for environmental liabilities and does not anticipate obtaining such coverage in the future.
EMPLOYEES
As of December 31, 1996, the Company had approximately 450 employees, of whom 25 were engaged in executive, technical and administrative functions, 20 in sales and customer service functions and 405 in production. Approximately 100 of its employees in New York state are represented by a labor union. The Company's collective bargaining agreement will expire in 2001. An attempt made in 1996 by a union to install a collective bargaining agreement at the Company's California plant was defeated in a vote by employees, which is currently being appealed by the union. The Company has not experienced any work stoppages and considers its relations with its employees to be good.
ITEM 2.
ITEM 2. PROPERTIES
The Company currently owns a production, warehouse and distribution center of approximately 300,000 square feet located outside of Los Angeles, California. With the acquisition of ASC in 1995, the Company acquired a manufacturing facility located in Plattsburgh, New York of approximately 87,000 square feet in size. Both plants are of a modern one-story construction. There are mortgages on both properties aggregating $4,263,000 at December 31, 1996. The Company also leases a 50,000 square foot warehouse facility in Plattsburgh, New York. The lease on this facility expires in 1998. The Company believes these facilities are sufficient for its current needs. However, the majority of the plant space is utilized and significant expansion of manufacturing operations will not be possible without additional construction on the sites or the addition of other facilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Since October 26, 1993, the Company's Common Stock has been traded on The Nasdaq Stock Market under the symbol "SSPC". The following table sets forth the high and low closing sales prices for the Common Stock as reported by The Nasdaq Stock Market:
At March 14, 1997, the closing sales price of the Common Stock as reported by The Nasdaq Stock Market was $18.25. At March 14, 1997, there were approximately 650 shareholders of record and approximately 1,500 beneficial shareholders.
Except for the S Corporation distributions prior to the Company's initial public offering, described herein, the Company has not paid cash dividends on its Common Stock and does not anticipate that it will do so in the foreseeable future. The present policy of the Company is to retain earnings for use in its operations and the expansion of its business.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The data set forth below should be read in conjunction with Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with Item 6 - "Selected Financial Data" and Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules required by Item 8 of this Report are set forth in the index on page, included elsewhere herein.
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
At December 31, 1996, the directors and executive officers of the Company and their ages were as follows:
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(1) Chairman of the Compensation Committee and Member of the Audit Committee.
(2) Chairman of the Audit Committee and Member of the Compensation Committee.
SHAHROKH "SHAWN" SEDAGHAT was elected Chairman and Chief Executive Officer of the Company in February 1995. Prior to that date he had been President of the Company since November 1992. From March 1985 to November 1992, Mr. Sedaghat held various positions with the Company including machine operator, assembly supervisor, molding supervisor, quality control manager and general manager.
RONALD W. JOHNSON has been Vice President of Finance and Chief Financial Officer of the Company since November 1992. From July 1983 until joining the Company, he was employed by McDonnell Douglas Information Systems Company in various executive positions with various subsidiaries and divisions of such company, including Vice President of Finance and Administration of McDonnell Douglas Computer Systems Company, Vice President of Financial Planning and Analysis of McDonnell Douglas Information Systems Group and Vice President of Finance and Chief Financial Officer of Microdata Corporation. From 1978 to 1983 he was Corporate Controller and Chief Accounting Officer of Electronic Memories and Magnetics Corporation, and from 1972 to 1978 he was employed by Price Waterhouse. Mr. Johnson is a Certified Public Accountant.
EDWARD F. CSASZAR became Vice President of Sales and Marketing of the Company in August 1993. Mr. Csaszar has served as President of General Kap Corporation, a company involved in the development and licensing of proprietary closures, since February 1986. From June 1988 to August 1993, he was the owner of Co-Pak Group, a manufacturer's representative for plastics manufacturers to the packaging industry.
EDWARD S. DOMBROSKI has been Vice President and General Manager since October of 1994. From April 1993 to October 1994, he was the Company's Vice President of Quality and Graphic Arts. He joined the Company in March 1992 as a manufacturing manager. Prior to joining the Company he was employed by Peerless Tube Co. since 1970 where he worked as a plant manager until 1992 when he became Director of Manufacturing.
