ITEM 1. BUSINESS
GENERAL
Carlisle Plastics, Inc. (the "Company") is a global leader in the production of consumer products made from plastics. The Company's products include trash bags, garment hangers and sheeting used for home improvement, construction and agriculture. The Company's trash bag products include private label and institutional lines, as well as the Company's own national consumer brands. Other Company products include plastic bottles, containers and packaging.
The Company's film products (including trash bag, sheeting and industrial film products) in 1993, 1992 and 1991 accounted for 65.4%, 67.7% and 69.6%, respectively, of the Company's consolidated net sales. The Company's molded products (including hangers, bottles and containers) in 1993, 1992 and 1991 accounted for 34.6%, 32.3% and 30.4%, respectively, of the Company's consolidated net sales.
Poly-Tech, which is an additional registrant hereunder, is a wholly-owned subsidiary of the Company.
HISTORY
The Company was incorporated in Delaware in 1985 and adopted its present name in February, 1989. In 1989, the Company acquired 79% ownership in Poly-Tech. In 1990, the Company, through Poly-Tech, purchased 100% of the outstanding capital stock of American Western Corporation ("American Western").
In 1991, the Company completed an initial public offering (the "Class A Stock Offering"). In conjunction with the Class A Stock Offering, the Company converted all shares of the Company's outstanding common stock into shares of Class B Common Stock; acquired the 21% minority interests in its directly owned subsidiaries in exchange for shares of Class A Common Stock; and changed its tax status from a "S" corporation to a "C" corporation.
In July 1991, the Company purchased a two-thirds interest in Rhino-X Industries, Inc. ("Rhino-X"). Under a put and call arrangement signed in conjunction with the acquisition of Rhino-X, the Company purchased the remaining shares on January 1, 1994.
PRODUCTS
The Company supplies plastic trash bags to three major markets. For mass merchandise and other retail stores, the Company provides Ruffies(R), a national brand consumer trash bag. For grocery chains nationwide, the Company provides private label consumer trash bags and food contact products, such as sandwich bags and wrap, recloseable bags and freezer bags. For institutional customers, such as food service distributors, janitorial supply houses, restaurants, hotels and hospitals, the Company provides heavy-duty trash liners.
The Company's leading plastic sheeting product, Film-Gard(R), is sold to consumers and professional contractors through do-it-yourself outlets, home improvement centers and hardware stores. A wide range of Film-Gard(R) products are sold for various uses, including painting, renovation/construction, landscaping and agriculture. The Company's industrial packaging film is sold directly to manufacturers for use as shrink wrap and for other packaging requirements.
The Company sells molded plastic garment hangers to four markets. The first is garment manufacturers who place their clothes on the Company's hangers before shipping to retail outlets. Another is the stores themselves, who buy standard Company hanger lines for retail display. For national retailers, the Company creates and sells customized hanger designs. The Company also supplies consumer plastic hangers directly to mass merchandise stores.
The Company manufactures a line of plastic bottles marketed to the dairy, water, juice, food and industrial markets on the eastern coast of the United States.
The Company operates in a competitive marketplace where success is dependent upon price, service and quality. The Company has positioned itself as a major supplier of innovative plastic products to large, rapidly growing national customers at the highest levels of value, service and quality.
In the consumer trash bag market, the Company competes primarily with two highly advertised national brands, as well as other private and controlled label products. The Company has historically concentrated on mass merchandisers as the primary market for its branded trash bags, while the other major national brands are marketed primarily through food retailers.
RAW MATERIALS
The primary raw materials used by the Company in the manufacture of its products are various plastic resins, primarily polyethylene. 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. Shortages of plastic resins have been infrequent.
The Company uses in excess of 400 million pounds of plastic resins annually. At this level, the Company is one of the largest purchasers of plastic resin in the United States. Management believes that large volume purchases of plastic resin result in lower unit raw material costs.
Natural gas and crude oil markets experience substantial cyclical price fluctuations as well as other market disturbances, including shortages of supply, the effect of 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. Plastic resin prices may fluctuate as a result of these factors.
The Company 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 detrimental impact on the profitability of the Company due to decreases in its profit margins.
MAJOR CUSTOMERS
The Company has no customer that accounts for over 10% of its consolidated net sales.
EMPLOYEES
As of December 31, 1993, the Company employed approximately 2,800 full-time employees, of whom approximately 2,400 are engaged in manufacturing and approximately 400 are engaged in administration and sales.
