ITEM 1. BUSINESS
Radnor Holdings Corporation (the “Company”, “Radnor”, “we”, “us” or “our”) is a leading manufacturer and distributor of a broad line of disposable foodservice products in the U.S. and of specialty chemical products worldwide. We operate 15 plants in North America and three in Europe and distribute our foodservice products from ten distribution centers throughout the United States. We are the second largest U.S. manufacturer of foam cups and containers and we also manufacture polystyrene and polypropylene drinking cups, stemware, plates, bowls, containers and cutlery. In fiscal 2004, we produced 14.7 billion foam and plastic cups for hot and cold drinks, foam bowls and containers and thermoformed lids and 1.5 billion pieces of plastic cutlery. We are upgrading our thermoforming equipment and installing new production lines to facilitate the introduction of our proprietary polypropylene cold drink cups. This expansion is needed to meet accelerating customer demand, including business awards from quick service restaurants (QSRs).
By capacity, we are the fifth largest worldwide producer of expandable polystyrene, or EPS, which is the primary raw material used in our foodservice packaging products. We have been manufacturing EPS and related products sold to the foodservice, insulation and protective packaging industries for more than 26 years. In fiscal 2004, we produced 364 million pounds of EPS. We supply 100% of our own EPS needs in addition to supplying EPS to other manufacturers of foodservice, insulation and protective packaging products.
Financial information concerning the Company’s business segments appears in Note 13 to the Consolidated Financial Statements included under Item 8 herein.
Industry Overview
Packaging. We compete within the foodservice industry, which includes products manufactured with paper, plastic, foam and other materials. Radnor manufactures a broad range of disposable foam, polypropylene and polystyrene foodservice products.
According to independent industry research, the U.S. foodservice disposable industry, which includes foodservice distributors, QSRs, retail and consumer customers such as mass merchandisers, drug stores and club stores, generated $11.5 billion in U.S. sales in 2002. In 2003, disposable cups and lids represented approximately $4.1 billion of the industry. It is projected that demand for disposable cups and lids will increase 4.0% annually to $5.0 billion in 2008. Growth in this market is projected to be driven by increasing disposable personal income levels and a favorable outlook for foodservice revenues, especially in the QSR segment. According to recent independent industry analyses, the plastic cup segment is projected to grow at an annual rate of 5.0% through 2008 while the foam cup segment is projected to grow at an annual rate of 2.9% through 2013.
The factors that originally gave rise to the use of disposable products continue to support the market’s growth. These include lower labor, maintenance and energy costs as compared to reusable products, as well as sanitary considerations and growth in the consumption of take-out foods and beverages. The expansion of QSRs and warehouse retailers and the consolidation of some foodservice distributors into larger companies with a national presence have also increased the use of disposable products.
Cold drink cups constitute a majority of the disposable cup market and consist primarily of paper and polystyrene cups. Plastic cold cup usage has increased dramatically in recent years as a result of advantages as compared to paper, including lower cost, elimination of sogginess, greater rigidity, seamless construction and unique design and printing capabilities. In addition, larger size cups can be molded to fit into car cup holders, thereby taking advantage of the trend toward larger cup sizes and growing take-out markets, including drive-thru windows at QSRs. Polypropylene products additionally have cost advantages and an enhanced appearance as compared to polystyrene plastic and other cold drink cup products. Led by demand from take-out markets, including drive-thru windows at QSRs, we believe growth in this segment will be strongest in larger sizes where polypropylene cups can be designed to fit into car cup holders.
Foam cup usage has also increased over the last two decades as a result of factors unique to this segment. These factors include the superior insulating and molding qualities of foam, lower production costs as compared to other disposable and reusable products and sanitary considerations. Although the success of foam
cups to date has been primarily in the hot drink segment, we believe that there continues to be significant growth opportunities in the sale of cold drink cups, particularly in the large (20 through 64 ounce) sizes, including specialized products such as car carrier cups, on which we make higher margin.
For both the plastic and foam products segments, other growth factors include the expansion of warehouse retailers, the growth in consumption of take-out foods and beverages and increased demand for larger sizes and specialized products.
Specialty Chemicals. We compete in the North American and European EPS markets. In North America, we sell EPS to the insulation, protective packaging and foodservice industries. Independent industry analyses estimated the U.S. EPS market to have been in excess of 400,000 metric tons in 2000 and projected an annual growth rate of approximately 3% through 2010. This market is concentrated, with Radnor and three other competitors accounting for over 90% of the North American market.
In Europe, we sell EPS to the insulation and protective packaging industries. The EPS market in Europe includes a broader range of product applications and is more fragmented than the North American market. An independent industry analysis estimated the European EPS market to have been in excess of 995,000 metric tons in 2000 and projected an annual growth rate of approximately 3% through 2005.
Products
Packaging. Radnor manufactures a broad range of disposable foodservice products, including cups, bowls, plates, containers, lids, cutlery, barware and stemware from EPS, polypropylene (“PP”) and polystyrene (“PS”):
Products
Markets
Drinkware
• Foam Traditional & Flair Cups
• Lids (Foam & Plastic)
• Thermoformed PP Cups
• Car Cups
• Stadium Cups
• Promotional Cups
• Co-Ex - Retail
• Alpha - Institutional
• XL/XL Diamond Thermoformed PS Cups
• Rigid Tumblers/Stemware Injection Molded PS
• Flex-Sof Polypropylene Tumblers
Caterers
Restaurants
Nightclubs
Hospitals
Stadiums
Convenience Stores
Supermarkets
Party Goods Stores
Schools
State Institutions
QSRs
Municipalities
Contract Feeders
OEMs
Advertising Specialties
Tableware
• Foam Food Containers
• Foam Food Bowls
• Injection Molded PS Plates
• Injection Molded PS Bowls & Lids
Cutlery
• Light PS Plastic Cutlery
• Light PP Plastic Cutlery
• Medium PS Plastic Cutlery
• Medium PP Plastic Cutlery
• Heavy PS Cutlery
• Heavy PP Plastic Cutlery
• Gild PS Plastic Cutlery
• Wrapped Cutlery
• Serving Spoons & Forks
Dessertware /
Miscellaneous
• Crystal Parfait & Lids
• Crystal Dessert Dishes
• Crystal Sundae Dishes
• Portion Cups & Lids
• Communion Cups
• Graduated Medicine Cups
Our thermoformed and injection molded polypropylene and polystyrene product lines include more than 450 cups and containers, ranging in size from 3.5 oz to 44 oz with matching lids. To simplify display and inventory requirements, we design our cold drink cups so that the same lid can be interchanged with many cup sizes. The use of polypropylene as a raw material provides drink cups with enhanced appearance qualities, including a rolled lip that is less abrasive to the user while providing a sturdy yet comfortable feel. Polypropylene also allows us to improve printing quality for our customers, permitting photographic-quality printing that is superior to the print capabilities of other substitute products. We also manufacture thermoformed polypropylene portion cups used for salad dressing, condiments and other food items, as well as rigid plastic cutlery products.
The use of foam provides an insulating feature to our products, allowing them to be used for both hot and cold beverages and food products while enhancing comfort for the end user. Foam cups are manufactured in varying sizes (4 to 64 ounces) for both hot and cold beverages and are sold under numerous brand names, including WinCup, COMpac, Profit Pals, STYROcup, Big Cool and Simplicity. Foam bowls and other containers are made in varying sizes (3.5 to 32 ounces) for both hot and cold food products and are sold under the STYROcontainers brand name. Our thermoformed leak-resistant plastic lids feature a “stacking ring” that minimizes the shifting of a second cup when placed on top of the first cup. Other enhanced lid features include vents, tear-away tabs and straw slots, depending on the intended use. Cups, bowls, containers and lids are designed so that the same lid can be interchanged with many different cup, bowl or container sizes, which simplifies inventory and display area requirements. For example, our 10 cup-2 lid product line allows two different lids to fit with ten different size cups.
Our cups, bowls and containers are available with custom offset or embossed printing. We also manufacture a broad range of custom-designed foam containers for many of our large national accounts. A significant component of this business is the manufacturing of containers for customers, which use the containers for dried noodle products sold through retail grocery and supermarket chains. We also supply our products in private label packaging for certain of our customers.
We continuously work to develop new products that fit with our customers’ specific needs. One of our early customer-driven developments was the “flare” cup design that replaced the heavier rim typically built into the top of a foam cup with a smooth, flared edge that improves the stability of the cup’s construction. The flare cup was well-received by customers because it combined the favorable appearance of paper with the insulating qualities of foam. More recently, our car carrier cups have addressed the end user’s desire for a cup that can contain larger volumes of liquid while fitting into an automobile’s cup holder.
Specialty Chemicals. In North America, we manufacture EPS for our internal consumption, in addition to selling directly to third-party manufacturers of foodservice, insulation and protective packaging products:
Products
Markets
Building and Construction
Modified Grades of EPS
Insulation, Residential and Industrial
• Structural Insulated Panels
• Insulated Concrete Forms
• Roofing Insulation
• Board, Tapered
• Wall Insulation
• Floor Soundproofing
Protective Packaging
Regular Grades of EPS
Electronics Packaging, Medical Device Packaging, Ice Chests/Coolers
Consumer Products
Regular Grades of EPS
Door Cores, Fishing Floats, Decorative Ornaments, Archery Targets, Wave Boards
Metal Casting
Lost Foam Grades of EPS
Lost Foam Casting
• Car Engine Blocks and Heads
• Pump Casings
• Fire Hydrants
• Rail Road Car Wheel Brake Drums
Food Service
Cup Grades of EPS
Foam Cups
Foam Containers
Loose Fill Packaging
Polystyrene Grades
Loose Fill “Peanuts”
EPS is categorized by size, with the smallest size, or cup-grade, used to manufacture foam cups and containers. Larger sizes are sold to manufacturers of insulation and protective packaging products and include EPS modified for fire retardancy.
We manufacture a broad range of EPS formulations in Europe for conversion into a variety of standard and specialized insulation and packaging products. This EPS is made primarily for the insulation and protective packaging industries and includes a range of bead sizes and densities for conversion by customers into light and heavy insulation boards as well as various shape products, such as insulated fish packaging boxes. We work closely with our European customers to incorporate special product features into our EPS, such as fire retardancy, low water absorption, specialty coatings, higher thermal insulation qualities and antistatic properties.
Sales, Marketing and Customers
Packaging. Radnor sells its broad range of disposable products to the foodservice industry through a 36-person sales organization and through an extensive network of 54 independent sales representatives. Sales and marketing efforts are directed by our Senior Vice President of Sales and Marketing and are supported by 12 senior sales managers averaging more than eleven years of experience in the foodservice industry. We believe our experienced sales team and long-term representative relationships enhance our ability to provide high levels of customer service and specialized marketing programs, including custom-designed products. Major end users of these products include QSRs, full-service restaurants, hospitals, nursing homes, educational institutions, airlines, business offices, movie theaters and other leisure time concessionaires, such as sports stadiums.
We sell disposable products in the foodservice industry to more than 1,400 national, institutional and retail accounts throughout the United States, in Mexico and in other countries. This customer base, which includes many of the foodservice industry’s largest companies, can be divided into three major categories:
National Accounts: National accounts are customers that use our disposable foodservice products in the sale of their own products and consist primarily of large QSR chains and convenience stores. During fiscal 2004, sales to these customers accounted for approximately 10.1% of our net sales.
Institutional Accounts: Institutional accounts are customers that purchase our disposable foodservice products with a view toward reselling such products in bulk to institutional end users, such as hospitals, restaurants, nursing homes, educational institutions, airlines, movie theaters and other leisure time concessionaires, such as sports stadiums. These customers, representing approximately 41.4% of our net sales in fiscal 2004, are primarily large foodservice distributors.
Retail Accounts: Retail accounts are customers that purchase our disposable foodservice products for resale to actual consumers of the products and consist primarily of supermarket chains and discount stores. In fiscal 2004, retail customers accounted for approximately 6.9% of our net sales.
Approximately 10.0% of our packaging product sales are made pursuant to arrangements under which product prices are automatically adjusted based on changes in prices of styrene monomer, polypropylene and other raw materials. Substantially all of our other packaging product sales are made pursuant to contracts or other arrangements under which we have the right to change product prices on 30 to 60 days’ prior written notice.
Specialty Chemicals. In North America, we sell EPS through a dedicated sales force averaging 21 years of experience and two broker organizations to manufacturers of foam protective packaging and insulation products. In Europe, we market through our Europe-wide sales office network. In support of these sales and marketing efforts, we employ people who are knowledgeable about chemical engineering and manufacturing processes in order to provide technical assistance to our customers.
In Europe, we sell EPS to 200 primarily mid-sized companies throughout Europe. We have actively pursued these customers because they provide potential for higher margins and because of their increased reliance on our technical support, which results in a greater ability to foster long-term customer relationships. We sell approximately 25% of our European EPS production to our former European insulation business pursuant to a long-term supply agreement.
Customer Concentration. No customer represented more than 6.3% of our net sales for fiscal 2004, although the five largest accounts represented approximately 21.5% of such sales. Because we are focusing our marketing efforts for our new thermoformed polypropylene products on our key customers, we anticipate that this customer concentration may increase in the future.
Manufacturing
We operate 15 plants in North America and three plants in Europe. Our eleven U.S. and European foam plants generally operate 24 hours a day, seven days a week and 355 days a year. Our plastic cup and
cutlery products are manufactured through an injection molding or thermoforming process that uses polystyrene and polypropylene as its principal raw materials in our state-of-the-art manufacturing facility in North Carolina. This plant operates 24 hours a day, seven days a week and 355 days a year. We also operate six plants located in the United States, Canada and Europe that manufacture EPS from styrene monomer and also operate 24 hours a day, seven days a week and 355 days a year.
Manufacturing Process. The manufacture of EPS, the primary raw material in the manufacture of foam products, has two steps: polymerization and impregnation. In the polymerization phase, styrene monomer, which is a commodity petrochemical derived primarily from benzene and ethylene, is suspended in water and then treated with chemicals and catalysts to produce polystyrene crystal in various sizes, each of which has different end-use applications, including general purpose polystyrene. To produce EPS, the crystal is impregnated with a high-purity pentane gas.
We manufacture our foam cups and containers utilizing a custom molding process. First, the cup-grade EPS is blended with a lubricating agent and then pre-expanded so that the EPS is of the appropriate density. This pre-expanded EPS is then fed through special screeners to remove undersized and oversized beads. The pre-expanded EPS is then injected into machine molds and fused by injecting steam into the mold cavity. After the EPS is fused, the mold shells are cooled, the mold halves are opened and the finished cups are ejected. The finished products are vacuum tested, counted and packaged.
We manufacture polypropylene cups and containers using a complete line process. In this process, polypropylene pellets and desired colorants are mixed, heated and extruded into a continuous sheet, which is then fed into a thermoformer and molded into the size and shape of the preferred product design. After the cups are cooled, they are trimmed from the sheet while still in the mold and are subsequently transferred to a forming station where the rims are rolled over in a coining process to provide attractive and highly functional lips for the finished products. The finished cups are automatically transferred for packaging into finished cases or to printing and then packaged into finished cases.
We manufacture both polypropylene and polystyrene cutlery and cups using an injection molding process in which resins and colorant are mixed and heated through an extrusion process. The liquid resin is then injected into the cavities of the mold to form the shape of the product. The material is cooled inside the mold through the use of chilled water. Both halves of the mold are then separated and the parts ejected where they are transported to either an automatic or manual packing station, depending on the type of finished product.
Our lid products are produced from high-impact polystyrene, or HIPS, which is subjected to heat and pressure, after which the product is extruded through a thin die. The lids are then trimmed for finished goods packing, while the scrap is ground and reintroduced into the original material blend.
Quality Control. Our manufacturing quality control program for foam foodservice products involves automated testing of all products for leaks. In addition, random testing is performed at least hourly at each facility for various attributes: seepage, weight, appearance, strength and, where applicable, print. We centrally collect the resulting data, subject it to statistical analysis and review the results. In addition, each machine operator and packer performs various quality checks during the production process. We also obtain random samples of finished foam packaging products from our various manufacturing facilities and perform an analysis similar to that described above at our Phoenix laboratory.