DENNIS CAMARA has been Vice President of Operations, Injection Molding since May 1993. Prior to that, he was Plant Manager of the Closure Division from May 1991 to May 1993. Prior to joining the Company, Mr. Camara was employed by Witco Corporations (Plastics) from 1989 to 1991 as Production Manager where he directed activities of the manufacturing department. From 1986 to 1989 he was employed by Newport Plastics, Inc. as a plant manager. From 1976 to 1986, Mr. Camara was employed by JSN Industries as a Vice President of Manufacturing.
ANDREAS ISELI has been Vice President of Operations, Tube Division since March 1993. Prior to that time, Mr. Iseli was the Company's Plant Manager, Tube Division from February 1990 to March 1993. Prior to joining the Company, Mr. Iseli was employed by Asia, Switzerland, a packaging machinery manufacturer, as Assistant Department Manager in Engineering from July 1987 to February 1990.
DANIEL E. WIENEKE has been the President of the Company's American Safety Closure subsidiary since August 1995. Before joining SEDA, Mr. Wieneke served as Vice President of Operations for E.T. Brown Drug Company, Inc. He was previously a Vice President of Hayward Laboratories, a drug manufacturer. Prior to those positions, he served in senior management positions with Nestle-Lemur Company, Contract Packaging Corporation and Shield Packaging Company, where he was National Sales Manager.
DANN V. ANGELOFF became a director of the Company in September 1993. Since 1976 Mr. Angeloff has been the President of The Angeloff Company, a corporate financial advisory firm. Mr. Angeloff serves on the Board of Directors of Compensation Resource Group, Eagle Lifestyle Nutrition, Inc., Leslie's Poolmart, Nicholas/Applegate Growth Equity Fund, Nicholas/Applegate Investment Trust, Public Storage, Ready Pac Produce, Inc. and Royce Medical Company. Mr. Angeloff is a former Trustee of the University of Southern California and is a University Counselor to the President of the University of Southern California.
ROBERT H. KING became a director of the Company in February 1995. Mr. King has served as President of Consumer Marketing International, Inc., a consumer product marketing company, since 1984. From 1978 to 1984, he served as Chairman, President, Chief Executive Officer and Chief Operating Officer of World Book, Inc., a publisher of reference books. From 1968 to 1978, he served as President of Time-Life Libraries, Inc., a publishing subsidiary of Time-Life, Inc.
ALFRED E. OSBORNE, JR., PH.D. became a director of the Company in November 1993. He currently serves as Associate Professor of Business Economics and as the Director of the Harold Price Center for Entrepreneurial Studies in the Anderson Graduate School of Management at UCLA, where he has held several management and teaching positions since 1972. Dr. Osborne currently serves on the Board of Directors of Greyhound Lines, Inc., Nordstrom, Inc., The Times Mirror Company and United States Filter Corporation. He has authored numerous articles, reports and other publications with respect to capital market issues confronting small and growing enterprises and is a member of the Council of Economic Advisors for California.
All directors hold office until the next annual meeting of shareholders or until their successors are elected and qualified. Executive officers serve at the discretion of the Board of Directors. There are no family relationships between any of the directors or executive officers of the Company.
DIRECTORS' COMPENSATION
In 1996, outside directors were entitled to: (i) an annual payment of $10,000, payable in equal quarterly installments of $2,500, (ii) $750 per meeting of the Board of Directors or any committee thereof that is attended in person, (iii) $500 per attended telephonic Board meeting, and (iv) $750 per Committee meeting for serving as a Committee Chairman. These amounts will increase by 20% in 1997.
In addition, each new outside Board member is entitled to receive stock options exercisable for 15,000 shares at a per share price equal to the market price of the Company's Common Stock on the date such person becomes a member of the Board, such options vesting at the rate of 25% a year. For each year after the first year, an outside director may be granted additional options at the then-market price on the date of grant. The Company may change this policy in the future.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain summary information regarding compensation paid by the Company for services rendered during the fiscal years ended December 31, 1996, 1995 and 1994 to the Company's Chief Executive Officer and its most highly paid executive officers other than the Chief Executive Officer whose compensation exceeded $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
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(1) Primarily represents automobile expenses or allowances paid by the Company.