CYCLICALITY AND SEASONALITY OF PORTIONS OF BUSINESS
The trash bag and plastic bottle businesses, which account for approximately 50% of 1993 consolidated net sales, have been stable during the recent economic cycles. The hanger, construction film and industrial film businesses, which are sensitive to economic conditions, gained market share in the difficult market conditions of 1992 and 1993.
Historically, the Company's results have been affected, in part, by the nature of its customers' purchasing trends for various seasonal and promotional programs. The first quarter is typically the least profitable quarter, and the third quarter is the strongest due to demands for hangers during the holiday season, lawn and leaf bags in the fall and strong promotional activity by major mass merchandisers.
ENVIRONMENTAL AND SAFETY MATTERS
The Company is currently not subject to any environmental proceedings. During 1993, the Company did not make any material capital expenditures for environmental control facilities, nor does it anticipate any in the near future.
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 preferences 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 historically the Company has not had to make significant capital expenditures for environmental compliance, the Company cannot predict with any certainty its future capital expenditures for environmental compliance because of continually changing compliance standards and technology. The Company does not currently have any insurance coverage for environmental liabilities and does not anticipate obtaining such coverage in the future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial statements of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
The Company estimates that it had 7,000 beneficial owners of the Class A Common Stock at December 31, 1993. The Company's Class B Common Stock was held by 8 record holders at December 31, 1993. Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to twenty votes. As of December 31, 1993, officers and directors of the Company controlled 74.4% of the combined voting power of the two classes of stock.
The indentures for the Company's senior notes generally prohibit the Company from paying dividends on its common stock (other than dividends on non-convertible capital stock or certain other securities). See Notes to Consolidated Financial Statements included herein.
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(a) In April 1989, the Company acquired 79% of the stock of Poly-Tech. In March 1990, Poly-Tech acquired 100% of the stock of American Western. In May 1991, the Company acquired the remaining 21% of Poly-Tech. In July 1991, the Company acquired 66.6% of the stock of Rhino-X. Results are included from the date of each respective purchase.
(b) In 1992, pretax income was reduced by $7.7 million for a new product introduction and $4.3 million for a restructuring charge. In 1991, pretax income was reduced by $3.4 million for a restructuring charge. In 1990, pretax income was net of certain non-recurring costs aggregating approximately $4.1 million, including $1.3 million settlement of a loan guarantee, $0.7 million estimated loss on property, and $2.1 million of costs associated with termination of the phantom stock plan, expenses incurred in connection with the American Western acquisition and transition of a manufacturing plant to Mexico. Net income was reduced $234, $89 and $3,576 in 1993, 1992 and 1991, respectively, for extraordinary items related to the early extinguishment of debt. Net income in 1993 was also increased by $1,586 for the cumulative effect of an accounting principle change relating to income taxes.
(c) In 1991, the provision for income taxes includes a $3.0 million non-recurring deferred tax charge to recognize tax effects of timing differences on conversion of the Company from a "S" corporation to a "C" corporation.
(d) Pro forma net income includes a provision for income taxes as if the entire Company had been a "C" corporation for the entire year.
(e) Share amounts in 1991, 1990 and 1989 have been retroactively adjusted to reflect a 125.9-for-1 stock split in May 1991.
(f) Includes junior subordinated notes due to stockholders and affiliates in the aggregate amount of $7.0 million in 1991, 1990 and 1989.
1993 as Compared with 1992
Net sales were $360.9 million in 1993 compared to $359.9 million in 1992. Unit volume for 1993 increased 4 percent from 1992.
Gross profit increased 2.6 percent to $98.9 million in 1993 from $96.4 million in 1992. Gross margin as a percent of sales increased to 27.4 percent in 1993 from 26.8 percent in 1992. The increase was largely due to improved margins for the film products group due to lower costs.
Operating expenses decreased 18.1 percent in 1993 to $67.4 million from $82.3 million in 1992. Operating expenses as a percent of sales decreased to 18.7 percent from 22.9 percent in 1992. Operating expenses in 1992 included $7.7 million associated with a new product introduction and $4.3 million of restructuring charges. These restructuring charges were utilized for realignment of production facilities, management reorganization, product re-engineering and reduction of product offerings.
Interest expense, including amortization of deferred financing costs, increased to $22.5 million in 1993 from $22.0 million in 1992 due to the issuance of $90.0 million 10.25% Notes in June of 1992. Interest expense for 1993 was reduced $0.8 million as the result of interest rate swap agreements.
The Company recorded a tax provision of $3.5 million in 1993, reflecting an effective tax rate of 37.2 percent, compared to a benefit of ($0.7) million in 1992 as a result of losses incurred.