Our manufacturing quality control program for thermoformed plastic products enables us to meet our customers’ requirements through a documented Quality Management System. We monitor and measure the attributes that are critical to quality. We then statistically analyze the data to ensure that the processes are consistent in conforming to the customers’ desires.
In addition to our own programs, certain of our larger customers have established their own product standards and perform periodic manufacturing audits at our facilities, either through their own personnel or through an independent testing group such as ASI Food Safety Consultants. We also submit products to third-party laboratories for microbiologic and physical tests to ensure that we conform to or exceed industry product safety standards.
We utilize our quality, service, manufacturing and customer partners to enact and follow through on initiatives consistent with total quality management and good manufacturing practices. Through these programs, we work with our customers to ensure product quality and to create new products that reflect the present and future needs of our customers.
Our North American EPS quality control laboratory includes infrared spectrograph and atomic absorption units. Our laboratory chemists are capable of performing complex chemical and atomic analysis of styrene monomer, polystyrene crystal, expandable polystyrene and all other material components of EPS production. This gives us the ability to customize EPS formulas to meet any special customer requirements. The EPS quality control program includes testing every production batch of EPS to ensure it meets specific customer requirements. Each batch is tested for particle sizes, pentane gas volume and, if the EPS is to be used for insulation, its fire retardation capability.
In Europe, our sophisticated quality control laboratory is complemented by a fully equipped analytical laboratory containing three fully instrumented, automatically controlled pilot reactors, a fully equipped reactor bay, including a reactor and equipment for screening and coating, as well as two complete lines for converting EPS into insulation boards and shape-molded products. Testing equipment for analytical and quality audit work includes electronic balancers, equipment for testing burning behavior, gas chromatographs, sweep electron microscopes, colorimeters, flexural/compressive strength testers, an izod impact tester and lambda value testers. We regularly test our EPS for a range of key attributes that vary by specific product. Our European facilities are either ISO 9001 or ISO 9002 certified and both are also ISO 14001 certified.
Engineering. As of March 31, 2005, we employed 72 full-time technical personnel, including 30 full-time engineers and engineering managers, based in the Phoenix, Corte Madera, Fort Worth, Mooresville and Canadian facilities. The engineering staff uses computer-aided design and computer-aided manufacturing systems to design advanced, three-dimensional models of products and molds. Once an electronic image of the machine and mold part design is generated, the part can be custom manufactured. We have the capacity to construct all of the proprietary equipment, machines and molds used in the production, testing and packaging of our foam products. We have also developed and are installing in our manufacturing facilities automated materials handling equipment that includes in-line printing, automatic case packaging equipment and more advanced molding machines.
We continually examine how to improve our manufacturing process efficiencies. Sophisticated infra-red imaging systems, providing real-time video displays, are used to evaluate the thermal efficiency of molds and machines under development. We also can create special prototype mold forms for new lid designs and single-cavity cup and container molds, both of which enhance our ability to evaluate customer design requests rapidly.
The managing director of our European EPS operations is an engineer, as are each of the managers and supervisors of the production facilities located in Europe. In Europe, we also employ two full-time engineers who are responsible for process and production engineering and interact regularly with research and development personnel based in the analytical laboratory as well as senior technical support staff responsible for assisting the sales team.
Raw Materials
Our foam products are manufactured from EPS, which is produced from styrene monomer. High-purity pentane is also used as an expanding agent in the production of EPS. The raw materials we use for the manufacture of thermoformed lids are primarily plastic resins such as polystyrene. Our plastic cups and cutlery are thermoformed and injection molded from polypropylene and polystyrene resins.
Styrene monomer is a commodity petrochemical that is readily available throughout the world in bulk quantities from numerous large, vertically integrated chemical companies. Styrene monomer prices have fluctuated significantly as a result of changes in petrochemical prices and the capacity, supply and demand for styrene monomer. For example, the contract price for styrene monomer increased from $0.25 per pound in January 2002 to $0.42 per pound in December 2003. The contract price for styrene monomer increased to $0.70 per pound in November 2004, and was $0.64 per pound as of February 2005. Although future styrene monomer
prices cannot be predicted with accuracy, contract prices are forecasted by independent industry surveys and producer reports to decline to $0.58 by the end of 2005. While the Company has been able to pass on the majority of past price increases to customers, the Company may not be able to increase prices if styrene monomer costs rise in the future.
We have historically purchased a majority of our styrene monomer requirements under a variety of long-term supply contracts. These contracts provided a supply of styrene monomer under several different pricing mechanisms and with volume discounts. The various pricing mechanisms included those tied to raw material prices, spot market indices, contract indices and varying mixtures of the three. On March 18, 2005, the Company amended the end of the term of its primary North American styrene monomer requirements contract from December 2009 to August 2005. By amending this contract, the Company believes it gained greater flexibility in its overall ability to purchase styrene monomer.
High-purity pentane, which is used as the expanding agent in the production of EPS, is available from a limited number of suppliers. Should high-purity pentane become unavailable, however, high-purity butane may be substituted as the expanding agent.
The raw materials used in the manufacture of our polystyrene plastic cups and cutlery and for the manufacture of thermoformed lids are primarily plastic resins such as polystyrene, which are available from a number of sources. Our polystyrene resin supplies are purchased under various agreements that contain minimum and maximum purchase requirements. The price we pay for polystyrene resin is determined at the time of purchase and can be supported by our styrene monomer purchases. The prices of polystyrene resins fluctuated in a fashion similar to the fluctuations affecting styrene monomer as described above. Polystyrene is largely a derivative of styrene monomer and prices react the same way over time. Prices also can change based on the operating rates of the polystyrene manufacturing facilities. Published contract polystyrene pricing was $0.88 per pound as of February 2005. The forecasted price of polystyrene is expected to range between $0.77 and $0.96 during 2005.
The primary raw materials used to manufacture our thermoformed plastic products are polypropylene resins that are made from propylene. We do not currently have long-term supply agreements for polypropylene and may not be able to enter into such agreements on favorable terms or at all. If we are unable to enter into long-term supply agreements, we will be more impacted by the changing market conditions for polypropylene. Polypropylene resin pricing follows the raw material price of propylene and is influenced by the operating rates of the respective polypropylene manufacturing locations. The published homopolymer polypropylene contract price was $0.69 per pound for February 2005 and is forecasted by independent industry surveys and producer reports to decline to $0.63 per pound by the end of 2005. Polypropylene has also had the tendency to fluctuate significantly over time. For example, the contract price for polypropylene ranged from $0.28 to $0.66 from the beginning of 2002 through December 2004. We anticipate entering into long-term contracts to provide consistent supply of polypropylene resins. We expect the pricing mechanisms in those contracts to be market driven and to change monthly. We also anticipate that we will obtain rebates based on volume incentives with the respective suppliers.
If pricing of either polystyrene or polypropylene resins would put us in an uncompetitive position, we can switch to the other resin to make our products competitive.
Proprietary Technology and Intellectual Property
We have developed a broad array of proprietary technology that is utilized in various stages of our manufacturing operations, including the manufacture of our new thermoformed polypropylene products. We rely primarily upon confidentiality agreements and restricted plant access to protect our proprietary technology, which we consider material to our operations. We own several patents relating to our foodservice packaging products and our EPS manufacturing processes. However, we do not consider these patents material to our operations.
As of March 31, 2005, we owned 57 trademarks and 11 copyrights registered in the United States, several of which are also registered in other countries. As of such date, we also owned a number of unregistered trademarks. We do not consider any of these trademarks or copyrights material to our operations.
Competition
We compete in the highly competitive foodservice industry. The foam segment of the disposable cup and container market is highly concentrated and, within this segment, we compete principally with Dart Container, which has significantly greater financial resources than we have and controls the largest share of this market segment. We do not believe that companies operating in related markets are likely to enter the foam segment due to the significant investment that would be required.
We believe that competition within the foam segment of the market is based primarily on customer service, product quality and the price at which products are offered. We believe that our market position is attributable to our high level of customer service and product quality, strategically located manufacturing facilities, proprietary technology and experienced management team.
The plastic segment of the disposable cup and container market is significantly fragmented. Major producers of thermoformed plastic cups and containers include Pactiv, Solo Cup, Alcoa Packaging and Dart Container. However, the Company believes that only one other competitor, Berry Plastics, manufactures deep-draw thermoformed polypropylene cold cups. It is possible that other competitors may enter the plastic segment of the disposable cup and container market despite the significant investment, especially in equipment and technology that would be required. In addition, as thermoformed polypropylene cold cups gain market acceptance, we would anticipate that producers of polystyrene plastic cups may enter this market.
We believe that competition within the plastic segment of the disposable cup and container market is based primarily on customer service, product quality and appearance and the price at which products are offered. We believe that the manufacturing capability we are developing, together with our experience customizing products, superior customer service, national distribution capabilities, demonstrated ability to successfully integrate acquisitions and ability to leverage our long-term customer relationships and our other competitive strengths, will position us to capture a meaningful portion of the plastic cold drink cup market.
We also compete with the paper segment, which is significantly more fragmented than the foam segment. We believe that competition between foam, plastic and paper is based on product appearance, quality and price.
In North America, the EPS industry is highly concentrated. Management believes that each of NOVA Chemicals, Inc., Huntsman Chemical Corp. and BASF Corporation, which are larger than we are and have greater financial resources than we have, controls a significant share of the market for supplying EPS to manufacturers of insulation and protective packaging products. We believe that competition within this industry is primarily based on price, although customer service, support and specialized product development can be significant competitive factors, particularly among the smaller manufacturers of foam insulation and protective packaging products.
The European EPS industry is more fragmented than in North America. Several companies, including BASF Corporation, and the NOVA Chemicals - BP joint venture are larger and have greater financial resources than we have. We believe that competition is based primarily on price, although technical support, specialized product development and consistent quality are important factors to many of our customers.
Employees
As of December 31, 2004, we had 1,940 full-time employees. We have never experienced a material labor strike or other labor-related work stoppage. We consider our relations with our employees to be good.
Our U.S. employees are not represented by any union. In Canada, approximately 60% of our employees are represented by a union and are covered by a collective bargaining agreement. In Finland, over 80% of our employees are represented by one of three unions and we are subject to two collective bargaining agreements. The European Union directives regarding employment are applicable to us in Finland; however, the terms of the collective bargaining agreements will control employment relationships to the extent that these agreements address relevant issues in a more detailed manner and include benefits exceeding the minimum standards established by the directives.
We are dependent on the management experience and continued services of our executive officers, including our Chief Executive Officer, Michael T. Kennedy. The loss of the services of these officers could have a material adverse effect on our business. In addition, our continued growth depends on our ability to attract and retain experienced key employees.
Environmental Matters
Our facilities are used for manufacturing or warehousing of foam container, thermoformed or injection molded products, as well as the EPS from which foam products are manufactured. Many of these facilities are subject to federal, state, foreign and local laws and regulations relating to, among other things, emissions to air such as pentane, styrene and particulate matter, discharges to water, and the generation, handling, storage, transportation and disposal of hazardous and non-hazardous materials and wastes.
In 1996, in connection with their acquisition, the soil and shallow groundwater at our domestic EPS facilities were found to contain elevated levels of various contaminants. However, based on the results of soil and groundwater testing, material remediation efforts with respect to these conditions have not been, and we believe will not be, required. We own and operate, or owned or operated, underground storage tanks, also referred to as USTs, at several of our facilities for the storage of liquid pentane and heavy fuel oil. Leak detection or containment systems are in place at each facility with USTs that we currently own or operate. USTs are generally subject to federal, state, local and foreign laws and regulations that require testing and upgrading of USTs and remediation of polluted soils and groundwater resulting from leaking USTs. In addition, if any leakage from our USTs were to migrate onto the property of others, we could be subject to civil liability to third parties for remediation costs or other damages.
Some of our facilities have been alleged or are known to have failed to comply with various reporting or permitting obligations under applicable environmental laws and regulations. The resolution of these allegations and failures has not had a material adverse effect on our financial condition or results of operations, nor do we believe that any future costs of achieving and maintaining compliance with these laws and regulations will have that effect. There have been no instances of noncompliance with these laws and regulations that have had a material adverse effect on our financial condition or results of operations. We believe the likelihood of any such instances as having occurred is remote. However, if any such instances of noncompliance are confirmed, we could incur significant fines, penalties or capital and operating costs. We cannot currently estimate the possible scope of these fines, penalties and costs as we are not aware of any such instances. There can be no assurance that recently promulgated or future environmental laws or regulations, including regulations affecting the volume of and permitting for air emissions in the United States, Canada and in Europe, or changes in interpretation of environmental laws and regulations or of reporting or permitting obligations, will not require us to incur substantial expenditures or significantly modify our operations.
Certain of our current and former facilities are located in industrial areas and have been in operation for many years. As a consequence, it is reasonably possible that historical or neighboring activities have affected properties currently or formerly owned or operated by us and that, as a result, additional environmental issues may arise in the future. Because we cannot predict the precise nature of these issues, we cannot estimate the possible range of costs we could incur to address them.
ITEM 2.
ITEM 2. PROPERTIES
We lease approximately 25,000 square feet in Radnor, Pennsylvania, a suburb of Philadelphia, for our executive offices. We believe that our present facilities are adequate for our current operations and that we will be able to lease or otherwise acquire any additional facilities as may be required for our future operations.
We also own or lease manufacturing, warehouse, office, machine assembly and utilities facilities at the locations shown in the following table:
Packaging
Location
Use
Approximate
Floor Space
Sq. Ft.
Corte Madera, California
Manufacturing, warehouse, machine assembly and office (leased)
79,000
Richmond, California
Warehouse (leased)
104,000
Higginsville, Missouri
Manufacturing and warehouse (partially leased)
103,000
Jacksonville, Florida
Manufacturing and warehouse (leased)
128,000
Edison, New Jersey
Warehouse (leased)
95,000
Metuchen, New Jersey
Manufacturing
84,000
Mount Sterling, Ohio
Manufacturing and warehouse
56,000
Shreveport, Louisiana
Manufacturing and warehouse
73,000
Stone Mountain, Georgia
Manufacturing and warehouse (partially leased)
366,000
Phoenix, Arizona
Machine assembly (leased)
12,000
Tolleson, Arizona
Manufacturing, warehouse and office
170,000
West Chicago, Illinois
Manufacturing, warehouse and office (partially leased)
350,000
El Campo, Texas
Manufacturing and warehouse (partially leased)
106,000
Mooresville, North Carolina
Manufacturing, warehouse and office (leased)
473,000
Lodz, Poland
Manufacturing and warehouse (leased)
31,000
Specialty Chemicals
Location
Use
Approximate
Floor Space
Sq. Ft.
Fort Worth, Texas
Manufacturing, warehouse and office (partially leased)
208,000
Saginaw, Texas
Manufacturing, warehouse and office
54,000
Baie D’Urfe, Quebec
Manufacturing, warehouse and office
71,000
Porvoo, Finland
Manufacturing, warehouse, machine assembly, utility and office (partially leased)
114,000
Kokemaki, Finland
Manufacturing, warehouse, utility and office (leased)
74,000
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are involved in a number of legal proceedings arising in the ordinary course of business, none of which we believe will have a material adverse effect on our financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There are no matters to be reported hereunder.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
There currently exists no established public trading market for the Company’s Voting Common Stock, $.10 par value, Nonvoting Common Stock, $.10 par value, or Class B Nonvoting Common Stock, $.01 par value.
Holders
As of March 31, 2005, there were 3 holders of record of the Company’s Voting Common Stock, 11 holders of record of the Company’s Nonvoting Common Stock and 13 holders of record of the Company’s Class B Nonvoting Common Stock.
Dividends
No dividends were declared or paid during the years ended December 31, 2004 or December 26, 2003. The declaration and payment of dividends are subject to the discretion of the Company’s Board of Directors and will depend on various factors, including restrictions on dividends contained in the Company’s credit agreements and the indentures pursuant to which the Company issued its 11% Senior Notes due 2010 and its Senior Secured Floating Rate Notes due on April 15, 2009.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data for the Company. The following data should be read in conjunction with the consolidated financial statements, the related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein. Financial results for the periods presented are not fully comparable because of the December 2001 disposition of our European insulation operations and the November 2003 acquisition of certain assets from Polar Plastics Inc. (the “Acquisition”) as described in Note 3 to the Company’s consolidated financial statements included elsewhere herein. Fiscal years 2000 and 2001 contain the results of operations from the European insulation operations.