(2) Shawn Sedaghat was elected Chairman of the Board and Chief Executive Officer effective February 28, 1995. He also retained the tile of President.
(3) Mr. Wieneke joined the Company in August 1995.
OPTION GRANTS, EXERCISES AND YEAR END VALUES
The following stock options were granted by the Company to the Named Executive Officers during the fiscal year ended December 31, 1996.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1996
- -------------------- (1) The dollar amounts under these columns are the result of calculations at the 5% and 10% annual rates of stock appreciation prescribed by the Securities and Exchange Commission and are not intended to forecast possible future appreciation, if any, of the Company's stock price. No gain to the optionees is possible without an increase in the price of the Company's stock, which will benefit all shareholders commensurately.
(2) For a description of the terms of such options, see "Stock Option Plan".
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
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(1) For a description of the terms of such options, see "Stock Option Plan."
(2) Based on a price per share of $16.50, which was the price of a share of Common Stock as quoted on the Nasdaq Stock Market at the close of business on December 31, 1996.
STOCK OPTION PLAN
A total of 1,000,000 shares of the Company's Common Stock has been reserved for issuance under the Company's 1993 Incentive Stock Option Plan and Nonstatutory Stock Option Plan, as amended (the "Option Plan"), which expires by its own terms in 2003. A total of 807,000 options were outstanding at December 31, 1996, 775,000 of which had been granted to executive officers and directors of the Company. The total options outstanding at December 31, 1996 are exercisable at the following prices:
The Option Plan provides for the grant of "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and nonqualified stock options to employees, officers, directors and consultants of the Company. Incentive stock options may be granted only to employees. The Option Plan is administered by a committee appointed by the Board, which determines the terms of options granted, including the exercise price, the number of shares subject to the option, and the option's exercisability.
The exercise price of all options granted under the Option Plan must be at least equal to the fair market value of such shares on the date of grant. The maximum term of options granted under the Option Plan is ten years. With respect to any participant who owns stock representing more than 10% of the voting rights of the Company's outstanding capital stock, the exercise price of any option must be at least equal to 110% of the fair market value on the date of grant.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of its directors for monetary damages arising from a breach of their fiduciary duty as directors, except to the extent otherwise required by Delaware law. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or recession.
The Company's Bylaws provide that the Company shall indemnify its directors and officers to the fullest extent permitted by Delaware law, including circumstances in which indemnification is otherwise discretionary under Delaware law. The Company has also entered into indemnification agreements with its officers and directors containing provisions which are in some respects broader than the specific indemnification provisions contained in Delaware General Corporation Law. The agreements may require the Company, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors' and officers' insurance if available on reasonable terms.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of March 14, 1997 by (i) each person known by the Company to own beneficially 5% or more of the Common Stock, (ii) each current director of the Company, (iii) each of the Named Executive Officers and (iv) all current directors and executive officers as a group.
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* Less than one percent.
(1) Each of such persons may be reached through the Company at 2501 West Rosecrans Boulevard, Los Angeles, California 90059 unless otherwise stated
(2) The persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by such person, subject to applicable community property laws.
(3) Includes 545,000 shares issuable pursuant to stock options exercisable within 60 days of March 14, 1997.
(4) Includes 27,750 shares issuable pursuant to stock options exercisable within 60 days of March 14, 1997.
(5) Represents shares issuable pursuant to stock options exercisable within 60 days of March 14, 1997.
(6) Includes 21,750 shares issuable pursuant to stock options exercisable within 60 days of March 14, 1997
(7) Includes 30,000 shares issuable pursuant to stock options exercisable within 60 days of March 14, 1997.