Net income increased to $7.2 million in 1993 from a net loss of ($6.3) million in 1992. Net income in 1993 and 1992 included an after-tax extraordinary charge of $0.2 and $0.1 million, respectively, relating to the early extinguishment of debt. Net income in 1993 also included a $1.6 million net benefit from the adoption of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
1992 Compared with 1991
Net sales increased 4.7 percent in 1992 to $359.9 million from $343.6 million in 1991. Unit volume increased 18 percent from 1991, partially offset by reductions in selling prices in the film products group.
Gross profit decreased 7.3 percent in 1992 to $96.4 million from $104.0 million in 1991. Gross margin as a percent of sales decreased to 26.8 percent in 1992 from 30.3 percent in 1991. The decrease in 1992 resulted from heavy promotional activity by competitors in certain segments of the plastic trash bag market.
Operating expenses increased 19.2 percent in 1992 to $82.3 million from $69.1 million in 1991. Operating expenses as a percent of net sales increased to 22.9 percent in 1992 from 20.1 percent in 1991. Operating expenses for 1992 included $7.7 million associated with a new product introduction and $4.3 million charges as a result of a restructuring plan.
Interest expense, including amortization of deferred financing costs, was $22.0 million in 1992 compared to $22.6 million in 1991. The decrease resulted from repayment of long-term debt from the proceeds of the Class A Stock Offering in May 1991 and lower interest rates in 1992. The decrease was partially offset by the issuance of the 10.25% Notes in June of 1992.
Interest and other income was $0.5 million in 1992 compared to $1.5 million in 1991. The 1991 amount included interest income from investment of the proceeds from the Class A Stock Offering until they were used to repay Company indebtedness.
The Company recorded a benefit of ($0.7) million in 1992 for income taxes, compared to a provision of $8.3 million in 1991. The 1991 provision included $3.0 million recorded for a non-recurring deferred tax charge to recognize the tax effects of timing differences on conversion of the Company from a "S" corporation to a "C" corporation.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations increased 47.7 percent to $19.5 million in 1993 from $13.2 million in 1992 primarily due to the increase in net income.
The Company's working capital of $54.3 million at December 31, 1993 decreased $7.6 million from December 31, 1992. This was primarily due to the reclassification of the $10.0 million 1994 Notes and a $2.7 million stock purchase obligation from long-term to current.
The Company's $10.0 million of 1994 Notes become due in March 1994. In addition, the Company is actively pursuing refinancing alternatives for $68.5 million of the 13.75% Notes, which become callable at the option of the Company at 103.93% of the outstanding principal amount in April 1994.
In September 1993, the Company received $2.0 million from the termination of an interest rate swap agreement, which it had entered into in June 1993. This gain has been deferred and is being amortized over the original term of the swap agreement.
In September 1993, the Company entered into a new interest rate swap agreement on a notional principal amount of $90.0 million, terminating in June 1997, matching the principal and due date of the Company's 10.25% Notes. Under the agreement, the Company receives interest at a fixed rate and pays interest at a floating rate, which is established in arrears at six month intervals. In December 1993, the Company received $0.3 million from the first settlement period of the swap agreement.
The net interest differential and amortization of the deferred gain of $0.8 million was recorded as a reduction of interest expense in 1993. The agreement is collateralized by the Company's accounts receivable.
The Company is subject to interest rate risk during the term of the swap agreement. A sufficient increase in market interest rates during the term of the agreement could result in the Company having a net payment obligation under the agreement. Further, the Company is subject to credit risk exposure from nonperformance by the counterparty during periods when such party has a net payment obligation to the Company.
The Company expects its cash on hand and funds from operations will be sufficient to cover future operating cash requirements. Approximately $179.7 million of the Company's outstanding indebtedness matures in 1997. Management believes that the Company will have the funds necessary to meet all of its financing requirements and obligations, based upon the Company's ability to generate funds from operations and obtain additional credit facilities.
The Company plans to use cash generated from operations and other sources to retire long-term indebtedness. The Company expects to fund its 1994 capital expenditures from cash from operations approximately equal to its 1994 depreciation expense.
TAX LAW CHANGE
The Omnibus Budget Reconciliation Act of 1993 (the "Act") was signed into law on August 10, 1993. Under SFAS No. 109, the effect of changes in tax law or rates is reported as a component of income tax expense from continuing operations in the period of enactment. The Act has not significantly changed the income tax consequences for the Company.
ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114, "Accounting for Impairment of a Loan," and SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company has evaluated the effects of these standards and believes that they will not affect the Company's financial condition or operating results.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 beginning on page 11.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the Company's 1994 Proxy Statement under the caption "Election of Directors" is incorporated herein by reference. Each of the executive officers of the Company is also a director of the Company; thus, the required information regarding executive officers of the Company is included in the 1994 Proxy Statement. Information in response to this Item with respect to Poly-Tech is set forth in Appendix A under the caption "Directors and Executive Officers," which is included in this Form 10-K starting on page 43, following the Consolidated Financial Statements and Consolidated Financial Statement Schedules.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the 1994 Proxy Statement under the caption "Executive Compensation" (except for the information under the subheadings "Compensation Committee Report on Executive Compensation" and "Stock Performance") is incorporated herein by reference and also as it relates to the directors and officers with respect to Poly-Tech (as described in Appendix A under the caption "Executive Compensation").
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the 1994 Proxy Statement under the caption "Security Ownership of Principal Shareholders and Management" is incorporated herein by reference. Information in response to this Item with respect to Poly-Tech is set forth in Appendix A under the caption "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the 1994 Proxy Statement under the caption "Certain Transactions" is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report: 1. Consolidated Financial Statements CARLISLE PLASTICS, INC. AND SUBSIDIARIES Independent Auditors' Report Consolidated Balance Sheets at December 31, 1993 and 1992 Consolidated Statements of Operations for the years ended December 31, 1993, 1992 and 1991 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1992 and 1991 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules of Carlisle Plastics, Inc. required to be filed by Item 8 and Paragraph (d) of this Item Schedule III -- Condensed Financial Information of Registrant Schedule V -- Property, Plant and Equipment Schedule VI -- Accumulated Depreciation and Amortization of Property, Plant and Equipment Schedule VIII -- Valuation and Qualifying Accounts Schedule X -- Supplementary Income Statement Information Such schedules and reports are at pages 36 through 42 of this report.
All other schedules for Carlisle Plastics, Inc. and Subsidiaries and all schedules for Poly-Tech, Inc. have been omitted because they are inapplicable, not required, or the information is included elsewhere in the consolidated financial statements or notes thereto.
3. The Exhibits are listed in the Index of Exhibits required by Item 601 of Regulation S-K at Item (c) below.
(b) No reports on Form 8-K were filed during the last quarter of the period covered by this report.
(c) The Index to Exhibits and required Exhibits are included following the Consolidated Financial Statement Schedules beginning at page 44 of this report.
(d) The Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules are included following the signatures beginning at page 14 of this report.
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.
CARLISLE PLASTICS, INC.
Dated: February 18, 1994
By /s/ WILLIAM H. BINNIE ----------------------------------- William H. Binnie Chairman of The Board and Chief Executive Officer
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.
POLY-TECH, INC.
Dated: February 18, 1994
By /s/WILLIAM H. BINNIE ------------------------------------ William H. Binnie Chairman of The Board
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Carlisle Plastics, Inc. Boston, Massachusetts
We have audited the accompanying consolidated balance sheets of Carlisle Plastics, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the consolidated financial statement schedules listed at Item 14(a)2. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules 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, such consolidated financial statements present fairly, in all material respects, the financial position of Carlisle Plastics, Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," during the year ended December 31, 1993.
DELOITTE & TOUCHE Boston, Massachusetts February 9, 1994
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
CARLISLE PLASTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BUSINESS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The principal business of Carlisle Plastics, Inc. (the "Company") is the manufacture, sale and distribution of plastic products.
In May 1991, the Company completed an initial public offering (the "Class A Stock Offering") of 6,750,000 shares of Class A Common Stock (a newly authorized series). In conjunction with the Class A Stock Offering, the Company converted all shares of the Company's outstanding common stock into 10,810,846 shares of Class B Common Stock; the Company acquired the minority interests in its directly owned subsidiaries in exchange for shares of Class A Common Stock; and the Company changed its tax status from a "S" corporation to a "C" corporation. The Company used proceeds from the Class A Stock Offering to retire indebtedness.
BASIS OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of Poly-Tech, Inc. ("Poly-Tech"), American Western Corporation ("American Western"), Rhino-X Industries, Inc. ("Rhino-X"), A&E Products (Far East) Ltd. ("Far East") and Plasticos Bajacal, S. A. De C. V. ("Plasticos"). Significant intercompany transactions have been eliminated in consolidation.
Certain amounts in the prior years' financial statements have been reclassified to conform to the current year's presentation.