(1) The Company’s fiscal year is the 52 or 53-week period that ends on the last Friday of December of each year. The years presented in the above table were 52-week years with the exception of 2004, which was a 53-week year.
(2) In 2004, the Company wrote-off $2.1 million in costs related to the accelerated termination of its primary North American styrene monomer requirements contract. See Note 6 to the Company’s consolidated financial statements included elsewhere herein.
(3) Represents gain resulting from sale of European insulation operations.
(4) In 2004, the Company wrote-off $0.8 million in costs, primarily investment banking fees, relating to the Company’s proposed initial public offering of its common stock.
In March 2003, the Company issued $135.0 million of senior notes due 2010 and amended its domestic revolving credit facility to include a $45.0 million term loan and to increase the revolving credit commitment from $35.0 million to $45.0 million. The proceeds were used to repay the then outstanding $159.5 million of Series A and Series B senior notes due 2003 and outstanding borrowings under the existing revolving credit facilities. The Company recorded $0.8 million of personnel costs directly related to the extinguishment of the long-term debt described above.
In 2002, the Company incurred $1.2 million in costs, primarily investment banking fees, relating to the exploration of the possible sale of its European specialty chemicals operations.
(5) Interest includes amortization of premium and debt issuance costs related to the Company’s senior notes of $1.2 million for the year ended December 29, 2000, $1.1 million for the years ended December 28, 2001 and December 27, 2002, $0.8 million for the year ended December 26, 2003 and $1.2 for the year ended December 31, 2004. In addition interest includes the write-off of $0.3 million and $1.0 million of deferred financing fees in 2004 and 2003, respectively, related to the early extinguishment of long-term debt.
(6) Fiscal 2003 and 2004 balance sheet data are not fully comparable due to the November 2003 Acquisition.
(7) Total debt includes capital lease obligations.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following discussion and analysis should be read in conjunction with Item 6, “Selected Financial Data” and Item 8, “Financial Statements and Supplementary Data” included elsewhere herein. Financial results for the periods presented are not fully comparable because of the November 2003 Acquisition and due to the fact that fiscal year 2004 was a 53 week period and fiscal years 2003 and 2002 were 52 week periods.
General
Radnor Holdings Corporation is a leading manufacturer and distributor of a broad line of disposable foodservice products in the United States and specialty chemical products worldwide. We operate 15 plants in North America and 3 in Europe and distribute our foodservice products from 10 distribution centers throughout the United States. In November 2003, we acquired the operations of Polar Plastics, Inc. and its subsidiary (“Polar Plastics” or the “Acquisition”). The Acquisition extended our product line to include thermoformed and injection molded disposable foodservice products. We are also upgrading our thermoforming equipment and installing new production lines to facilitate the introduction of our proprietary polypropylene cold drink cups. This product line expansion is necessary to meet accelerating customer demand, including business awards from quick service restaurant customers.
We have been manufacturing expandable polystyrene, or EPS, and related products sold to the foodservice, insulation and protective packaging industries for more than 26 years. In the foodservice industry, we are the second largest manufacturer of foam cup and container products in the U.S. By capacity, we are also the fifth largest worldwide producer of EPS. In fiscal 2004, we produced 14.7 billion foam and plastic cups for hot and cold drinks, foam bowls and containers and thermoformed lids and 364 million pounds of EPS. We supply 100% of our own EPS needs in addition to supplying EPS to other manufacturers of foodservice, insulation and protective packaging products.
Net Sales
Net sales represent the sales of the Company’s products less (i) cash discounts and allowances, which historically have averaged approximately 2% of gross sales, and (ii) sales and marketing rebates.
Cost of Goods Sold
Raw material and energy-related costs represent a large portion of the Company’s cost of goods sold and are susceptible to price fluctuations based upon supply and demand as well as general market conditions. Beginning in January 2003 through January 2005, market prices of styrene monomer, the primary raw material in the Company’s foam products, increased by 56%. Although future raw material prices cannot be predicted with accuracy, prices for styrene monomer are forecasted by independent industry surveys and producer reports to decline by approximately 10% over the remainder of 2005. While the Company has been able to pass on the majority of past raw material price increases to customers, the Company may not be able to increase prices if raw material costs rise in the future.
Our plastic cups and cutlery are thermoformed and injection molded from polypropylene and polystyrene resins. The prices of polystyrene resins have generally fluctuated in a fashion similar to the fluctuations affecting styrene monomer. Polystyrene is largely a derivative of styrene monomer and prices typically react similarly over time. Prices also can change based on the operating rates of the polystyrene manufacturing facilities. Published contract pricing for high-impact polystyrene, or HIPS, was $0.88 per pound as of February 2005. The forecasted price of HIPS is expected to range between $0.77 and $0.96 during 2005.
The primary raw materials used to manufacture our thermoformed plastic products are polypropylene resins, which are made from propylene. We do not currently have long-term supply agreements for polypropylene. Polypropylene resin pricing will generally follow the raw material price of propylene and be influenced by the
operating rates of the respective polypropylene manufacturing locations, as well as general supply and demand conditions. Polypropylene has also had the tendency to fluctuate significantly over time. For example, the contract price for polypropylene ranged from $0.28 to $0.66 from the beginning of 2002 through December 2004. The published polypropylene contract price was $0.69 per pound for February 2005 and is projected by independent industry surveys and producer reports to decline to $0.63 per pound by the end of 2005.
In connection with the Company’s engineering initiatives, the Company has invested significant resources in research and development. The Company expenses all research and development costs in the period incurred and includes such costs in cost of goods sold. As a percentage of net sales, these costs have represented 0.4%, 0.5% and 0.8% in fiscal 2004, 2003 and 2002, respectively.
Distribution Expense
The Company ships its products from manufacturing locations using a combination of common carriers and its own fleet of leased vehicles. Distribution expense consists of the costs to ship products, including costs of labor and leased vehicles.
Key Business Indicators
The Company’s financial results are directly impacted by several key items, which management has identified as key indicators in its evaluation of the business. These indicators include:
•
Sales Volumes - The comparison of unit volumes sold versus the comparable period in prior years provides key operating information.
•
Pricing Spread over Raw Material Costs - The selling prices of the Company’s products as compared to various raw material costs, including styrene monomer, polystyrene and polypropylene, are key financial performance metrics.
•
Energy-Related Costs - Energy-related costs provide key information with respect to overall profitability.
Year Ended December 31, 2004 Compared to the Year Ended December 26, 2003
Executive Summary
The Company’s gross operating profitability was higher in 2004 as compared to 2003 primarily due to higher selling prices and sales volumes across all segments, which largely offset increases in raw material costs. Fiscal 2004 net sales of $442.2 million increased 29.4% over the prior year due to increased selling prices, the impact of the Acquisition in November 2003 and the favorable impact of changes in foreign currency exchange rates. Income from operations decreased $2.1 million from the prior year to $4.8 million as the improvements in gross profit described above were offset by higher distribution costs, selling expenses, foreign currency transaction losses and other expenses.
Consolidated Results
The following table summarizes the results of operations for the fiscal years ended December 31, 2004 and December 26, 2003.
Net sales in fiscal 2004 were $442.2 million, an increase of $100.5 million from $341.7 million in fiscal 2003. This increase was primarily due to higher average selling prices ($39.6 million), the Acquisition
in November 2003 ($34.9 million), higher sales volumes ($10.9 million) and foreign currency changes driven by the strengthening of the Euro and Canadian dollar against the U.S. dollar ($13.5 million).
Gross profit increased $7.2 million to $69.9 million or 15.8% of net sales in fiscal 2004 from $62.7 million or 18.4% of net sales in fiscal 2003. This was primarily caused by higher average selling prices across all segments, combined with the impact of the Acquisition ($6.6 million), higher sales volumes ($2.1 million), partially offset by higher raw material prices ($36.8 million) and the write-off of costs associated with the accelerated termination of one of the Company’s raw material requirements Contracts ($2.1 million) as described in Note 6 to the Company’s consolidated financial statements included elsewhere herein.
Operating expenses increased by $9.3 million or 16.7% in fiscal 2004 to $65.1 million from $55.8 million in fiscal 2003. This was primarily caused by an increase in operating costs at our packaging operations ($7.6 million) and specialty chemicals operations ($1.6 million). Included in operating expenses for the year ended December 31, 2004 are approximately $1.4 million of foreign currency transaction losses compared to losses of $1.0 million in the prior year.
For the reasons described above, income from operations decreased by $2.1 million in fiscal 2004 to $4.8 million or 1.1% of net sales from $6.9 million or 2.0% of net sales in 2003.
Interest expense increased $4.7 million during fiscal 2004 to $26.8 million from $22.0 million in fiscal 2003 primarily due to the impact of higher average levels of outstanding debt, primarily related to the Acquisition and capital expenditures for our new state-of-the-art manufacturing equipment, along with increased interest rates. Income from unconsolidated affiliates decreased $3.1 million from the prior year to $0.5 million primarily due to the consolidation of the investment partnership in which the Company is the limited partner. Other expenses of $0.5 million in fiscal 2004 decreased $0.4 million from $0.9 million in fiscal 2003.
The effective tax rate for fiscal 2004 increased to 33.5% from 21.1% in the prior year. This increase was primarily due to the creation of a valuation allowance against certain of the Company’s state net operating loss carryforwards in the prior year for which there was no corresponding expense in the current year.
Segment Analysis
Packaging Segment Results
The following table summarizes the packaging segment results of operations for the fiscal years ended December 31, 2004 and December 26, 2003.
Net sales in the packaging segment in fiscal 2004 increased $48.8 million or 24.8% to $245.2 million compared to $196.4 million in fiscal 2003. The increase was primarily due to the Acquisition in November 2003 ($34.9 million), higher average selling prices ($8.6 million), and increased sales volumes ($4.0 million).
Gross profit in the packaging segment was adversely impacted by the lag between increases in raw material prices and the implementation of selling price increases, as well as by the impact of the installation of the Company’s new thermoforming equipment. During 2004, primarily the fourth quarter, the Company expended significant time and resources to install and test its first new state-of-the-art thermoforming line. Due to the extent of the facilitization required and the scope of the project, operating results were negatively impacted by both the costs of the project as well as the temporary effect on overall operational efficiency. Despite these items, gross profit increased $1.8 million to $46.3 million or 18.9% of net sales in fiscal 2004 from $44.5 million or 22.7% of net sales in fiscal 2003. This was caused primarily by higher average selling prices, as discussed above, as well as the impact of the Acquisition ($6.6 million) and higher sales volumes
($1.1 million), which were only partially offset by higher raw materials prices ($10.0 million) and the overall impact of the new equipment installation.
Operating expenses increased $7.6 million to $34.2 million in fiscal 2004 from $26.6 million in fiscal 2003. This was primarily due to higher distribution costs ($4.4 million) associated with an increase in sales volumes and increased transportation costs, higher depreciation and amortization ($1.4 million) and increased selling expenses ($1.2 million).
For the reasons described above, income from operations decreased $5.8 million to $12.1 million in fiscal 2004 from $17.9 million in the prior year.
Specialty Chemicals Segment Results
The following table summarizes the specialty chemicals segment results of operations for the fiscal years ended December 31, 2004 and December 26, 2003.
For fiscal 2004, net sales in the specialty chemicals segment increased $55.8 million or 36.2% to $210.0 million from $154.2 million in fiscal 2003. This increase was primarily due to higher selling prices and sales volumes, combined with currency effects driven by the strengthening of both the Euro and the Canadian dollar. Sales at our North American specialty chemicals operations increased $19.5 million primarily due to higher average selling prices ($14.4 million) and favorable currency effects ($3.1 million), combined with the impact of increased sales volumes ($2.0 million). Sales at our European operations increased $36.3 million primarily due to the higher average selling prices ($17.3 million) and favorable currency effects ($11.3 million), combined with the impact of increased sales volumes ($7.4 million). Net sales included $13.0 million and $8.9 million of sales to the packaging segment for fiscal 2004 and 2003, respectively, which are eliminated in consolidation.
Gross profit increased by $5.5 million to $23.6 million or 11.2% of net sales in fiscal 2004 from $18.1 million or 11.7% of net sales in fiscal 2003. This increase was primarily caused by higher selling prices, as described above, and higher sales volumes ($1.1 million), as well as by the impact of changes in foreign currency rates ($2.0 million), partially offset by higher raw material prices ($26.8 million), primarily styrene monomer, and a write-off of costs associated with the accelerated termination of one of the Company’s raw material requirements contracts ($2.1 million) as described in Note 6 to the Company’s consolidated financial statements included elsewhere herein.
For fiscal 2004, operating expenses increased by $1.6 million to $20.2 million from $18.6 million in fiscal 2003 primarily as a result of changes in foreign currency rates ($1.4 million).
For the reasons described above, income from operations increased $3.9 million to $3.4 million in fiscal 2004 from a $0.5 million loss in the prior year.
Corporate and Other
Corporate operating expenses increased by $0.1 million during the fiscal 2004 to $10.7 million from $10.6 million in fiscal 2003 primarily due to, as described in Note 8 to the consolidated financial statements included elsewhere herein, $0.8 million in other expenses related to the extinguishment of long-term debt in fiscal 2003 for which there was no corresponding expense in the fiscal 2004, partially offset by the write-off, in the current year, of costs associated with the Company’s proposed initial public offering of our common stock ($0.8 million).
Year Ended December 26, 2003 Compared to the Year Ended December 27, 2002
Executive Summary
The Company’s profitability was lower in 2003 as compared to 2002 due to higher raw material and energy-related costs, which had a negative impact on our operating results. Fiscal 2003 net sales of $341.7 million increased 5.7% over the prior year mainly due to changes in foreign currency rates and the Acquisition, which occurred on November 14, 2003. Income from operations decreased $15.8 million from the prior year to $6.9 million mainly due to significant increases in energy-related costs at our packaging segment and a contraction in the spread between selling prices and raw material costs at our specialty chemicals segment, both due in large part to the hostilities which occurred in the Middle East, partially offset by the impact of changes in foreign currency rates.
Consolidated Results
The following table summarizes the results of operations for the fiscal years ended December 26, 2003 and December 27, 2002.
Net sales in fiscal 2003 were $341.7 million, an increase of $18.5 million from $323.2 million in fiscal 2002. This increase was primarily caused by foreign currency changes driven by the strengthening of the Euro against the U.S. dollar ($17.4 million) combined with higher selling prices at the specialty chemicals segment ($1.6 million), and the Acquisition in November 2003 ($3.0 million). These increases were partially offset by decreased sales volumes at our domestic packaging and specialty chemicals operations ($2.2 million).
Gross profit decreased to $62.7 million or 18.3% of net sales in fiscal 2003 from $79.7 million or 24.7% of net sales in fiscal 2002. This decrease was primarily caused by higher raw material costs ($9.8 million), and higher energy-related costs ($7.4 million) combined with higher depreciation at our specialty chemicals segment ($1.1 million) and higher employee costs ($1.1 million). These decreases were partially offset by foreign currency changes driven by the strengthening of the Euro against the U.S. dollar ($2.6 million), higher selling prices at the specialty chemicals segment ($1.6 million) and the impact of the Acquisition ($1.3 million).
Operating expenses decreased by $1.2 million in fiscal 2003 to $55.8 million. This was primarily caused by lower operating expenses at our corporate offices ($4.2 million), largely offset by an increase in operating costs at our packaging operations ($1.8 million) and specialty chemicals operations ($1.1 million). Included in operating expenses for the year ended December 26, 2003 are approximately $1.0 million of foreign currency transaction losses, as well as $0.4 million of internal costs related to the Acquisition and the costs related to the Company’s registration statement relating to the proposed sale of the Company’s common stock.
For the reasons described above, income from operations decreased by $15.8 million in fiscal 2003 to $6.9 million or 2.0% of net sales from $22.7 million or 7.0% of net sales in 2002.
Interest expense of $22.0 million in 2003 was comparable to $21.4 million in the prior year, as lower average interest rates more than offset the impact of higher average levels of outstanding debt. Income from unconsolidated affiliates decreased $2.5 million from the prior year to $3.6 million due to a reduction in partners’ capital from an investment partnership in which the Company serves as a limited partner. Other expenses of $0.9 million in 2003 were comparable to $1.1 million in 2002.