(8) Includes 734,375 shares issuable pursuant to stock options exercisable within 60 days of March 14, 1997.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS
Pacific Atlantic Brokerage, Inc. ("Pacific Atlantic"), a corporation majority owned by Shawn Sedaghat, provides freight forwarding services to the Company. The cost of these services provided by Pacific Atlantic to the Company and charged to operations amounted to $1,243,000 in 1996. The Company's Audit Committee periodically reviews the freight forwarding services and terms under which those services are provided to the Company by Pacific Atlantic. To the extent that such freight forwarding services are not competitive in terms of price and otherwise with those that could be obtained from independent sources, the Committee would consider modifying the relationship accordingly or associating with another freight forwarding company. As of December 31, 1996, the Company owed $90,000 to Pacific Atlantic. The Company believes that the terms of the transactions referenced in this section were on terms as favorable to the Company as would have been received in transactions negotiated at arms-length.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits.
(1) Financial Statements filed as part of this Report are set forth in the "Index to Financial Statements" on page of this Report.
(2) The Financial Statement Schedules as set forth in the "Index to Financial Statements" on page of this Report are filed as part of this Report.
(3) The following Exhibits are filed as part of this Report.
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* Incorporated by reference to, and all such Exhibits have the corresponding Exhibit number filed as part of the Registrant's Form 10-K for the year ended December 31, 1994, filed with the SEC on March 29, 1995.
** Incorporated by reference to, and all such Exhibits have the corresponding Exhibit number filed as part of the Registrant's Registration Statement on Form S-1 (File No. 33-68706) and Amendments No. 1 and 2 filed with the SEC on September 13, 1993, October 19, 1993 and October 21, 1993, respectively.
*** Incorporated by reference to, and all such Exhibits have the corresponding Exhibit number filed as part of the Registrant's Registration Statement on Form S-4 (File No. 33-93248) and Amendments No. 1, 2, 3 and 4 filed with the SEC on June 8, 1995, January 18, 1996, March 29, 1996, May 17, 1996 and June 6, 1996, respectively.
(b) Reports on Form 8-K:
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SEDA SPECIALTY PACKAGING CORP.
By /s/ Shawn Sedaghat --------------------------------------- Shawn Sedaghat Chairman of the Board, President and Chief Executive Officer
Date: March 28, 1997
Power of Attorney
Each person whose signature below hereby authorizes and appoints Shawn Sedaghat and Ronald W. Johnson, each with full power of substitution and full power to act as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all amendments to this Annual Report on Form 10-K, including any and all post-effective amendments hereto, with exhibits thereto and other documents in connection therewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SEDA SPECIALTY PACKAGING CORP.
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of SEDA Specialty Packaging Corp.
In our opinion, the consolidated financial statements listed in the accompanying index on page present fairly, in all material respects, the financial position of SEDA Specialty Packaging Corp. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP Costa Mesa, California February 19, 1997
SEDA SPECIALTY PACKAGING CORP. & Subsidiaries CONSOLIDATED BALANCE SHEET
See accompanying notes to consolidated financial statements
SEDA SPECIALTY PACKAGING CORP. & Subsidiaries CONSOLIDATED STATEMENT OF INCOME
See accompanying notes to consolidated financial statements
SEDA SPECIALTY PACKAGING CORP. & Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements
SEDA SPECIALTY PACKAGING CORP. & Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS
See accompanying notes to consolidated financial statements
SEDA SPECIALTY PACKAGING CORP. & Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
SEDA Specialty Packaging Corp. ("SEDA") manufactures plastic closures, containers and custom packaging products using injection molding, extrusion and stretch-blow molding processes; decorates many of those products using offset printing, hot stamping and labeling processes; and sells its products at wholesale prices to customers primarily in the personal care, pharmaceutical, food and beverage, and household and industrial chemical industries. On June 22, 1995, SEDA acquired a majority interest in American Safety Closure Corp. ("ASC"), and on July 15, 1996, SEDA acquired the remaining outstanding common stock of ASC (Note 3).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the accounts of SEDA and its wholly-owned subsidiaries (Note 3). The consolidated entity is referred to as "the Company" in the accompanying consolidated financial statements. All material intercompany transactions and balances are eliminated in consolidation. The consolidated financial statements include amounts that are based on management's best estimates and judgments. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made for consistent presentation.