CASH EQUIVALENTS
Cash equivalents include highly liquid investments with a maturity of three months or less when purchased. The recorded amount of cash equivalents approximates fair market value.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is principally determined using the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed on a straight-line basis over the estimated lives of the assets ranging from two to fifty years. Amortization of property acquired under capitalized leases and leasehold improvements is computed on a straight-line basis over the shorter of the estimated useful lives of the assets or the remaining term of the lease.
GOODWILL
Goodwill arising from excess purchase cost over net assets acquired is amortized on the straight-line method principally over forty years. Accumulated amortization aggregated $10,352 and $8,221 for the years ended December 31, 1993 and 1992, respectively.
DEFERRED FINANCING COSTS
Included in other assets at December 31, 1993 and 1992 are $9,570 and $9,415, respectively, of deferred financing costs which are being amortized using the interest method over the term of the related debt. Accumulated amortization aggregated $5,355 and $3,990 at December 31, 1993 and 1992, respectively.
CARLISLE PLASTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REVENUE RECOGNITION
Revenues are generally recognized in the ordinary course when products are shipped and customers are invoiced.
In 1992, the Company entered into a bartering agreement, whereby it exchanged inventory for advertising credits. The credits were valued at the $1,600 cost basis of the inventory exchanged. The difference between fair value of the advertising credits and the cost basis of the inventory is recognized as income when the credits are used. During 1993, credits of $981 were used; as a result, income of $760 and advertising expense of $1,741 were recognized. During 1992, no credits were used and no income was recognized.
INCOME TAXES
The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," effective January 1, 1993, and recorded the cumulative effect of this change, which increased net income by $1,586. This statement requires recognition of deferred assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and the tax basis of assets and liabilities using enacted tax rates. Previously, the Company accounted for income taxes under the provisions of SFAS No. 96, "Accounting for Income Taxes."
Prior to the Class A Stock Offering, the Company was treated as a "S" corporation, although certain of its subsidiaries were "C" corporations. As a "S" corporation, the Company was generally not liable for federal and certain state income taxes where the "S" corporation status was recognized. Accordingly, such income taxes relating to earnings were the obligation of the Company's stockholders and, therefore, were not recorded in the accompanying consolidated financial statements. In conjunction with the Class A Stock Offering, the Company unified its tax status to a "C" corporation. Pro forma income taxes and net income for 1991 reflect the effect on such amounts as if the Company had been a "C" corporation for the entire period.
INCOME PER COMMON SHARE
Income per common share is computed on the basis of the weighted average number of common shares (retroactively adjusted to reflect a 125.9-for-1 stock split in May 1991) and common equivalent shares, consisting of the dilutive effect of stock options outstanding during each year. Pro forma income reflects the effect on income taxes in 1991 as if the Company had been a "C" corporation for the entire period.
ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114, "Accounting for Impairment of a Loan," and SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company has evaluated the effects of these standards and believes that they will not affect the Company's financial condition or operating results.
Accumulated depreciation and amortization includes $1,745 and $1,689 at December 31, 1993 and 1992, respectively, relating to assets acquired under capital leases.
In April 1989, the Company, in connection with the acquisition of Poly-Tech, issued $100,000 Senior Notes (the "13.75% Notes"). The 13.75% Notes may be redeemed at the option of the Company after April 1, 1994, in whole at any time or in part from time to time, on not less than 30 nor more than 60 days notice to the noteholders, at the following redemption prices (expressed as percentages of principal amount), plus accrued interest (if any) to the date of redemption. Redemption prices are 103.93%, 101.96% and 100.00% if redeemed during the 12-month period commencing April 1, 1994, 1995 and 1996, respectively. The fair value of the $68,525 principal of the 13.75% Notes at December 31, 1993 is estimated to be $72,506, based on the quoted market price for this issuance.
In March 1990, the Company, in connection with the long-term financing of Poly-Tech's acquisition of American Western, issued $60,000 Senior Variable Rate Notes due 1997 (the "1997 Notes") and $10,000 Senior Variable Rate Notes due 1994 (the "1994 Notes"), (together, the "Variable Rate Notes"). The Variable Rate Notes may be redeemed at the option of the Company, in whole at any time or in part from time to time, on not less than 30 nor more than 60 days notice to the noteholders, at par plus accrued interest.
CARLISLE PLASTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Market price is not readily available; however, management believes that the carrying value of the Variable Rate Notes approximates fair value for these obligations.