The effective tax rate for fiscal 2003 decreased to 21.1% from 38.8% in the prior year. This reduction was primarily due to the creation of a valuation allowance against certain of the Company’s state net operating loss carryforwards.
Segment Analysis
Packaging Segment Results
The following table summarizes the packaging segment results of operations for the fiscal years ended December 26, 2003 and December 27, 2002.
Financial results at the Company’s packaging operations were negatively impacted by higher energy-related costs, higher raw material costs and lower sales volumes of foam packaging products, primarily during the first half of fiscal 2003. These factors were due in large part to the hostilities which occurred in the Middle East. Partially offsetting these items were savings realized from implemented cost containment measures.
Net sales in the packaging segment in fiscal 2003 increased $1.0 million to $196.4 million compared to $195.4 million in fiscal 2002. The increase was primarily due to the Acquisition in mid-November ($3.0 million) and increased sales at our European packaging operations ($0.7 million). These increases were partially offset by lower selling prices ($1.7 million) resulting primarily from changes in product mix and lower sales volumes ($1.0 million), primarily during the first half of 2003.
Gross profit decreased $9.9 million to $44.5 million or 22.7% of net sales in fiscal 2003 from $54.4 million or 27.8% of net sales in fiscal 2002. This decrease was primarily caused by higher energy-related costs ($6.2 million) and raw material costs ($2.1 million). The increase in energy-related costs stemmed from an increase in the average price per million British thermal units of natural gas, primarily during the first half of 2003. The increase in raw materials related to higher EPS production costs, resulting from increased styrene monomer costs over the prior year.
Operating expenses increased $1.9 million to $26.6 million in fiscal 2003 from $24.7 million in fiscal 2002. This increase was due to higher general and administrative costs ($2.2 million), primarily at our European packaging operations, partially offset by lower distribution costs ($0.6 million) in the domestic packaging operations resulting from lower sales volumes.
For the reasons described above, primarily higher energy-related and raw material costs, income from operations decreased $11.8 million to $17.9 million in fiscal 2003 from $29.7 million in the prior year.
Specialty Chemicals Segment Results
The following table summarizes the specialty chemicals segment results of operations for the fiscal years ended December 26, 2003 and December 27, 2002.
For fiscal 2003, net sales in the specialty chemicals segment increased $19.9 million or 14.8% to $154.2 million from $134.3 million in fiscal 2002. This increase was primarily due to currency effects driven by the strengthening of both the Euro and the Canadian dollar. Sales at our North American specialty chemicals operations increased $6.6 million primarily due to the favorable currency effects ($3.6 million) combined with higher selling prices ($6.5 million), partially offset by lower sales volumes ($3.8 million). Sales at our European operations increased $13.3 million primarily due to the favorable currency effects ($13.8 million) combined with higher sales volumes ($2.7 million), partially offset by lower selling prices ($3.1 million). Net sales included $8.9 million and $9.8 million of sales to the packaging segment for fiscal 2003 and 2002, respectively, which are eliminated in consolidation.
Gross profit decreased by $3.8 million to $18.1 million in fiscal 2003 from $21.9 million in fiscal 2002. This was mainly due to higher styrene monomer costs ($7.7 million), the primary raw material in EPS, combined with higher energy costs ($1.2 million) and depreciation expense ($1.1 million), partially offset by higher selling prices ($3.3 million) as discussed above and the favorable impact of changes in foreign currency rates ($2.6 million).
For fiscal 2003, operating expenses increased by $1.1 million to $18.6 million from $17.5 million in fiscal 2002. This increase was primarily caused by changes in foreign currency rates ($2.3 million) combined with increased selling costs ($0.4 million) and higher distribution costs resulting from increased sales volumes ($0.4 million). These increases were partially offset by lower general and administrative expenses resulting from cost savings initiatives that were implemented during fiscal 2003.
For the reasons described above, primarily higher raw material and energy-related costs, income from operations decreased $4.9 million in fiscal 2003 from $4.4 million in the prior year.
Corporate and Other
Corporate operating expenses decreased by $4.2 million during fiscal 2003. In addition to the $1.2 million of expenses incurred in the prior year related to the exploration of the possible sale of the European specialty chemicals operations, this favorable change was caused by lower general and administrative expenses ($2.0 million) resulting from cost savings initiatives implemented during fiscal 2003 and lower amortization costs. Partially offsetting this was an increase in foreign currency losses ($1.0 million) and expenses related to the extinguishment of long-term debt ($0.8 million) as described in Note 8 to the consolidated financial statements included elsewhere herein.
Liquidity and Capital Resources
During fiscal 2004, cash used in operating activities totaled $12.3 million mainly due to a $9.3 million increase in working capital. The increase in working capital was primarily due to higher accounts receivable ($5.6 million) and inventory ($14.4 million), partially offset by higher accounts payable ($8.9 million). The increase in accounts receivable was mainly caused by increased sales volumes and higher average selling prices. The increases in inventory and accounts payable were due in large part to higher raw material costs.
During fiscal 2004, inventory turnover was approximately 6.0 times per year compared to 6.3 in 2003. As of December 31, 2004, the average collection period for our accounts receivable was 43 days, which was slightly lower than the 45 day average collection period as of December 26, 2003.
The Company used $36.0 million in investing activities during fiscal 2004, primarily due to $34.5 million in capital expenditures which were primarily related to the installation of new state-of-the-art manufacturing equipment. Distributions received from investments in unconsolidated affiliates exceeded the additional investments in these affiliates by $1.1 million during fiscal 2004.
On April 27, 2004, the Company issued $70.0 million of Senior Secured Floating Rate Notes due 2009. The notes bear interest at a floating rate of LIBOR plus 6.75% per year. Interest on the notes is reset quarterly and is payable quarterly, with the first payment having been made on July 15, 2004. The notes will mature on April 15, 2009. The net proceeds were used to repay a then outstanding $40.5 million term loan and
outstanding borrowings under the existing revolving credit facilities. In connection with the repayment of the term loan, we amended the domestic revolving credit facility to increase the commitment from $45 million to $55 million.
As of December 31, 2004, the Company had $60.2 million outstanding under its revolving credit facilities. After taking into account cash on hand, we had the ability to draw up to an additional $8.3 million under these facilities as of December 31, 2004. The principal uses of cash for the next several years will be debt service, capital expenditures and working capital requirements. The Company’s capital expenditures for fiscal years 2004 and 2003 were $34.5 million and $11.4 million, respectively.
As a holding company, the Company is dependent upon dividends and other payments from its subsidiaries to generate the funds necessary to meet its obligations. Subject to certain limitations, the Company is, and will continue to be, able to control its receipt of dividends and other payments from its subsidiaries. Under the Company’s current business plan, the Company expects that in 2005 and in the long-term, cash generated from operations will be sufficient to meet the Company’s expected operating needs. However, as a result of uncertainties including pricing of the Company’s products, general market and economic conditions and fluctuations in raw material prices, the Company is not able to accurately predict the amount of cash that will be generated from operating activities and cash generated from operating activities, if any, may not be sufficient to meet the Company’s operating needs. To the extent that the Company uses cash in operating activities, we expect that such amounts will be financed from borrowings under credit facilities.
The Company expects to spend approximately $25.0 million on capital expenditures in 2005. Of this amount, approximately $20.0 million relates to new capital expenditures, while $5.0 million relates to maintenance-related capital expenditures on existing equipment. Management estimates that capital expenditures will be made from cash generated from operating activities with the remainder financed with other long-term debt. The Company’s planned spending on capital investments is expected to provide sufficient capacity to satisfy the production requirements under the Company’s current business plan. The Company believes that the levels of capital expenditures permitted by its credit facilities will be sufficient to meet long-term capital expenditure requirements under the Company’s current business plan. The Company has flexibility regarding its long-term capital spending as the majority of its capital spending is not subject to contractual commitments, has the ability to adjust capital spending based on results of operations, excluding maintenance-related capital expenditures, and can assess the overall liquidity position of the Company at the time future investment decisions are made.
The Company’s projected fiscal 2005 debt service payments as of December 31, 2004 were $37.8 million, which included debt principal payments of $10.9 million and interest payments of $26.9 million. As of December 31, 2004, if the interest rate on the Company’s variable rate debt had changed by 1%, the Company’s annual debt service payment obligations would have changed by approximately $1.3 million. Management estimates that debt service requirements will be satisfied from cash generated from operating activities with the remainder financed from borrowings under credit facilities.
From time to time, the Company evaluates and may pursue various capital raising transactions including the sale of debt or equity securities and the divestiture of non-core assets, which will enhance the Company’s overall liquidity and improve its capital structure. The Company may need to pursue capital raising transactions in the event that cash generated from operating activities and amounts financed from borrowings, including borrowings from any additional commitments under the Company’s credit facilities, are insufficient to cover our operating, short-term capital expenditure and debt service requirements. If a capital raising transaction is necessary, the Company may not be able to enter into such a transaction on favorable terms or at all.
Credit Agreements
Effective September 2004 the Company amended its domestic revolving credit facility to increase the commitment from $55 million to $65 million. In February 2005 the Company again amended its domestic revolving credit facility (as amended to date, the “Amended Credit Agreement”) to increase the revolving commitment from $65 million to $75 million effective upon the Company’s satisfaction of certain conditions relating to the pay down of the facility or the Company’s borrowing base requirements, which were subsequently satisfied.
Effective April 2004 in connection with the issuance of the senior secured Floating Rate Notes, in September 2004, February 2005 and again in March 2005, we amended certain financial covenants in the Amended Credit Agreement to permit additional flexibility in operating our business and address compliance issues and instances of non-compliance. The recent amendments caused changes to the following financial covenants: (i) the minimum fixed charge coverage ratios, (ii) the maximum ratio of funded indebtedness to earnings before interest, taxes, depreciation and
amortization and (iii) the limitation of capital expenditures. As amended, the Amended Credit Agreement contains the following financial covenants:
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A minimum fixed charge coverage ratio, which is .80 to 1.00 for the quarter ending March 31, 2005 and increasing over time thereafter to 1.15 to 1.00 for the quarter ending September 30, 2005 and for each quarter thereafter;
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A maximum ratio of funded indebtedness to earnings before interest, taxes, depreciation and amortization which is 7.20 to 1.00 for the quarter ending June 30, 2005 and declining over time thereafter until reaching 3.75 to 1.00 for the quarter ending March 31, 2007 and for each quarter thereafter;
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Limitation of capital expenditures of $35.0 million for the fiscal year ended December 31, 2004 which will revert to $25.0 million for fiscal year ending December 31, 2005 provided the Company applies specified proceeds of certain capital raising transactions to reduce outstanding obligations under the facility;
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A minimum ratio of borrowers’ consolidated tangible assets to consolidated tangible assets of the Company’s domestic subsidiaries of 85%;
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A minimum ratio of borrowers’ consolidated earnings before interest, taxes, depreciation and amortization of consolidated earnings before interest, taxes, depreciation and amortization of the Company’s domestic subsidiaries of 85%; and
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Limitation of operating lease arrangements to $11.0 million per year.
As a result of the amendments discussed above, one of which served to eliminate the fixed charge coverage ratio and funded indebtedness to earnings before interest, taxes, depreciation and amortization covenants at December 31, 2004, the Company is in compliance with all covenants, including financial covenants, under all of the Company’s credit arrangements.
As part of the February 2005 amendment, the lenders received an assignment of rights under two promissory notes in the aggregate principal amount of $22.9 million, a pledge of certain stock from an affiliate of the Company and a guaranty from the Company’s President and Chief Executive Officer of the obligation under the facility up to an amount not exceeding $8.0 million. We also agreed to apply the net proceeds of certain capital events to reduce outstanding obligations under the facility.
Contractual Obligations and Commercial Commitments
The Company has future obligations for debt repayments, capital leases, future minimum rental and similar commitments under non-cancelable operating leases, non-competition agreement and purchase obligations as well as contingent obligations related to outstanding letters of credit. These obligations as of December 31, 2004 are summarized in the tables below.
(1) These amounts represent commitments under a long-term styrene monomer supply contract, as discussed in Note 6 to the Company’s consolidated financial statements included elsewhere herein.
(2) The Company has an employment agreement with its President and Chief Executive Officer that is contingent upon closing of a public offering by the Company of its common stock. See Item 11 included elsewhere herein for a description of the employment agreement. The obligations under this contingent agreement are not included in the Contractual Obligations table above.
Critical Accounting Policies and Estimates
The Company prepares its financial statements in conformity with U.S. generally accepted accounting principles. The preparation of such consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of those financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company discloses its significant accounting policies in the notes to its audited consolidated financial statements. Judgments and estimates of uncertainties are required in applying the Company’s accounting policies in certain areas. Following are some of the areas requiring significant judgments and estimates: determination of an asset’s useful life; estimates of allowances for bad debts; cash flow and valuation assumptions in performing asset impairment tests of long-lived assets; valuation assumption in determining the fair value of investments held by affiliates; and estimates of realizability of deferred tax assets.
The Company’s senior management has reviewed these critical accounting policies and estimates and the discussion below with its Audit Committee.
There are numerous critical assumptions that may influence accounting estimates in these and other areas. We base our critical assumptions on historical experience, third-party data and on various other estimates we believe to be reasonable. Certain of the more critical assumptions include:
Bad Debt Risk
•
Credit worthiness of specific customers and aging of customer balances
•
Contractual rights and obligations
•
General and specific economic conditions
Depreciable Lives of Plant and Equipment
•
Changes in technological advances
•
Wear and tear
•
Changes in market demand
The depreciable lives of the plant and equipment used in the operation of our business average approximately 17.1 years. Management monitors the assumptions underlying the useful lives of these assets and may potentially need to adjust the corresponding depreciable lives as circumstances change. A change in the average depreciable life of the Company’s plant and equipment by one year would impact depreciation expense by $1.1 million.
Asset Impairment Determinations
•
Intended use of assets and expected future cash flows
•
Industry specific trends and economic conditions
•
Customer preferences and behavior patterns
•
Impact of regulatory initiatives
Fair Value of Investments Held by Affiliates
•
Expected future cash flows of underlying investments
•
Changes in market demand
•
Industry specific trends and economic conditions
•
Third-party valuations
Changes in key assumptions about the financial condition of an underlying investment or actual condition which differs from estimates could result in an other than temporary impairment charge. However, given the substantial margin by which the fair value of the underlying investments exceeds the carrying value of our investment, the Company does not anticipate a material impact on the consolidated financial statements from differences in these assumptions.
Deferred Taxes
•
Expected future profitability and cash flows
•
Impact of regulatory initiatives
•
Timing of reversals of existing temporary differences between book and taxable income
Changes in key assumptions about expected future profitability and cash flows could result in changes to the Company’s tax provision and deferred tax liability position resulting from its ability to utilize existing net operating loss carry forwards. Given the margin by which expected future profitability and cash flows exceed those levels required to utilize existing net operating loss carry forwards, the Company does not anticipate a material impact on the consolidated financial statements from differences in these assumptions.
Recently Issued Accounting Standards and Regulatory Items
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, “Inventory Costs - An Amendment of ARB No. 43, Chapter 4,” which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). Under this Statement, such items will be recognized as current-period charges. In addition, the Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. SFAS 123(R) will be effective for interim or annual reporting periods beginning on or after June 15, 2005. We previously adopted the fair value recognition provisions of SFAS No. 123 Accounting for Stock-Based Compensation, in the third quarter of 2003. Accordingly, we believe that SFAS No. 123(R) will not have a material impact on our balance sheet or income statements. We continue to assess the potential impact that the adoption of SFAS No. 123(R) could have on our statement of cash flows.
On October 22, 2004, the American Jobs Creation Act (the “AJCA”) was signed into law. The AJCA provides for the deduction for U.S. federal income tax purposes of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. As the Company currently plans to permanently reinvest the undistributed earnings of its foreign subsidiaries, it does not expect that the ACJA will have a material impact on its financial position or results of operations. The AJCA also provides for a domestic manufacturing deduction for U.S. federal income tax purposes. We will not benefit from this deduction until the date in the future that our U.S. federal tax losses have been fully absorbed.