REVENUE RECOGNITION - Revenue is recognized as product is shipped to customers.
CASH AND CASH EQUIVALENTS - For purposes of the statement of cash flows, the Company considers all short-term, highly liquid investments with original maturities of three months or less to be cash equivalents. The Company's investment portfolio at December 31, 1996 consisted of short-term investment funds which are included in the Company's cash and cash equivalents. The cost which equaled fair market value of such securities at December 31, 1996 and 1995 was $2,237,000 and $3,156,000, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount of cash, cash equivalents and accounts receivable approximate fair value because of the short maturity of these investments. The carrying amount of the Company's long-term obligations approximate fair value based upon the current rates offered to the Company for obligations of the same remaining maturities.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of trade receivables. This risk is limited by the Company's large number of customers and their dispersion, both geographically and across many industry lines. Sales to one customer amounted to $6,407,000 (11% of net sales) in the year ended December 31, 1996 and sales to a different customer amounted to $3,396,000 (11% of net sales) in the year ended December 31, 1994. There were no individual customers that represented over 10% of net sales for the year ended December 31, 1995. One customer represented 15% and 16% of trade accounts receivable at December 31, 1996 and 1995, respectively.
INVENTORIES - Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost. Expenditures for major renewals and betterments that extend the useful lives of property, plant and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are relieved, and any resulting gain or loss is recognized. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. The useful life for buildings is 40 years and the useful lives range from 7 to 15 years for machinery and equipment, 3 to 7 years for molds and transportation equipment and 5 to 7 years for furniture and office equipment. Leasehold improvements are amortized over the lesser of the useful life of the related asset or the remaining lease term.
GOODWILL - The excess of the purchase price over the fair market value of identifiable net assets of ASC acquired in 1996 is being amortized using the straight-line method over 10 years (Note 3). Periodically, the Company evaluates the recoverability of intangibles based on estimated undiscounted future cash flows from operating activities compared with the carrying value of the intangibles.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE - Earnings per common and common equivalent share is calculated using the weighted average number of common shares outstanding and equivalent common shares derived from the inclusion of dilutive stock options and warrants.
ACCOUNTING FOR STOCK-BASED COMPENSATION - Pursuant to the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. Accordingly, no compensation cost for stock options has been recorded because the exercise price of all options granted by the Company was equal to or greater than the fair market value of the underlying shares on the date of grant (Note 10).
NOTE 3 - ACQUISITION OF AMERICAN SAFETY CLOSURE CORP.
Effective June 22, 1995, SEDA acquired a majority interest in American Safety Closure Corp. ("ASC") pursuant to a Merger Agreement dated January 5, 1995, as amended. During 1995, the Company acquired approximately 86% of ASC's outstanding common stock in exchange for $3,551,000 in cash and 82,500 shares of SEDA common stock (valued at $7.875 per share, the fair value at July 5, 1995) which had an aggregate value of $650,000. Effective July 15, 1996, SEDA acquired the remaining outstanding common stock of ASC as contemplated in the Merger Agreement, as amended. The transaction has been reflected in the accompanying consolidated financial statements using the purchase method of accounting. The cost of the acquisition of the minority interest in 1996 was $459,000 in cash and 163,638 shares of SEDA common stock with an aggregate value of $2,740,000 (valued at $16.75 per share, the fair value at July 15, 1996), bringing the total cost of the acquisition of ASC to $4,010,000 in cash and $3,390,000 for 246,138 shares of SEDA common stock. The cost of the acquisition has been allocated to the assets acquired and the liabilities assumed based upon their estimated fair values. ASC's results of operations have been included in the Company's consolidated results since June 22, 1995. A summary of the cumulative purchase price allocation as reflected in the accompanying financial statements is as follows:
The following table presents the unaudited pro forma results of operations as if SEDA had acquired ASC at the beginning of each respective year presented. The pro forma information for the year ended December 31, 1995, combines the Company's consolidated results of operations for that period with the unaudited results of ASC for the period January 1, 1995 to June 22, 1995, since ASC results for the period June 22, 1995 to December 31, 1995, are already reflected in the Company's consolidated results. The pro forma information gives effect to certain pro forma adjustments, such as additional depreciation and amortization. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition actually been made as of those dates or of results which may occur in the future.