In June 1992, the Company issued $90,000 Senior Notes (the "10.25% Notes"). The 10.25% Notes may be redeemed at the option of the Company after June 14, 1995, in whole at any time or in part from time to time, on not less than 30 nor more than 60 days notice to the noteholders, at the following redemption prices (expressed as percentages of principal amount), plus accrued interest (if any) to the date of redemption. Redemption prices are 102.56% if redeemed during the 12-month period commencing June 15, 1995 and 100% thereafter. The fair value of the 10.25% Notes is estimated to be $96,039, based on the quoted market price for this issuance.
The Company retired $5,000, $1,800, and $24,675 of its 13.75% Notes in 1993, 1992 and 1991, respectively, and $40,900 of its 1997 Notes in 1991. The Company incurred extraordinary charges of $234, $89 and $3,576 (net of taxes of $138, $52 and $2,056, respectively) related to the early retirement of debt in 1993, 1992 and 1991, respectively.
The indentures relating to the 13.75% Notes, the Variable Rate Notes, and the 10.25% Notes (collectively, the "Notes") have been guaranteed by Poly-Tech and contain certain restrictive covenants affecting the Company and its subsidiaries. Such restrictive covenants limit the incurrence of additional debt by the Company, additional secured debt by the Company and its subsidiaries, sale and leaseback transactions, debt and preferred stock of the Company's subsidiaries, redemptions of capital stock of the Company and its subsidiaries, redemptions of certain subordinated obligations of the Company, sales of assets and subsidiary stock, transactions with affiliates, mergers and amendments to certain intercompany securities. In addition, the covenants generally prohibit dividends or distributions on capital stock of the Company and its subsidiaries, except for dividends or distributions payable in certain equity securities and except for dividends or distributions payable to the Company or a subsidiary and, if a subsidiary has minority stockholders, pro rata to such stockholders. Under certain circumstances the Company's subsidiaries (other than Poly-Tech) may be required to guarantee the Notes. Upon a "change of control" or "fundamental change of control" (as such terms are defined in the indentures) of the Company, each holder of the notes has the right to require the Company to repurchase its notes at 101% of the principal amount plus accrued interest.
Certain property, plant and equipment are utilized as collateral to secure certain indebtedness.
Cash paid for interest during the years ended December 31, 1993, 1992 and 1991 was $21,946, $20,813 and $23,537, respectively.
CARLISLE PLASTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The discount rate used in determining the projected benefit obligation was 7% in 1993 and 8% in 1992 and 1991. The assumed long-term rate of return on plan assets was 8% in 1993, 1992 and 1991. The rate of increase in future compensation levels used in determining the projected benefit obligation was 4.5 to 5.5% in 1993, 1992 and 1991. Plan assets consist of guaranteed insurance contracts, pooled fixed income, pooled equity and pooled real estate investments. Cash contributions to the pension plan were $122, $294 and $208 for the years ended December 31, 1993, 1992 and 1991, respectively.
The Company also maintains a defined contribution plan (the "Plan"). Full time employees of the Company who are not members of collective bargaining units or who are not covered by another qualified retirement plan sponsored by the Company are eligible to participate in the Plan after six months of employment. Under the Plan, a participant may elect to reduce annual compensation by 1% to 16% and to have that amount contributed to the Plan by the Company on a pre-tax basis. The Company matches employee contributions at a rate of 50% of the employee's contribution up to 6% of the employee's salary up to the maximum allowable deferral per the Internal Revenue Code. Employee contributions vest immediately, whereas employer contributions vest over a period of three years. During 1993, 1992 and 1991, the Company's aggregate matching contributions were $372, $405 and $421, respectively.
CARLISLE PLASTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
As discussed in Note 1, the Company adopted SFAS No. 109, "Accounting for Income Taxes," effective January 1, 1993. This Statement supersedes SFAS No. 96, "Accounting for Income Taxes." The cumulative effect of adopting SFAS No. 109 on the Company's financial statements was to increase net income by $1,586 ($.09 per share).
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carryforwards.
The Company provided a valuation allowance of $1,165 against deferred tax assets recorded as of January 1, 1993. The valuation reserve decreased $1,165 for the year ended December 31, 1993. The valuation allowance was reversed because the Company acquired the minority interest of its 67%-owned subsidiary on January 1, 1994 and the realization of tax loss carryforwards became more likely than not. Of the valuation allowance reversed, $675 was allocated to reduce goodwill, which primarily relates to the tax loss carryforwards acquired in a prior year business combination.
The effect of applying SFAS No. 109 was to decrease pretax accounting income by $495 for the year ended December 31, 1993. The impact resulted from a requirement to adjust the assets and liabilities for prior business combinations from net-of-tax to pretax amounts.