Forward Looking Statements
The statements contained in this Annual Report that are not historical facts, including but not limited to raw material prices, are based on current expectations. These statements are forward looking (as defined in the U.S. Private Securities Litigation Reform Act of 1995) in nature and involve a number of risks and uncertainties. Actual results may vary materially due to risks relating to raw material price volatility, dependence on key customers, international operations, dependence on key personnel and environmental matters, as well as general business and economic conditions, both domestic and international, and other risks that may be described from time to time in the reports that the Company files with the Securities and Exchange Commission. See “Business-Raw Materials”, “Business-Competition”, “Business-Employees”, “Business-Environmental Matters,” and “Quantitative and Qualitative Disclosures about Market Risk.”
Risks Relating to Our Business
To the extent that our costs for raw materials rise without comparable increases in the prices of our products or our supply of raw materials is hindered and no alternative sources can be found, our gross profit and net income may decrease.
Our foam products are manufactured from EPS, which is produced from styrene monomer. Our plastic cups and cutlery are thermoformed and injection molded from polypropylene and polystyrene resins.
Styrene monomer is a commodity petrochemical that is readily available throughout the world in bulk quantities from numerous large, vertically integrated chemical companies. Prices for styrene monomer have fluctuated significantly, principally due to supply and demand in the styrene monomer market, but also because of fluctuations in petrochemical feedstock prices. Beginning in January 2002 through March 2003,
market prices for styrene monomer increased by more than 80%. From March 2003 through July 2003, market prices for styrene monomer decreased by approximately 15%, but from July 2003 through February 2005, market prices for styrene monomer increased by approximately 66% to $0.64 per pound.
We may be subject to significant increases in prices for polypropylene and polystyrene resins that may materially impact our financial condition. The prices of polystyrene resins fluctuate in a fashion similar to the fluctuations affecting styrene monomer as described above. Polystyrene is largely a derivative of styrene monomer and prices react the same way over time. Prices also can change based on the operating rates of the polystyrene manufacturing facilities.
We have long-term supply agreements to purchase styrene monomer and polystyrene, however, in March 2005 we accelerated the termination of our primary North American styrene monomer requirements contract to not later than August 1, 2005. We believe that entering into long-term supply agreements for the purchase of styrene monomer and polystyrene has increased our flexibility to purchase styrene monomer and polystyrene and mitigated, but not eliminated, the impact on us of future price fluctuations for styrene monomer and polystyrene. We will continue to be exposed to fluctuations in styrene monomer and polystyrene prices to the extent that our supply agreements do not satisfy our needs for styrene monomer and polystyrene or if we are not able to replace the long-term supply contract pursuant to which we purchase styrene monomer for our domestic operations on favorable terms or at all.
The primary raw materials used to manufacture our thermoformed plastic products are polypropylene resins that are made from propylene. We do not currently have long-term supply agreements for polypropylene and may not be able to enter into such agreements on favorable terms or at all. If we are unable to enter into long-term supply agreements, we will be more impacted by the changing market conditions for polypropylene, particularly if our competitors are able to do so. Polypropylene resin pricing will follow the raw material price of propylene and be influenced by the operating rates of the respective polypropylene manufacturing locations. Polypropylene prices have had the tendency to fluctuate significantly over time. For example, the contract price for polypropylene ranged from $0.28 to $0.69 per pound from the beginning of 2002 through February 2005. The published homopolymer polypropylene contract price was $0.69 per pound for February 2005. We may not be able to arrange for other sources of polypropylene resins in the event of an industry-wide general shortage of resins used by us, or a shortage or discontinuation of certain types or grades of resin purchased from one or more of our suppliers.
If raw material prices increase and we are unable to pass such price increases on to our customers, employ successful hedging strategies, enter into long-term supply contracts at favorable prices or buy on the spot market at favorable prices, our gross profit and thus net income may decrease. To the extent that our supply of raw materials is hindered and no alternative sources can be found, our revenues also may decrease. In addition, to the extent prices for polypropylene resins significantly increase compared to polystyrene resins, the cost advantage for our polypropylene products will be mitigated or eliminated and our sales of polypropylene products may suffer. See “Business-Manufacturing-Raw Materials.”
Both the disposable foodservice packaging product market and the market for EPS are highly competitive. Many of our competitors in both of these markets are larger and have significantly greater resources, which could put us at a competitive disadvantage against such competitors.
In North America, we compete in the highly competitive foodservice industry and in the market for EPS. Within the foam segment of the cup and container market, we compete principally with Dart Container, which controls the largest share of this market segment. The plastic segment of the disposable cup and container market in which we compete is significantly more fragmented. However, the Company believes that only one other competitor, Berry Plastics, manufactures deep-draw thermoformed polypropylene cold drink cups. As thermoformed polypropylene cold cups gain market acceptance, we would anticipate that producers of polystyrene plastic cups may enter this market. Our products also compete with metal, glass, paper and other packaging materials, as well as plastic packaging materials made through different manufacturing processes. In Europe, we compete primarily in the fragmented European EPS market. See “Business-Competition.”
Many of our current and potential competitors in both North America and Europe are larger than we are and have significantly greater resources than we have, which could adversely impact our ability to effectively compete with these companies. The competition we face could result in our products losing market share or our having to reduce our prices, either of which would have a material adverse effect on our business and results of operations and financial condition.
Our customers for our disposable foodservice packaging products are concentrated; our revenues and net income may decline if we are unable to maintain our relationships with our largest customers.
In North America, we supply foam cup and container products to a number of national QSR and convenience store companies and to a number of large foodservice distributors. No customer represented more than 6.3% of our net sales for fiscal 2004, although the five largest accounts represented approximately 21.5% of such sales. While we have not lost sales from our key customers in fiscal 2003, 2004 or 2005 to date, if any of such customers substantially reduces its level of purchases from us, our revenues and net income may decline. As a result of concentrating our marketing efforts for thermoformed polypropylene products initially on key existing customers, especially QSRs, we anticipate that the concentration of net sales from our largest customers may increase beginning in 2005. Moreover, continued consolidation among distributors in the foodservice industry could result in an increasingly concentrated customer base or the loss of certain customers. See “Business-Sales, Marketing and Customers.”
We may not be successful in expanding our product line to include plastic products, and our inability to implement our expansion plans may have an adverse effect on our ability to increase our revenues, cash flows and net income.
We will be dependent upon the successful integration and retooling of the assets we have acquired and the installation of the new equipment we have ordered to manufacture these products. We will also need to market this new product line to our existing customers and new customers if we are to be successful. In addition to the risks relating to the asset acquisition and the equipment installation discussed above, our ability to penetrate this new market may be adversely affected by:
•
unanticipated delays in rolling out the line of products;
•
responses by competitors in the cold drink cup market, who may reduce prices or take other actions designed to preserve their market share;
•
catastrophic damage to the facility at which we will be manufacturing these products; and
•
delays or refusals by our key customers to purchase thermoformed polypropylene products.
Although several current and new customers are purchasing or have advised us of their intent to purchase cold drink cups from us, we may not achieve our anticipated level of sales or profitability of cold cups in 2005 or beyond. Our sales of polypropylene cold drink cups could be adversely affected by a decision by one or more of these customers to delay purchasing or not to proceed under the purchase commitments we have received, whether due to product quality concerns, changes in business strategies or other considerations. In addition, because these commitments do not include volume guarantees and may be terminated at any time at our customers’ discretion, we may not sell to these customers the volume of polypropylene cold drink cups that we currently anticipate.
If we are not able to begin selling a significant volume of polypropylene products beginning in 2005, our revenues, cash flows and net income may be lower than expected.
We conduct a significant portion of our operations in foreign countries, and are subject to risks that are inherent in operating abroad, including governmental regulation, changes in import duties, trade restrictions, currency restrictions and other restraints and burdensome taxes.
Our international operations and the products we sell are subject to numerous governmental regulations and inspections. Although we believe we substantially comply with such regulations, changes in
legislation or regulations and actions by regulators, including changes in administration and enforcement policies, may from time to time require operational improvements or modifications at various locations or the payment of fines and penalties, or both.
We are subject to a variety of governmental regulations in the countries where we market our products, including import quotas, tariffs and taxes. For example, distributions of earnings and other payments, including interest, received from our foreign subsidiaries may be subject to withholding taxes imposed by the jurisdiction in which such entities are formed or operating, which will reduce the amount of after-tax cash we can receive. In general, as a U.S. corporation, we may claim a foreign tax credit against our federal income tax expense for such foreign withholding taxes and for foreign income taxes paid directly by foreign corporate entities in which we own 10% or more of the voting stock. The ability to claim such foreign tax credits and to utilize net foreign losses is, however, subject to numerous limitations, and we may incur incremental tax costs as a result of these limitations or because we are not in a tax-paying position in the United States. We may also be required to include in our income for U.S. federal income tax purposes our proportionate share of certain earnings of those foreign subsidiaries that are classified as “controlled foreign corporations” without regard to whether distributions have been actually received from such subsidiaries.
Our financial results depend in part on the economies of the markets in which we have operations and other interests. These markets are in countries with economies in various stages of development or structural reform, and our operations in such markets also could be affected by:
•
political, social and economic instability;
•
war, civil disturbance or acts of terrorism;
•
taking of property by nationalization or expropriation without fair compensation;
•
imposition of limitations on conversions of foreign currencies into U.S. dollars or remittance of dividends and other payments by foreign subsidiaries;
•
hyperinflation; and
•
impositions or increase of investment and other restrictions or requirements by foreign governments.
Our international operations involve transactions in a variety of currencies. Our financial results may be significantly affected by fluctuations of currency exchange rates. Such fluctuations are significant to our international operations because many of the costs related to those operations are incurred in currencies different from those that are received from the sale of our products in foreign markets, and there is normally a time lag between the incurrence of such costs and collection of the related sales proceeds. To the extent that foreign subsidiaries distribute dividends in local currencies in the future, the amount of cash to be received by us and, consequently, the amount of cash available to make payments for principal of and interest on our senior notes, will be affected by fluctuations in exchange rates, and such shifts in the currency exchange rates may have a material adverse effect on our revenues, cash flows and net income. Although we periodically evaluate derivative financial instruments to manage foreign currency exchange rate changes, we have never held derivatives for managing foreign currency exchange rate risks.
A number of our agreements are governed by the laws of, and subject to dispute resolution in the courts of, or through arbitration proceedings in, the country or region in which the operations are located. We cannot accurately predict whether such forum will provide us with an effective and efficient means of resolving disputes that may arise in the future. Even if we are able to obtain a satisfactory decision through arbitration or a court proceeding, we could have difficulty enforcing any award or judgment on a timely basis. Our ability to obtain or enforce relief in the United States is uncertain.
We depend on the services of Michael T. Kennedy, our President, Chief Executive Officer and Chairman, the loss of whom would materially harm our business.
We are dependent on the management experience and continued services of Michael T. Kennedy, our President, Chief Executive Officer and Chairman. We entered into an employment agreement with Mr. Kennedy for an initial three-year term that is contingent upon closing of a public offering of our common stock. We do not currently maintain key person life insurance policies on Mr. Kennedy. Mr. Kennedy has extensive and specialized experience in the foodservice and EPS packaging industries. Accordingly, if Mr. Kennedy were unable or unwilling to continue in his present position, we could have difficulty finding a comparably experienced replacement. If we were unable to replace Mr. Kennedy, our sales and product line expansion initiatives could suffer. In addition, our continued growth depends on our ability to attract and retain other experienced key employees.
If we are not able to use our net operating loss carryforwards to reduce our income tax obligations, our income tax expense may increase and our cash flows may decrease.
As of December 31, 2004, we had federal net operating loss carryforwards of approximately $114.3 million from our U.S. operations. These net operating loss carryforwards will expire between December 2009 and 2023. We have assessed our ability to utilize our federal net operating loss carryforwards and concluded that no valuation allowance currently is required since we believe that it is more likely than not that the federal net operating loss carryforwards will be utilized either by generating taxable income or through tax planning strategies. However, some portions of these net operating loss carryforwards may expire before we can utilize them to reduce our income tax obligations. Our income tax obligations affect our cash position and, therefore, may affect our ability to make payments on our long-term debt, including the notes.
We are subject to various environmental laws and regulations that could impose substantial costs upon us and may adversely affect our business, results of operations and financial condition.
Our operations are subject to federal, state, local and foreign environmental laws and regulations. As a result, we are involved from time to time in administrative or legal proceedings relating to environmental matters. The aggregate amount of future clean up costs and other environmental liabilities may be material. We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist. Enactment of more stringent laws or regulations or more strict interpretation of existing laws and regulations may require additional expenditures by us, some of which could be material. See “Business-Environmental Matters.”
The continuing hostilities in the Middle East or the outbreak or escalation of hostilities elsewhere could increase our manufacturing costs.
Continued unrest in Iraq and the outbreak, continuation or escalation of hostilities between the United States and any foreign nation, organization or group, together with the recent increase in the frequency and severity of terrorist and similar activity, may have a material adverse effect on our business, results of operations or financial condition. In particular, continued conflict in the Middle East may result in a real or perceived shortage of oil and/or natural gas, which could result in an increase in our manufacturing costs, including an increase in our energy costs and the cost of some of our raw materials.
We rely on unpatented proprietary know-how and trade secrets.
While we hold certain patents and trademarks, we rely primarily upon confidentiality agreements and restricted plant access to protect our proprietary technology. However, these methods and our patents and trademarks may not afford complete protection and others may independently develop the know-how and trade secrets or develop better production methods than us. Further, we may not be able to deter current and former employees, contractors and other parties from breaching confidentiality agreements and misappropriating our proprietary information, and it is possible that third parties may copy or otherwise obtain and use our proprietary information and technology without authorization or otherwise infringe on our intellectual property rights. While we attempt to ensure that our intellectual property and similar proprietary rights are protected and
that the third party rights we need are licensed to us when entering into business relationships, third parties may take actions that could materially and adversely affect our rights or the value of our intellectual property, similar proprietary rights or reputation. Furthermore, claims or litigation asserting infringement of intellectual property rights may be initiated by third parties seeking damages, the payment of royalties or licensing fees and/or an injunction against the sale of our products and we may not prevail in any such litigation or be successful in preventing such judgment. In the future, we may also rely on litigation to enforce our intellectual property rights and contractual rights, and, if not successful, we may not be able to protect the value of our intellectual property. Any litigation could be protracted and costly and could have a material adverse effect on our business and results of operations regardless of its outcome. Although we believe that our intellectual property rights are sufficient to allow us to conduct our business without incurring liability to third parties, our products may infringe on the intellectual property rights of third parties and our intellectual property rights may not have the value we believe them to have.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s market risk is the potential loss arising from adverse changes in interest rates. The Company’s long-term debt obligations are mostly at fixed interest rates and denominated in U.S. dollars. The Company manages its interest rate risk by monitoring trends in interest rates as a basis for determining whether to enter into fixed rate or variable rate agreements. Market risk is estimated as the potential increase in fair value of the Company’s long-term debt obligations resulting from a hypothetical one-percent decrease in interest rates and amounts to approximately $5.6 million over the term of the debt.
Although the Company continues to evaluate derivative financial instruments to manage foreign currency exchange rate changes, the Company does not currently hold derivatives for managing these risks or for trading purposes.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities and Exchange Act of 1934 (the “Exchange Act”) is accurately recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision of the Chief Executive Officer and Chief Financial Officer, the Company’s management conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2004. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. As part of the year-end close process, certain adjustments were identified and recorded at several of our subsidiaries. While the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at year-end, the Company is taking steps to further strengthen the control environments at both the subsidiary and the corporate monitoring levels to more quickly identify and resolve these types of issues. Among other things, we are in the process of adding new personnel resources and restructuring reporting relationships. The above matters were discussed with our Audit Committee.