NOTE 4 - Inventories
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property under capital lease, primarily machinery and equipment included above, aggregated $2,877,000 at December 31, 1996 and $2,499,000 at December 31, 1995. Included in accumulated depreciation are amounts related to property under capital lease of $929,000 and $706,000 at December 31, 1996 and 1995, respectively. Depreciation expense charged to operations was $4,912,000, $3,746,000 and $2,281,000 in 1996, 1995 and 1994, respectively, which included $223,000, $171,000 and $152,000, respectively, pertaining to property under capital lease.
NOTE 6 - OTHER ASSETS
NOTE 7 - INCOME TAXES
The Company's provision for income taxes for the three years ended December 31, 1996 is comprised of the following:
Deferred tax liabilities (assets) are comprised of the following at December 31:
The Company records the benefit of Revitalization Zone tax credits in the year earned; such credits begin expiring in the years 2009 and 2010.
The provision for income taxes differs from the amount of income tax determined by applying the applicable US statutory income tax rate to income before income taxes as a result of the following differences:
NOTE 8 - DEBT
BANK CREDIT AGREEMENT - On June 27, 1996, the Company modified its credit agreement with a bank which provides financing of up to $21.7 million, consisting of a $14.7 million term loan commitment for equipment financing ("equipment term loans - bank") and a $7 million revolving line of credit. The agreement expires June 30, 1998. All amounts borrowed under the revolving line of credit are due and payable upon expiration. As of December 31, 1996 $950,000 was outstanding under the revolving line of credit. Term loans are to be repaid over periods of up to five years. The term loans and line of credit are collateralized by a general first priority lien on all the assets of the Company except certain property, plant and equipment where the bank's security interest is subordinated to the holders of the Company's building and equipment notes payable. The term loan amount available to the Company at December 31, 1996, for additional borrowing was $6 million.
Interest on the revolving line of credit is payable monthly at an annual rate equal to the bank's prime rate or, at the Company's option, 1.2% above the London Interbank Offered Rate (LIBOR). At December 31, 1996, the interest rate in effect was 8.5%. Interest on the term loans is at varying rates, at the Company's option, from 1.5% to 1.75% above the bank's certificate of deposit rate or LIBOR for an agreed-upon time period.
The Company must comply with covenants set forth in the agreement which require, among other restrictions, that the Company maintain minimum levels of tangible net worth (which limits the payment of dividends), working capital and net income and certain minimum financial ratios and that the Company restrict the incurrence of additional debt without the bank's consent. The Company was in compliance with such covenants at December 31, 1996.
LONG-TERM DEBT - Long-term debt is comprised of the following (average rate refers to the weighted average interest rate in effect for each debt category at December 31, 1996):
The mortgages, notes and other long-term debt are payable to banks, other financial companies and government agencies in monthly installments through October 2003, currently approximating $347,000 plus a payment in December 1997 of $3.1 million on one of the building mortgages. The building mortgages are secured by land and buildings with a net book value at December 31, 1996 of $9,132,000; the equipment term loans - bank are secured as discussed above; and the equipment notes - other are secured by equipment with a net book value of $1,879,000 at December 31, 1996. Aggregate maturities of long-term debt over the next five years are as follows:
NOTE 9 - COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases certain machinery and equipment under capital and operating leases expiring in various years through 1999. The Company incurred $115,000, $96,000, and $222,000 in operating lease expense during the years ended December 31, 1996, 1995 and 1994, respectively. Generally, the Company's capital leases include purchase options at the end of the lease term. Minimum lease commitments under non-cancelable leases at December 31, 1996, are as follows:
NOTE 10 - STOCKHOLDERS' EQUITY
UNDERWRITERS' WARRANTS - The Company issued warrants to the underwriters of its initial public offering in 1993, exercisable until October 1997, to purchase 150,000 shares of common stock at an exercise price equal to the greater of $16.80 or the closing price of SEDA's common stock on the date of exercise, less $10.