As of December 31, 1993, the Company had net operating loss carryforwards from a subsidiary which is not consolidated for the purpose of filing income tax returns. These carryforwards, totalling $9,385, expire in the years 2006 to 2008. The Company also had alternative minimum tax credits totalling $2,553, which have no expiration date.
Cash paid for income taxes during the years ended December 31, 1993, 1992 and 1991 was $2,382, $1,864 and $3,497, respectively.
The Omnibus Budget Reconciliation Act of 1993 (the "Act") was signed into law on August 10, 1993. The Act did not significantly change the income tax consequences for the Company.
CARLISLE PLASTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS
NOTES RECEIVABLE FROM AFFILIATES
At December 31, 1993 and 1992, the Company had a $125 non-interest bearing note receivable from an affiliate. The Company provides purchasing, accounting, and other administrative services for the affiliate. In 1993, 1992 and 1991, the Company received $86, $130 and $203, respectively, from the affiliate as payment for the services rendered.
SUBORDINATED PROMISSORY NOTES
Interest expense paid to stockholders and affiliates (the notes were retired in 1992) was $263 and $564 in 1992 and 1991, respectively.
MANAGEMENT FEES
In May 1991, the Company entered into a three-year Management Agreement with Carlisle Plastics Management Corporation ("CPMC"), an affiliate of the Company, which receives an annual management fee of $1,500. Management fees in 1993, 1992 and 1991 include $1,500, $1,500 and $875, respectively, paid by the Company to CPMC under this agreement. In addition, prior to May, in 1991 the Company paid management fees of $1,763 to other affiliates of the Company.
The indentures for the 10.25% Notes require that management fees do not exceed 2.0% of sales per year and that each affiliate execute a management fee subordination agreement.
LEASES
Rental expense of approximately $246, $217, and $206 was incurred during the years ended December 31, 1993, 1992 and 1991, respectively, with respect to the lease of office, manufacturing and warehouse space owned by affiliates of the Company.
The Company leases an aircraft from Carlisle Air Corporation ("CAC"), an affiliate of the Company. Lease payments were paid to CAC in the amount of $303, $325 and $90 for 1993, 1992 and 1991, respectively, in connection therewith.
INSURANCE PREMIUMS
During a portion of 1991, the Company obtained insurance coverage from Greenhill Financial Group, Inc. ("Greenhill"), an affiliate of the Company. Greenhill consolidated the insurance coverage for various entities, including the Company. In 1991, the Company paid $2,100 in premiums to Greenhill.
AFFILIATED PURCHASES
Purchases from affiliates of the Company were $257, $355 and $28 for the years ended December 31, 1993, 1992 and 1991, respectively.
OTHER TRANSACTIONS
Distributions to stockholders of $1,744 were made during the year ended December 31, 1991. These distributions were approximately equal to income taxes owed by stockholders with respect to the Company's taxable income for a period of time during which the Company operated as a "S" corporation.
In conjunction with the Class A Stock Offering, the Company made a special distribution to those stockholders who owned common stock of the Company prior to the Class A Stock Offering. The special distribution was valued at $4,493 and consisted of the Company's interest in a metals foundry in Costa Rica,
CARLISLE PLASTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
two unsecured notes payable to the Company by Carlisle Realty Holdings I Limited Partnership plus accrued interest, and certain notes receivable from stockholders plus accrued interest.
Prior to the Class A Stock Offering, the Chairman of the Board and Chief Executive Officer and a former director of the Company owned an aggregate 21% interest in each of the Company's direct subsidiaries (the "Minority Interests"). Concurrent with the completion of the Class A Stock Offering, the Company acquired their Minority Interests in exchange for issuance of 48,364 shares of Class A Stock having an aggregate fair market value equal to the book value of the Minority Interests.
8. STOCKHOLDERS' EQUITY
As of December 31, 1993 and 1992, the Company had authorized 10,000,000 shares of preferred stock at $.01 par value, 50,000,000 shares of Class A Common Stock at $.01 par value, and 20,000,000 shares of Class B Common Stock at $.01 par value. The Class B Common Stock is one-for-one convertible to Class A Common Stock and has restrictions on transfers other than those to entities outside the current holders of Class B Common Stock. Each share of Class A Common Stock is entitled to one vote, and each share of Class B Common Stock is entitled to twenty votes.
In 1992, 355,900 options granted in 1991 were repriced to $5.00, the market price at the time of repricing. All options granted were at an option price per share greater than or equal to the market value at the date of grant.