There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, does not expect that the Company’s disclosure controls or its internal controls will prevent all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. As a result of the inherent limitations in a cost-effective controls system, misstatements due to error or fraud may occur and not be detected. Accordingly, the Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the disclosure controls and procedures are met.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Item 11 contains a discussion of certain 2005 compensation and bonus arrangements approved on March 29, 2005, which is incorporated by reference into this Item 9B.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The directors and executive officers of the Company and their ages as of March 30, 2005 are as follows:
Name
Age
Position
Michael T. Kennedy
President, Chief Executive Officer and Chairman of the Board
Michael V. Valenza
Senior Vice President - Finance and Chief Financial Officer
Richard C. Hunsinger
Senior Vice President - Sales and Marketing
Donald D. Walker
Senior Vice President - Operations
R. Radcliffe Hastings
Executive Vice President, Treasurer and Director
John P. McKelvey
Senior Vice President, Human Resources and Administration
Caroline J. Williamson
Vice President and Corporate Counsel
Paul D. Ridder
Vice President and Corporate Controller
Paul M. Finigan
Director
Michael T. Kennedy has served as President, Chief Executive Officer and Chairman of the Board of the Company since its formation in November 1991. Between March 1985 and July 1990, Mr. Kennedy served as Chief Financial Officer of Airgas, Inc., a New York Stock Exchange-listed distributor of industrial gases.
Michael V. Valenza has served as Senior Vice President-Finance and Chief Financial Officer of the Company since April 1993. He joined the Company in September 1992 as Director of Finance. From 1984 until joining the Company, Mr. Valenza served in a variety of positions with Arthur Andersen LLP, most recently as a manager in the Enterprise Group.
Richard C. Hunsinger has served as Senior Vice President-Sales and Marketing of the Company since its formation in November 1991. From 1979 through August 1991, Mr. Hunsinger served in various management positions, including Vice President of Sales and Marketing, for Winkler/Flexible Products, Inc., a former division of The Coca Cola Company.
Donald D. Walker has served as Senior Vice President-Operations of the Company since November 1992. Mr. Walker served as Vice President of Manufacturing and as Director of Manufacturing of the Company from February 1992 through November 1992. From 1969 until February 1992, Mr. Walker served in various management positions with Scott Container Products Group, Inc. (WinCup’s predecessor), WMF Corporation and Thompson Industries.
R. Radcliffe Hastings has served as Executive Vice President and Treasurer of the Company since March 2004. Mr. Hastings served as Senior Vice President and Treasurer of the Company from June 1996 until March 2004 and as a director since May 1997. Previously, Mr. Hastings was with Continental Bank, N.A. and its successor, Bank of America, for 18 years. Mr. Hastings held a variety of management positions in the U.S. banking group and in Bank of America’s securities operation, BA Securities, Inc.
John P. McKelvey has served as Senior Vice President-Human Resources and Administration for the Company since March 2002. From October 1992 through March 2002, Mr. McKelvey was the Vice President-Human Resources and Quality Assurance for the Company. From February 1992 until October 1992, Mr. McKelvey was Director of Human Resources for the Company. From 1971 until joining the Company, Mr. McKelvey served in a variety of human resources management positions for Scott Container Products Group, Inc., Texstyrene Corporation, WMF Corporation and Thompson Industries.
Caroline J. Williamson has served as Vice President and Corporate Counsel of the Company since March 1997. From March 1996 to March 1997, Ms. Williamson served as counsel for Aetna U.S. Healthcare. From September 1992 to March 1996, Ms. Williamson was an associate with Duane Morris LLP.
Paul D. Ridder has served as Vice President and Corporate Controller of the Company since December 2002. From January 1998 through December 2002, Mr. Ridder served as Corporate Controller for the Company. From August 1996 through January 1998, Mr. Ridder held various management positions with the Company, including Director of Financial Reporting and Manager of Financial Reporting. From 1993 until joining the Company, Mr. Ridder served in a variety of positions with Price Waterhouse LLP, most recently as a senior accountant.
Paul M. Finigan has served as a director of the Company since July 2000. Mr. Finigan served as counsel to the law firm of Day Berry & Howard, LLP from October 2002 to January 2005. From November 1999 to June 2002, Mr. Finigan served as Chief Legal Officer of Lumenos, Inc.
Board Committees
Our board of directors has the authority to appoint committees to perform certain management and administrative functions. Currently, the Board has appointed an Audit Committee and a Compensation Committee.
The Audit Committee has the responsibility for the appointment, compensation, retention and oversight of our independent registered public accountants for the purpose of preparing or issuing an audit report or performing other audit, review or attest services. The audit committee also has the responsibility of reviewing the results and scope of audit and other services provided by the independent registered public accountants, evaluating the objectivity and independence of our outside registered public accountants and reviewing and evaluating our audit functions generally. The audit committee also exercises oversight of our internal controls and financial reporting processes, and ethical and legal compliance matters. The Audit Committee is comprised of Mr. Kennedy, Mr. Hastings and Mr. Finigan. The Board of Directors has determined that Mr. Kennedy is an audit committee financial expert. Neither Mr. Kennedy nor Mr. Hastings is “independent” within the meaning of the rules adopted by the New York Stock Exchange and the Nasdaq Stock Market, although we are not currently subject to those rules. Our Board of Directors has determined that the qualifications and experience of Messrs. Kennedy and Hastings provide valuable guidance to the Audit Committee notwithstanding their lack of independence, and that their significant stock ownership enhances the likelihood that they will perform their duties as members of the Audit Committee in a manner that is in the best interest of our stockholders and other constituencies.
The Compensation Committee is responsible for approving, or making recommendations to the Board of Directors with respect to, the compensation arrangements (including bonus payments) for our executive officers, approving or making recommendations with respect to our equity incentive plans and making recommendations with respect to our general compensation plans and programs. The sole member of the Compensation Committee is Mr. Finigan. Mr. Finigan qualifies as independent within the meaning of the rules adopted by the New York Stock Exchange and the Nasdaq Stock Market.
Code of Ethics for Senior Officers
We have adopted a Code of Ethics for our chief executive officer and our other senior financial officers, including our chief financial officer, treasurer and controller. We will provide a copy of the code of ethics to any person upon request without charge. Any such request should include the name and mailing address of the person making the request, which should be directed to:
Radnor Holdings Corporation
Radnor Financial Center
150 Radnor Chester Road
Suite 300
Radnor, PA 19087-5292
Attention: Corporate Controller
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Officers of the Company who serve as directors are not compensated for serving as directors of the Company. The Company’s non-officer director receives an annual retainer of $25,000 for his services as director, plus an annual retainer of $5,000 for his services as a member of each Board committee on which he sits and an annual retainer of $5,000 for his services as the chairperson of each Board committee that he chairs. The Company’s non-officer director serves as chairperson of each of the Audit Committee and the Compensation Committee, and his current aggregate annual retainer is $45,000. The non-officer director may also receive, in the Company’s discretion, $1,250 per meeting for his attendance at meetings of the Board and of its committees. In addition, all directors are reimbursed for their expenses incurred in attending meetings.
The following table sets forth certain information concerning the compensation paid to the Company’s chief executive officer and the Company’s four other most highly compensated executive officers (the “Named Executive Officers”) whose total annual salary and bonus exceeded $100,000 for the year ended December 31, 2004:
Summary Compensation Table
(1) In accordance with the rules of the Securities and Exchange Commission, other compensation in the form of perquisites and other personal benefits has been omitted in those instances where the aggregate amount of such perquisites and other personal benefits constituted less than the lesser of $50,000 or 10% of the total of annual salary and bonuses for the officer for such year.
(2) Represents transportation costs paid by the Company on behalf of Mr. Kennedy.
(3) Includes $4,760 of matching contributions by the Company under its 401(k) Retirement Savings Plan and premiums of $71,054 paid by the Company with respect to a supplemental life insurance policy for the benefit of Mr. Kennedy.
(4) Represents a matching contribution by the Company under its 401(k) Retirement Savings Plan.
The Compensation Committee determined that no bonuses would be paid to any of the Named Executive Officers (other than the President and Chief Executive Officer) for the year ended December 31, 2004.
The following table sets forth the 2005 salary approved by the Compensation Committee for the Company’s Named Executive Officers:
Effective April 1, 2005, the President and Chief Executive Officer’s annualized base salary was reduced from $3,000,000 to $1,000,000. The Compensation Committee also approved the 2005 Bonus Plan for the Company’s President and Chief Executive Officer. Bonuses payable to the Company’s President and Chief Executive Officer under the Bonus Plan are determined quarterly by the Committee based on attainment of certain financial objectives and execution of certain nonfinancial objectives. The financial objectives consist of targets for profitability and the nonfinancial objectives relate to divestitures, capital raising transactions and critical operating initiatives. For 2005, the President and Chief Executive Officer will be eligible to receive an amount up to $2,500,000 if all financial objectives are exceeded and nonfinancial objectives are met. Notwithstanding the foregoing, the Compensation Committee retains the discretion under the Bonus Plan to adjust the amount of any bonus to be paid to the Company’s President and Chief Executive Officer with respect to the nonfinancial objectives.
The following table sets forth information with respect to options to purchase the Company’s Nonvoting Common Stock held at December 31, 2004 by the Named Executive Officers. No options were granted to or exercised by such persons during the fiscal year ended December 31, 2004.
(1) Based on the estimated fair value of $20,500 per share of the underlying securities, as determined by the Company’s Board of Directors.
Employment Agreements
In May 1993, the Company entered into an employment agreement with Richard C. Hunsinger, which was amended in January 1996, pursuant to which Mr. Hunsinger serves as Senior Vice President-Sales and Marketing of the Company. The agreement was for an initial term of seven years and six months and, absent 180 days prior written notice by either party before the end of any renewal term, renews for twelve months from year to year. Under the agreement as amended, Mr. Hunsinger is entitled to an annual salary of not less than $145,000 beginning in 1996, subject to annual cost of living increases. The agreement contains a covenant not to engage in any business that is competitive with the business of the Company in any geographical area in which it does business during the term of the agreement and for a period of two years immediately following the termination of the agreement.
In April 1996, the Company entered into an employment agreement with R. Radcliffe Hastings, pursuant to which Mr. Hastings serves as Senior Vice President and Treasurer of the Company. The agreement was for an initial term of three years and, absent 90 days prior written notice by either party before the end of any renewal term, renews for twelve months from year to year. Mr. Hastings is entitled to an annual salary of
not less than $125,000, subject to annual review by the Board of Directors. The agreement contains a covenant not to compete in any business that is competitive with the business of the Company in the United States during the term of the agreement.
We entered into an employment agreement with Mr. Kennedy that is contingent upon closing of a public offering by us of common stock. The agreement, which will be for an initial three-year term (subject to possible one-year renewals after this three-year period), will provide for an annual base salary of $1,000,000. All bonuses payable during, or in respect of, the employment term will be set by our compensation committee based upon reasonable performance criteria established by the committee no later than March 31 of the year to which it relates and after consultation with Mr. Kennedy. Mr. Kennedy will have the right to elect whether to receive any bonus that may become payable in the form of cash or shares of our common stock. As a long-term incentive, Mr. Kennedy will receive an award of 70,000 shares of restricted stock, assuming a 1,803-for-one stock split, upon the closing of the offering. All of these shares will be subject to forfeiture under the circumstances to be described in the award. The risk of forfeiture for such shares generally lapses with respect to one-third of such shares on each of the first three anniversaries of the closing of the offering. Mr. Kennedy will be eligible to participate in all of the Company’s employee benefits (including retirement, health and fringe benefits) made available generally to other officers and key employees and to such other benefits provided to him in accordance with past practice. Under the employment agreement, Mr. Kennedy’s employment may be terminated with or without “cause” by us at any time. In the event that we terminate Mr. Kennedy’s employment other than “for cause” or Mr. Kennedy terminates for “good reason” (as such terms will be defined in the agreement), we will be obligated to provide severance pay equal to two times his then current annual base salary and bonus amount and two years’ health insurance continuation and to unrestrict his restricted stock award to the extent such restrictions had not then already lapsed. The severance benefits increase to three times annual base salary and bonus and the health insurance continuation extends to three years in the event the qualifying termination occurs within two years following a “change of control of the Company” (as will be defined in the agreement). This agreement will also provide that, upon a change of control, (i) Mr. Kennedy will have the right to resign during a 60-day period following the first anniversary of the date of the change of control and receive the severance pay and benefits that would otherwise be provided if his employment were terminated other than “for cause” and (ii) Mr. Kennedy will be entitled to receive a tax “gross-up” payment to fully offset any excise taxes incurred if the after-tax benefit to Mr. Kennedy of the gross-up is at least 10% greater than the after-tax benefit that Mr. Kennedy would receive if he were cut back to the maximum amount that could be paid to him without incurring any such excise taxes. The employment agreement will also contain customary post-employment restrictive covenants in connection with Mr. Kennedy’s ability to compete and to solicit customers and employees of the Company.
Compensation Committee Interlocks and Insider Participation
There were no Compensation Committee interlocks required to be disclosed under Item 402(j) of Regulation S-K under the Securities Act of 1933 during 2004.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 31, 2005, with respect to each person who is known by the Company to own beneficially 5% or more of each class of voting securities of the Company.
The following table sets forth certain information as of December 31, 2004, with respect to compensation plans under which equity securities of the Company are authorized for issuance.
(1) Excludes the number of securities to be issued upon exercise of outstanding options, warrants and rights. Also excludes securities issuable pursuant to the Company’s 2003 Incentive Compensation Plan, which was approved by the Company’s stockholders in November 2003 but will not be effective until completion of a recapitalization of the Company. The recapitalization is expected to involve the conversion of each class of our common stock into a single class of common stock and a related stock split, and is not expected to be implemented until shortly before the completion of an initial public offering of our common stock.
The following table sets forth certain information as of March 31, 2005, with respect to beneficial ownership of each class of equity securities of the Company by (a) the directors of the Company, (b) the Named Executive Officers and (c) the directors and all executive officers of the Company as a group.
(1) Includes shares of Nonvoting Common Stock that certain individuals have the right to acquire, on or before May 31, 2005, upon the exercise of stock options granted pursuant to the Company’s Equity Incentive Plan, as follows: Michael V. Valenza-130; Richard C. Hunsinger-100; Donald D. Walker-125; and the directors and all executive officers as a group-470.
(2) Based upon 600, 5,400 and 245 outstanding shares of Voting Common Stock, Class B Nonvoting Common Stock and Nonvoting Common Stock, respectively, as well as the shares the respective individual has the right to acquire on or before May 30, 2005.
(3) Includes 419 shares held in a grantor retained annuity trust created by Mr. Kennedy. Mr. Kennedy retains the right to acquire the balance of these shares for value from the trust under certain circumstances specified in the instrument governing the trust. Excludes 2,108 shares owned by eight trusts for the benefit of Mr. Kennedy’s children.
(4) Includes 270 shares held in a grantor retained annuity trust created by Mr. Hastings. Mr. Hastings retains the right to acquire the balance of these shares for value from the trust under certain circumstances specified in the instrument governing the trust.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has made interest-bearing advances to Michael T. Kennedy, the Company’s Chief Executive Officer, for personal use. As of December 31, 2004, outstanding principal and interest from these advances totaled $4.1 million, which was the highest amount outstanding in fiscal 2004. These advances accrue interest monthly at the 100% short-term semi-annual applicable federal rate for the current month. As of March 30, 2005, the outstanding principal and interest from these advances totaled $4.1 million.
Vincent F. Garrity, Jr. is of counsel to Duane Morris LLP, which serves as the Company’s primary legal counsel. Mr. Garrity is also a trustee of eight trusts for the benefit of Mr. Kennedy’s children and a grantor retained annuity trust for the benefit of Mr. Kennedy’s children and other family members and certain charities that own an aggregate of 2,527 shares of our Class B Nonvoting Common Stock and for which Mr. Garrity, in his capacity as trustee, has sole dispositive power and, to the extent such shares are entitled to vote on any matter, sole voting power.
The Company provides certain management services to a related company of which Mr. Kennedy is also a director for which the Company receives a fee. During 2004, the Company earned management fees of $3.2 million. At December 31, 2004, unpaid management fees totaled $0.1 million.
Michael T. Kennedy agreed to guarantee our obligations under the Amended Credit Agreement up to an amount not exceeding $8.0 million.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Prior to the formation of the Audit Committee in 2004, the Board of Directors performed the duties that are now the responsibility of the Audit Committee. In 2004, the Audit Committee engaged the Company’s independent registered public accounting firm and has pre-approved all non-audit services provided by KPMG LLP.