STOCK OPTIONS - In September 1993, the Company adopted its 1993 Incentive and Nonstatutory Stock Option Plan ("the Plan") and subsequently amended it in July 1994. The Plan will terminate after 10 years. A total of 1,000,000 shares of the Company's Common Stock have been reserved for issuance under the Plan. The Plan provides for the grant of incentive stock options to employees of the Company and non-qualified stock options to employees, officers and directors of the Company. The plan is administered by a committee appointed by the Board, which determines the terms of the options granted, including the exercise price, the number of shares subject to option, and the option's vesting period. The exercise price of all options granted under the Plan must be at least equal to the fair market value of such shares on the date of grant. The maximum term of options granted under the Plan is 10 years. With respect to any participant who owns stock representing more than 10% of the voting rights of the Company's outstanding capital stock, the exercise price of any option must be at least equal to 110% of the fair market value on the date of grant.
The Company has adopted the disclosure only provisions of SFAS 123 (Note 2). Accordingly, no compensation cost has been recognized for the Plan. Had compensation cost for the Plan been determined based on the fair value at the grant date for awards in 1996 and 1995 consistent with the provisions of SFAS 123, the Company's net income and earnings per common and common equivalent share would have been reduced to the following pro forma amounts:
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 1996 and 1995: dividend yield of 0%, expected volatility of 47.5%, risk free interest rate of 7%, and an expected life of 5 years.
Information regarding activity in the Plan for 1996, 1995 and 1994 is as follows. The term average price refers to the weighted-average exercise price of options outstanding, granted and exercised:
The following table summarizes additional information about options outstanding at December 31, 1996. The term Average Price refers to the weighted-average exercise price of the applicable options and the term Contract Life refers to the weighted-average remaining contractual life of the outstanding options,
NOTE 11 - RELATED PARTY TRANSACTIONS
The Company, 2501 West Rosecrans, Inc., Tube Tech Corporation of Delaware and Pacific Atlantic Brokerage, Inc. are related parties because a common stockholder holds or held a substantial ownership interest in each of the companies, and Shapour Sedaghat, former Chairman of the Company, is a related party because of his ownership interest in the Company.
2501 West Rosecrans, Inc. was 100% owned by one of the Company's principal stockholders. On April 20, 1994, the Company acquired from 2501 West Rosecrans, Inc. the building and real estate comprising its manufacturing facilities and corporate headquarters, at a cost of approximately $6.3 million, which approximated fair market value, in exchange for a promissory note in the principal amount of $1.6 million, bearing interest at 6% per annum, and the Company's assumption of the existing five-year note due to a financial institution in the principal amount of approximately $4.7 million, bearing interest at 8.5% per annum. At the closing of the transaction, the Company paid $1 million to the financial institution to reduce the amount outstanding on the five-year note. Prior to this transaction, the Company leased the facility from 2501 West Rosecrans, Inc. and paid rent of $219,000 in 1994.
Tube Tech Corporation of Delaware (Tube Tech) is 50% owned by the Company. Tube Tech has been an exclusive sales representative of the Company since 1992 for selected plastic tube customers. Total commissions paid by the Company to Tube Tech for the years ended December 31, 1996, 1995 and 1994 were $326,000, $294,000 and $496,000, respectively. The Company's investment in Tube Tech is accounted for using the equity method of accounting for investments.
Pacific Atlantic Brokerage, a corporation majority owned by one of the Company's principal stockholders, provides freight forwarding services to the Company. The cost of these services provided by Pacific Atlantic Brokerage to the Company and charged to operations amounted to $1,243,000 in 1996, $911,000 in 1995 and $636,000 in 1994.
The Company paid $120,000 in 1996 and $70,000 in 1995 to Shapour Sedaghat, former Chairman of the Company, for consulting services after his retirement from the Company. As of December 31, 1996 and 1995, in the aggregate the Company owed $189,000 and $136,000, respectively, to these related parties.
SEDA SPECIALTY PACKAGING CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
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(1) Represents write-offs of bad debts