In 1992, a director and officer was granted options (which are not included in the above table) to purchase 400,000 shares of the Company's Class A Common Stock at $4.00 per share (which was the fair market value of the shares at the date of the agreement). The options vest on September 1, 1993, 1994 and 1995 in the amount of 50,000, 50,000 and 300,000, respectively.
CARLISLE PLASTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Amounts above include $2,573 which is payable to affiliates of the Company.
Total rent expense under all operating leases was $4,476, $4,969 and $4,828 for 1993, 1992 and 1991, respectively.
LETTERS OF CREDIT
The Company had outstanding letters of credit amounting to approximately $1,357 and $1,455 at December 31, 1993 and 1992, respectively, relating to purchase commitments issued to suppliers and an insurance carrier.
LITIGATION
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial statements of the Company.
10. CONCENTRATION OF CREDIT RISK
In September 1993, the Company received $2,000 from the termination of an interest rate swap agreement, which it had entered into in June 1993. This gain has been deferred and is being amortized over the original term of the swap agreement.
On September 15, 1993, the Company entered into a new interest rate swap agreement on a notional principal amount of $90,000 terminating on June 15, 1997 (matching the principal and due date of the Company's 10.25% Notes). Under the agreement, the Company receives interest at a fixed rate and pays interest at a floating rate, which is established in arrears at six month intervals.
The net interest differential and amortization of the deferred gain of $752 was recorded as a reduction of interest expense in the year ended December 31, 1993. The agreement is collateralized by the Company's accounts receivable.
The Company is subject to interest rate risk during the term of the swap agreement. A sufficient increase in market interest rates during the term of the agreement could result in the Company having a net payment obligation under the agreement. Further, the Company is subject to credit risk exposure from nonperformance by the counterparty during periods when such party has a net payment obligation to the Company.
CARLISLE PLASTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company had accounts receivable from a single customer, Wal*Mart, of $3,200 and $4,500 at December 31, 1993 and 1992, respectively. This customer has a history of timely payments to the Company. The Company believes it had no significant exposure to credit risk at December 31, 1993.
11. RESTRUCTURING CHARGE AND NEW PRODUCT INTRODUCTION
During 1992 and 1991, the Company recorded restructuring charges aggregating $4,320 and $3,431, respectively. These restructuring charges included realignment of production facilities, management reorganization, product re-engineering and reduction of product offerings. In addition, in 1992 the Company incurred costs of $7,743 associated with a new product introduction.
12. BUSINESS ACQUISITION
In July 1991, the Company purchased a two-thirds interest in Rhino-X for $5,000. This acquisition was accounted for using the purchase method of accounting, and accordingly, the purchase price has been allocated to assets acquired and liabilities assumed based on their fair market value. Included in goodwill at December 31, 1993 is $6,230 relating to this acquisition.
Under a put and call arrangement signed in conjunction with the acquisition of Rhino-X in July 1991, the Company purchased the minority interest shares at the minimum price of $12 per share on January 1, 1994. The Company had discounted this purchase at 10% and, accordingly, recorded an obligation of $3,500 and $3,152 at December 31, 1993 and 1992, respectively. At December 31, 1993 and 1992, this obligation was reduced by $779 and $714, respectively, for sales tax payments made by the Company and recoverable from the minority shareholders.
CARLISLE PLASTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CARLISLE PLASTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. CONDENSED FINANCIAL INFORMATION OF CARLISLE PLASTICS, INC. AND SUBSIDIARIES
Condensed consolidating financial information of the Company and subsidiaries is included in this Note.
Mr. Binnie has been Chairman of the Board of Directors of Poly-Tech since 1989.
Mr. Wilbur has been President of Poly-Tech since September 1992. From 1990 to 1992, Mr. Wilbur was President of Wilbur and Associates, a consulting and merger and acquisition company, and Vice Chairman of Edina Group, Inc., a merger and acquisition company. Mr. Wilbur was President and Chief Operating Officer of Poly-Tech, Inc. from 1984 to 1990.
Mr. Bhatt has been Vice President, Secretary and Chief Financial Officer of Poly-Tech since 1989.
EXECUTIVE COMPENSATION
The compensation paid or accrued in 1993 on behalf of Messrs. Binnie, Wilbur and Bhatt was paid or accrued for services rendered to Carlisle Plastics, Inc., Poly-Tech and their respective subsidiaries. Information regarding such compensation is included in Item 11 of the Annual Report on Form 10-K, which incorporates by reference the information set forth in the 1994 Proxy Statement under the caption "Executive Compensation."