During fiscal years 2004 and 2003, the Company retained KPMG LLP to provide services in the following categories and paid the following amounts (in thousands):
Audit fees are those fees for professional services rendered in connection with the audit of the Company’s annual consolidated financial statements included in its Annual Report on Form 10-K and the review of the Company’s quarterly consolidated financial statements included in its Quarterly Report on Form 10-Q’s that are customary under auditing standards of the Public Company Accounting Oversight Board (United States), as well as for statutory audits in foreign jurisdictions. Audit-related fees consist primarily of services rendered in connection with employee benefit plan audits, SEC registration statements on Form S-4 and Form S-1, due diligence assistance and consultation on financial accounting and reporting standards. Tax fees are primarily for preparation of tax returns, assistance with tax audits and appeals, advice on acquisitions and divestitures and technical assistance.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this Annual Report
1. The consolidated financial statements of the Company and its subsidiaries are listed in Item 8.
2. Financial Statement Schedules - None.
3. Exhibits:
3.1
Restated Certificate of Incorporation of Radnor Holdings Corporation, as amended (Incorporated by reference to Exhibit No. 3.1 filed with the Form 10-K for the year ended December 25, 1998 filed by Radnor Holdings Corporation)
3.2
Bylaws of Radnor Holdings Corporation (Incorporated by reference to Exhibit 3.2 filed with the Form S-4 Registration Statement filed by Radnor Holdings Corporation, WinCup Holdings, Inc., Radnor Chemical Corporation (formerly SP Acquisition Co.), StyroChem U.S., Ltd. (formerly StyroChem U.S., Inc. and StyroChem International, Inc.), StyroChem Canada, Ltd. (formerly StyroChem International, Ltd.) and Radnor Management, Inc., Commission File No. 333-19495 (the “Original S-4”))
4.1
Indenture dated as of March 11, 2003 among Radnor Holdings Corporation, as issuer, and Radnor Chemical Corporation, Radnor Delaware II, Inc., Radnor Management Delaware, Inc., Radnor Management, Inc., StyroChem Delaware, Inc., StyroChem Europe Delaware, Inc., StyroChem U.S., Ltd., StyroChem GP, L.L.C., StyroChem LP, L.L.C., WinCup Europe Delaware, Inc., WinCup GP, L.L.C., WinCup LP, L.L.C., WinCup Texas, Ltd. and WinCup Holdings, Inc., as guarantors, and Wachovia Bank, National Association, as trustee, including form of Notes and Guarantees (Incorporated by reference to Exhibit 4.1 filed with the Form 10-Q for the quarterly period ended March 28, 2003 filed by Radnor Holdings Corporation)
4.2
Indenture dated as of April 27, 2004 among Radnor Holdings Corporation, as issuer, and Radnor Chemical Corporation, Radnor Delaware II, Inc., Radnor Management Delaware, Inc., Radnor Management, Inc., StyroChem Delaware, Inc., StyroChem Europe Delaware, Inc., StyroChem U.S., Ltd., StyroChem GP, L.L.C., StyroChem LP, L.L.C., WinCup Europe Delaware, Inc., WinCup GP, L.L.C., WinCup LP, L.L.C., WinCup Texas, Ltd. and WinCup Holdings, Inc., as guarantors, and Wachovia Bank, National Association, as trustee, including form of Notes and Guarantees (Incorporated by reference to Exhibit 4.1 filed with Amendment No. 1 to the Form 10-Q for the quarterly period ended March 26, 2004 filed by Radnor Holdings Corporation)
*10.1
Amended and Restated Contract of Sale dated as of November 7, 2003 by and between Chevron Phillips Chemical Company LP and Radnor Chemical Corporation, StyroChem U.S., Ltd., StyroChem Canada, Ltd., StyroChem Finland Oy, WinCup Texas, Ltd. and WinCup Holdings, Inc. (Incorporated by reference to Exhibit 10.1 filed with Amendment No. 1 to the Form S-1 Registration Statement filed by Radnor Holdings Corporation, Commission File No. 333-110443 (the “Form S-1”))
**10.2
Agreement of Sale dated as of January 1, 1998 by and between Lyondell Chemie Nederland, B.V., as assignee of Lyondell Chemical Nederland, Ltd. (formerly known as ARCO Chemie Nederland, Ltd.) and StyroChem Finland Oy (Incorporated by reference to Exhibit 10.49 filed with the Form 10-K for the Year Ended December 25, 1998 filed by Radnor Holdings Corporation)
Delaware, Inc., WinCup Texas, Ltd., StyroChem GP, L.L.C., StyroChem LP, L.L.C., WinCup GP, L.L.C., WinCup LP, L.L.C. and PNC Bank, National Association (Incorporated by reference to Exhibit 10.20 filed with the 2001 10-K)
10.23
Second Amendment to Fourth Amended and Restated Revolving Credit and Security Agreement dated as of March 5, 2003 among WinCup Holdings, Inc., Radnor Chemical Corporation, StyroChem U.S., Ltd., Radnor Holdings Corporation, Radnor Delaware II, Inc., StyroChem Delaware, Inc., WinCup Texas, Ltd., StyroChem GP, L.L.C., StyroChem LP, L.L.C., WinCup GP, L.L.C., WinCup LP, L.L.C., PNC Bank, National Association, Fleet Capital Corporation and LaSalle Business Credit, LLC (Incorporated by reference to Exhibit 10.1 filed with the Form 10-Q for the quarterly period ended March 28, 2003 filed by Radnor Holdings Corporation)
10.24
Third Amendment to Fourth Amended and Restated Revolving Credit, Term Loan and Security Agreement dated as of August 1, 2003 among WinCup Holdings, Inc., Radnor Chemical Corporation, StyroChem U.S., Ltd., Radnor Holdings Corporation, Radnor Delaware II, Inc., StyroChem Delaware, Inc., WinCup Texas, Ltd., StyroChem GP, L.L.C., StyroChem LP, L.L.C., WinCup GP, L.L.C., WinCup LP, L.L.C., PNC Bank, National Association, Fleet Capital Corporation, LaSalle Business Credit, LLC and Fifth Third Bank (Incorporated by reference to Exhibit 10.59 filed with Amendment No. 2 to the Form S-4 Registration Statement filed by Radnor Holdings Corporation, Radnor Chemical Corporation, Radnor Delaware II, Inc., Radnor Management Delaware, Inc., Radnor Management, Inc., StyroChem Delaware, Inc., StyroChem Europe Delaware, Inc., StyroChem U.S., Ltd., StyroChem GP, L.L.C., StyroChem LP, L.L.C., WinCup Europe Delaware, Inc., WinCup GP, L.L.C., WinCup LP, L.L.C., WinCup Texas, Ltd. and WinCup Holdings, Inc., Commission File No. 333-105123)
10.25
Fourth Amendment to Fourth Amended and Restated Revolving Credit, Term Loan and Security Agreement dated September 12, 2003 among WinCup Holdings, Inc., Radnor Chemical Corporation, StyroChem U.S., Ltd., Radnor Holdings Corporation, Radnor Delaware II, Inc., StyroChem Delaware, Inc., WinCup Texas, Ltd., StyroChem GP, L.L.C., StyroChem LP, L.L.C., WinCup GP, L.L.C., WinCup LP, L.L.C., PNC Bank, National Association, Fleet Capital Corporation, LaSalle Business Credit, LLC and Fifth Third Bank (Incorporated by reference to Exhibit 10.1 filed with the Form 10-Q for the quarterly period ended September 26, 2003 filed by Radnor Holdings Corporation)
10.26
Fifth Amendment to Fourth Amended and Restated Revolving Credit, Term Loan and Security Agreement dated October 27, 2003 among WinCup Holdings, Inc., Radnor Chemical Corporation, StyroChem U.S., Ltd., Radnor Holdings Corporation, Radnor Delaware II, Inc., StyroChem Delaware, Inc., WinCup Texas, Ltd., StyroChem GP, L.L.C., StyroChem LP, L.L.C., WinCup GP, L.L.C., WinCup LP, L.L.C., PNC Bank, National Association, Fleet Capital Corporation, LaSalle Business Credit, LLC and Fifth Third Bank (Incorporated by reference to Exhibit 10.2 filed with the Form 10-Q for the quarterly period ended September 26, 2003 filed by Radnor Holdings Corporation)
10.27
Sixth Amendment to Fourth Amended and Restated Revolving Credit, Term Loan and Security Agreement dated November 17, 2003 among WinCup Holdings, Inc., Radnor Chemical Corporation, StyroChem U.S., Ltd, Radnor Holdings Corporation, Radnor Delaware II, Inc., StyroChem Delaware, Inc., WinCup Texas, Ltd., StyroChem GP, L.L.C., StyroChem LP, L.L.C., WinCup GP, L.L.C., WinCup LP, L.L.C., PNC Bank, National Association, Fleet Capital Corporation, LaSalle Business Credit, LLC and Fifth Third Bank (Incorporated by reference to Exhibit 10.26 filed with Amendment No. 1 to the Form S-1)
10.28
Seventh Amendment to Fourth Amended and Restated Revolving Credit, Term Loan and Security Agreement dated March 12, 2004 among WinCup Holdings, Inc., Radnor Chemical Corporation, StyroChem U.S., Ltd, Radnor Holdings Corporation, Radnor Delaware II, Inc., StyroChem Delaware, Inc., WinCup Texas, Ltd., StyroChem GP, L.L.C., StyroChem LP, L.L.C., WinCup GP, L.L.C., WinCup LP, L.L.C., PNC Bank, National Association, Fleet Capital Corporation, LaSalle Business Credit, LLC and Fifth Third Bank (Incorporated by reference to Exhibit 10.69 filed with the Form 10-K for the Year Ended December 26, 2003 filed by Radnor Holdings Corporation)
10.29
Eighth Amendment to Fourth Amended and Restated Revolving Credit, Term Loan and Security Agreement dated April 27, 2004 by and among WinCup Holdings, Inc., Radnor Chemical Corporation, StyroChem U.S., Ltd, Radnor Holdings Corporation, Radnor Delaware II, Inc., StyroChem Delaware, Inc., WinCup Texas, Ltd., StyroChem GP, L.L.C., StyroChem LP, L.L.C., WinCup GP, L.L.C., WinCup LP, L.L.C., PNC Bank, National Association, Fleet Capital Corporation, LaSalle Business Credit, LLC and Fifth Third Bank (Incorporated by reference to Exhibit 10.1 filed with the Form 10-Q for the quarterly period ended March 26, 2004 filed by Radnor Holdings Corporation)
10.30
Ninth Amendment to Fourth Amended and Restated Revolving Credit and Security Agreement dated September 27, 2004 by and among WinCup Holdings, Inc., Radnor Chemical Corporation, StyroChem U.S., Ltd., Radnor Holdings Corporation, Radnor Delaware II, Inc., StyroChem Delaware, Inc., WinCup Texas, Ltd., StyroChem GP, L.L.C., StyroChem LP, L.L.C., WinCup GP, L.L.C., WinCup LP, L.L.C., PNC Bank, National Association, Fleet Capital Corporation, LaSalle Business Credit, LLC and Fifth Third Bank (Incorporated by reference to Exhibit 10.1 filed with the Form 8-K filed by Radnor Holdings Corporation on September 30, 2004)
10.31
Tenth Amendment to Fourth Amended and Restated Revolving Credit and Security Agreement dated February 15, 2005 by and among WinCup Holdings, Inc., Radnor Chemical Corporation, StyroChem U.S., Ltd., Radnor Holdings Corporation, Radnor Delaware II, Inc., StyroChem Delaware, Inc., WinCup Texas, Ltd., StyroChem GP, L.L.C., StyroChem LP, L.L.C., WinCup GP, L.L.C., WinCup LP, L.L.C., PNC Bank, National Association, Fleet Capital Corporation, LaSalle Business Credit, LLC and Fifth Third Bank
10.32
Security Agreement dated as of April 27, 2004 among Radnor Holdings Corporation, WinCup Holdings, Inc., Radnor Chemical Corporation, StyroChem U.S., Ltd., Radnor Delaware II, Inc., StyroChem Delaware, Inc., WinCup Texas, Ltd., StyroChem GP, L.L.C., StyroChem LP, L.L.C., WinCup GP, L.L.C., WinCup LP, L.L.C. and Wachovia Bank, National Association, as collateral agent (Incorporated by reference to Exhibit 10.2 filed with the Form 10-Q for the quarterly period ended March 26, 2004 filed by Radnor Holdings Corporation)
10.33
Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated April 27, 2004 by StyroChem U.S., Ltd. in favor of Commonwealth Land Title of Fort Worth, Inc. for the benefit of Wachovia Bank, National Association, in its capacity as collateral agent with respect to Business Highway 287 North (Peden Road), Fort Worth, Texas property, which was recorded by the Recorder of Deeds for Tarrant County, Texas (Incorporated by reference to Exhibit 10.54 filed with Amendment No. 1 to the 2004 S-4)
10.34
Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated April 27, 2004 by StyroChem U.S., Ltd. in favor of Commonwealth Land Title of Fort Worth, Inc. for the benefit of Wachovia Bank, National Association, in its capacity as collateral agent with respect to North Sylvania Avenue, Fort Worth, Texas property, which was recorded by the Recorder of Deeds for Tarrant County, Texas (Incorporated by reference to Exhibit 10.55 filed with Amendment No. 1 to the 2004 S-4)
* Portions of this Exhibit have been deleted pursuant to an Order Granting Confidential Treatment under the Securities Act and Rule 406 Promulgated Thereunder.
** Portions of this Exhibit have been deleted pursuant to the Company’s Application Requesting Extension of Previous Grant of Confidential Treatment under the Exchange Act and Rule 24b-2 Promulgated Thereunder.
*** Portions of this Exhibit have been deleted pursuant to the Company’s Application Requesting Confidential Treatment under the Exchange Act and Rule 24b-2 Promulgated Thereunder.
+ This exhibit represents a management contract or compensatory plan or arrangement.
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act
Registrant has not sent and does not anticipate sending any annual report to its security holders other than a copy of this Form 10-K report. Registrant has not sent and does not anticipate sending any proxy statement, form of proxy or other proxy solicitation material to more than ten of its security holders with respect to any annual or other meeting of security holders, as it has only three holders of voting securities. If any annual report other than this Form 10-K report is hereafter furnished to Registrant’s security holders, or if any proxy statement, form of proxy or other proxy solicitation material is hereafter sent to more than ten of its security holders with respect to any annual or other meeting of security holders, Registrant will furnish four copies thereof to the Securities and Exchange Commission when it is so sent.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Radnor Holdings Corporation:
We have audited the accompanying consolidated balance sheets of Radnor Holdings Corporation and subsidiaries as of December 31, 2004 and December 26, 2003, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the fiscal years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Radnor Holdings Corporation and subsidiaries as of December 31, 2004 and December 26, 2003, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 31, 2005
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2004 and December 26, 2003
(In thousands, except share amounts)
See accompanying notes to consolidated financial statements.
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal years ended December 31, 2004, December 26, 2003
and December 27, 2002
(In thousands)
See accompanying notes to consolidated financial statements.
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity (Deficit)
Fiscal years ended December 31, 2004, December 26, 2003
and December 27, 2002
(In thousands, except share amounts)
See accompanying notes to consolidated financial statements.
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal years ended December 31, 2004, December 26, 2003
and December 27, 2002
(In thousands)
(Continued)
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal years ended December 31, 2004, December 26, 2003
and December 27, 2002
(In thousands)
See accompanying notes to consolidated financial statements.
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DISCONTINUED OPERATIONS
The Company
Radnor Holdings Corporation (“Radnor”) was incorporated in Delaware on November 6, 1991 to acquire the outstanding stock of Benchmark Holdings, Inc. (“Benchmark”) and WinCup Holdings, Inc. (“WinCup”). Radnor, through its WinCup subsidiary, is a leading manufacturer and distributor of disposable foodservice products and the second largest producer in the United States of foam cups and containers. In November 2003, the Company extended its product line to include thermoformed and injection molded products through the acquisition of certain thermoforming equipment and other assets of Polar Plastics Inc. and a subsidiary (collectively “Polar Plastics” or the “Acquisition”) (Note 3). Through its Radnor Chemical Corporation subsidiary, Radnor is the fifth largest worldwide producer of expandable polystyrene (“EPS”). Radnor and its subsidiaries (collectively the “Company”) sell their products primarily to national, institutional, retail, and wholesale customers throughout the U.S., Canada, Mexico, and Europe. The Company markets its products under a variety of brand and trade names, including “WinCup®,” “Handi-Kup®,” and “StyroChem®.”
The Company has a number of large national accounts and supplies products to a number of large foodservice distributors. The five largest accounts represented approximately 21%, 26% and 28% of the Company’s net sales for each of the fiscal years 2004, 2003 and 2002, respectively. Consolidation among distributors in the foodservice industry could result in an increasingly concentrated customer base or the loss of certain customers.
Discontinued Operations
Pursuant to an asset purchase agreement among Benchmark, WinCup and the Fort James Corporation, formerly James River Paper Company, Inc. (“Fort James”), dated October 31, 1995, Benchmark and WinCup sold to Fort James all of the assets of Benchmark’s cutlery and straws business and all of the assets of WinCup’s thermoformed cup business, except for cash, accounts receivable, and prepaid assets. The operations of Benchmark’s cutlery and straws business and WinCup’s thermoformed cup business were accounted for as discontinued operations. The loss in fiscal 2002, net of tax benefits of $32,000, represents the settlement of a contingent liability related to the discontinued operations. The Company has no further exposure to this contingent liability.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company’s fiscal year is the fifty-two or fifty-three week period that ends on the last Friday of December of each year. The fiscal year ended December 31, 2004 was a 53 week period and the fiscal years ended December 26, 2003 and December 27, 2002 were 52 week periods.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Radnor and all of its majority owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Beginning in the fourth quarter of the fiscal year ended December 26, 2003, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”) 46, “Consolidation of Variable Interest Entities”, and began to consolidate Radnor Investments, L.P. Prior to the adoption of FIN 46, the Company utilized the equity method of accounting for Radnor Investments,
L.P. The equity method of accounting is used when the Company has a 20% to 50% ownership interest in other companies. Certain reclassifications have been made to the prior years’ presentations to conform to the current year’s presentation.
Fair Value Accounting
The Company owns a 20% limited partner investment in Radnor Investments, L.P. (the “Partnership”). The Partnership accounts for its investments in accordance with the specialized accounting guidance in the American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide, Audits of Investment Companies and therefore (i) values its investments, which are generally subject to restrictions on resale and generally have no established market, at fair value, and (ii) does not consolidate the media programming company whose major operation is a basic tier arts and entertainment channel and is the primary investment of the Partnership. The Partnership determines fair value to be the amount for which an investment could be exchanged in an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale. The Partnership’s valuation policy considers the fact that no ready market exists for substantially all of the entities in which it invests. The Partnership’s valuation policy is intended to provide a consistent basis for determining the fair value of the portfolio. The Partnership will record unrealized depreciation on investments when it believes that an investment has become other than temporarily impaired, including where collection of a loan or when the enterprise value of the company does not currently support the cost of the Partnership’s investments. Conversely, the Partnership will record unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore, the Partnership’s investment has also appreciated in value. Because of the inherent uncertainty of such valuation, estimated values may differ significantly from the values that would have been used had a ready market for these investments existed and/or the Partnership liquidated its position and the differences could be material.
The Partnership’s primary investment is a 71.4% ownership in a media programming company whose major operation is a basic tier arts and entertainment channel. The fair value of this investment was determined on a discounted cash flow basis. The significant drivers of the fair value determination are the estimated number of subscribers to the channel, the estimated level of advertising shown on the channel, reliance on the contract through which the channel’s content is distributed and the assessed likelihood of renewal of the contract. While the estimates made by the Partnership with respect to these significant drivers taken as a whole remain valid, actual future results could differ from those estimates.
Accounts Receivable, Net
Accounts receivable are net of allowances for doubtful accounts of $207,000 and $815,000 at December 31, 2004 and December 26, 2003, respectively. Bad debt expense was ($44,000), $677,000 and $294,000 for fiscal years 2004, 2003 and 2002, respectively. The related write-offs of accounts receivable were $564,000, $733,000 and $627,000 for those years, respectively.
Inventories
Inventories are recorded at the lower of cost (first-in, first-out) or market. Inventories at December 31, 2004 and December 26, 2003, consisted of the following (in thousands):
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Plant and equipment under capital leases are stated at the present value of minimum lease payments.
Depreciation on plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets. The estimated useful life of buildings is 40 years, while machinery and equipment is 5 to 15 years. Plant and equipment held under capital leases and leasehold improvements are amortized straight line over the shorter of the lease term or estimated useful life of the asset. Maintenance and repairs are charged to operations currently, and replacements and significant improvements are capitalized. Depreciation expense in 2004, 2003 and 2002 was $18,006,000, $15,311,000 and $14,122,000, respectively.
Supplies and Spare Parts
Supplies and spare parts include maintenance parts maintained in central stores locations. When needed at the manufacturing facilities, parts are shipped and expensed when used.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If the carrying amount of the assets are less than the sum of the future undiscounted cash flows, such assets are considered to be impaired.
Investments in Affiliated Companies
Investments in which the Company owns more than 20% but less than a majority are accounted for using the equity method. Investments in which the Company owns less than 20% are accounted for under the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” or at the cost method, as applicable.
As a result of the adoption of FIN 46, the Company began to consolidate Radnor Investments, L.P. beginning in the fourth quarter of the year ended December 26, 2003. As discussed in Note 4 to the Company’s consolidated financial statements, the adoption of this interpretation resulted in an increase to the investment assets on its consolidated balance sheet of $65.3 million with a corresponding minority interest payable of $48.9 million. This transaction did not have a material effect on the Company’s consolidated net income or cash flows. Prior to the adoption of FIN 46, the Company utilized the equity method of accounting. Under the equity method, original investments are recorded at cost in other assets and adjusted for the Company’s share of undistributed earnings or losses of these companies.
Intangible Assets
At December 31, 2004, intangible assets amounted to $9.9 million (net of accumulated amortization of $1.3 million) consisting of customer lists of $7.6 million and a non-competition agreement of $2.3 million (Note 3). At December 26, 2003, intangible assets amounted to $5.8 million (net of accumulated amortization of $0.1 million) consisting of customer lists of $3.2 million and a non-competition agreement of $2.6 million. The increase in intangible assets was due to finalizing the purchase accounting related to the Acquisition. The customer list is being amortized over ten years, its estimated useful life, while the non-competition agreement is being amortized over seven years, the term of the agreement. There are no expected residual values related to these intangible assets. Amortization expense in 2004 and 2003 was $1.2 million and $0.1 million, respectively. Estimated future amortization expense by fiscal year is as follows: 2005 - $1.2 million; 2006 - $1.2 million; 2007 - $1.2 million; 2008 - $1.2 million; 2009 - $1.2 million and $3.9 million thereafter.
Other Assets
Other assets include deferred financing costs of $6.3 million and $4.4 million as of December 31, 2004 and December 26, 2003, respectively, related to the note offerings executed in 2004 and 2003. Such costs are being amortized over the terms of the related notes. Amortization of deferred costs of $1,159,000, $891,000 and $1,492,000 was included in interest expense for the years ended December 31, 2004, December 26, 2003 and December 27, 2002, respectively. In addition to the deferred financing costs, other assets include various deposits totaling $4.4 million and $2.1 million at December 31, 2004 and December 26, 2003, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax law and statutory tax rates applicable to the periods in which the temporary differences are expected to affect taxable income.
Revenue Recognition
The Company recognizes revenue when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.
Currency Translation
The Company conducts business in a number of foreign countries and as a result is subject to the risk of fluctuations in foreign currency exchange rates and other political and economic risks associated with international business. The Company’s foreign entities report their assets, liabilities, and results of operations in the currency in which the entity primarily conducts its business. Foreign assets and liabilities are translated into U.S. dollars at the rates in effect at the end of the fiscal period. The revenue and expense accounts of foreign subsidiaries are translated into U.S. dollars at the average rates that prevailed during the period. Adjustments resulting from the translation of the financial statements are reflected as a currency translation adjustment in stockholders’ equity. Currency transaction losses were $1.4 million and $1.0 million in 2004 and 2003, respectively, while gains and losses in 2002 were not material.
Research and Development
Research and development costs are charged to expense as incurred and are included in cost of goods sold. These costs represented 0.4%, 0.5% and 0.8% of net sales in 2004, 2003 and 2002, respectively.
Stock Option Accounting
The Company applied the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations including Financial Accounting Standards Board (“FASB”) Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25,” issued in March 2000, to account for its stock options. In the third quarter of fiscal 2003, the Company adopted SFAS No. 148 and will account for all prospective option grants under the fair value method. See Note 9 for additional information regarding the Company’s stock option plan. No stock options have been issued by the Company subsequent to its adoption of SFAS No. 148.
The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period.
This pro forma impact may not be representative of the effects for future years and is likely to increase as additional options are granted and amortized over the vesting period.
As the Company’s stock is not publicly traded, the fair value of each option was estimated on the grant date using the minimum value method (which excludes a volatility assumption), with the following assumptions: risk-free rate of interest - 6.31%; expected life - 10 years; and no dividends paid.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Judgments and estimates of uncertainties are required in applying the Company’s accounting policies in certain areas. Following are some of the areas requiring significant judgments and estimates: determination of an asset’s useful life; estimates of allowances for bad debts; cash flow and valuation assumptions in performing asset impairment tests of long-lived assets; valuation assumption in determining the fair value of investments held by affiliates; and estimates of realizability of deferred tax assets.
Fair Value of Financial Instruments
The estimated fair value of financial instruments was determined by the Company using market quotes, if available, or discounted cash flows using market interest rates. The carrying values of cash, accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these items. The carrying amounts of the Company’s bank term loans and the lines of credit approximate fair value because they have variable interest rates based on either the prime rate or the interbank offering rate of the currency in which the Company borrows. The fair value of the senior notes at December 31, 2004 approximate their carrying values.
Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 151, “Inventory Costs - An Amendment of ARB No. 43, Chapter 4,” which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Under this Statement, such items will be recognized as current-period charges. In addition, the Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. SFAS 123(R) will be effective for interim or annual reporting periods beginning on or after June 15, 2005. We previously adopted the fair value recognition provisions of SFAS No. 123 Accounting for Stock-Based Compensation, in the third quarter of 2003. Accordingly, we believe that SFAS No. 123(R) will not have a material impact on our balance sheet or income statements. We continue to assess the potential impact that the adoption of SFAS No. 123(R) could have on our statement of cash flows.
3. POLAR PLASTICS ACQUISITION
On November 14, 2003, the Company purchased Polar Plastics, a business consisting of a state-of-the-art manufacturing facility, including thermoforming and injection molding machines capable of producing polypropylene and polystyrene products, raw material storage and handling equipment, as well as related production assets and net working capital. The Company assumed the long-term lease for a 342,000 square foot facility in Mooresville, North Carolina that includes manufacturing, warehouse and office space. The machinery and equipment in a smaller manufacturing and warehouse facility in Winston-Salem, North Carolina was also acquired. The Company also acquired the rights to the product lines currently manufactured at these facilities, which include a broad range of plastic cups, stemware, plates, bowls, containers and cutlery. The Acquisition provided the manufacturing capacity to accelerate the development and marketing of new polypropylene foodservice packaging products, particularly disposable cold drink cups.
The Acquisition was recorded using the purchase method of accounting and, accordingly, results of its operations have been included in the Company’s consolidated financial statements since November 14, 2003, the effective date of the acquisition. The purchase price for the Acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The purchase price for the assets was approximately $26.3 million, which included $4.5 million in cash paid at closing, issuance of a six-year note in the amount of $10.0 million bearing interest at 6.0%, the assumption of $9.3 million in other long-term contractual obligations and a $2.5 million holdback based on working capital levels. Polar Plastics and certain of its affiliates and key management also entered into seven-year non-competition agreements that will require an additional $3.0 million in payments over five years. The results of the acquired business have been included in the Company’s Packaging segment since the effective date of the acquisition.
The purchase price of the acquisition was allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the date of the acquisition. The purchase price allocation to each major asset and liability caption of the Acquisition is as follows (in thousands):
Pro Forma Operating Results
The following presents unaudited pro forma operating results as if the Acquisition had occurred on December 28, 2001. The pro forma results were prepared from financial information obtained during the due diligence process and have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made as of December 28, 2001 or the results that may occur in the future. (unaudited) (in thousands):
4. INVESTMENTS IN AFFILIATED COMPANIES
The Company’s investment partnership accounts for its investments by the fair value method of accounting as described in Note 2. The Partnership’s investments are generally subject to restriction on resale and generally have no established market. The Partnership values all of its investments at fair value as determined in good faith by Radnor Investment Advisors, L.P. (the General Partner) in accordance with the Partnership’s valuation policy.
The Partnership’s investments in and advances to affiliates totaled $39.8 million as of December 31, 2004. The Partnership’s largest investment, totaling $39.2 million, relates to interest in Creative Networks International (the Netherlands) B.V., a pay-television programming company whose major operation is a basic tier arts and entertainment channel on the Sky Italia Broadcasting satellite platform in Italy. In addition, the Partnership maintains a $0.6 million investment in SkinHealth, Inc., a Massachusetts-based firm that provides cosmetic, dermatology and skin rejuvenation products and procedures. The Partnership invested $2.0 million and $0.1 million during the fiscal years ended December 31, 2004 and December 26, 2003, respectively, in Creative Networks International (the Netherlands) B.V. and SkinHealth, Inc.
The following is a summary of cost versus fair value for the Partnership’s investment portfolio at December 31, 2004 and December 26, 2003 (in thousands, except share amounts):
In addition, the Company held certain investments accounted for under the equity method of accounting, which totaled $1,871,000 and $1,761,000 at December 31, 2004 and December 26, 2003, respectively.
On January 31, 2005, the Company’s $18.9 million limited partnership interest in Radnor Investments, L.P. was converted into a note receivable, bearing interest at an annual rate equal to the Prime Index reported by Bloomberg plus one percent (1%) with interest compounded daily. Immediately following the conversion, the Company assigned its remaining interests as a limited partner in Radnor Investments, L.P. to Radnor Investment Advisors, Inc., an unrelated Delaware corporation. In addition, Radnor Investments, L.P. merged with Radnor Investment Advisors, L.P, an unaffiliated limited partnership. As a result of these transactions, effective January 31, 2005, the Company no longer maintains a limited partnership investment in Radnor Investments, L.P. and all investment interests previously held by Radnor Investments, L.P are now maintained by Radnor Investment Advisors, L.P.
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
On March 11, 2003, the Company issued $135.0 million of 11.0% Senior Notes due 2010 and amended its domestic revolving credit facility to include a $45.0 million term loan and to increase the revolving credit commitment from $35.0 million to $45.0 million. The proceeds were used to repay the existing $159.5 million Series A and Series B Senior Notes and outstanding borrowings under the existing revolving credit facilities.
On April 27, 2004, the Company issued $70.0 million of Senior Secured Floating Rate Notes due 2009. The notes bear interest at a floating rate of LIBOR plus 6.75% per year. Interest on the notes is reset quarterly and is payable quarterly, with the first payment having been made on July 15, 2004. The notes will mature on April 15, 2009. The net proceeds were used to repay a then outstanding $40.5 million term loan and outstanding borrowings under the existing revolving credit facilities. In connection with the repayment of the term loan the Company amended its domestic revolving credit facility to increase the commitment from $45 million to $55 million.
The Company’s Canadian Revolving Credit Facility and Finnish Credit Agreements are due on demand. The $8.1 million outstanding on these facilities at December 31, 2004 have been classified as non-current in the accompanying consolidated balance sheet as the Company has the ability to refinance these facilities under the Amended Credit Agreement.
Effective September 2004, the Company amended its domestic revolving credit facility to increase the commitment from $55 million to $65 million. In February 2005, the Company again amended its domestic revolving credit facility (as amended to date, the “Amended Credit Agreement”) to increase the revolving commitment from $65 million to $75 million effective upon the Company’s satisfaction of certain conditions relating to the pay down of the facility or the Company’s borrowing base requirements.
Effective April 2004 in connection with the issuance of the Senior Secured Floating Rate Notes, in September 2004, February 2005 and again in March 2005, the Company amended certain financial covenants in the Amended Credit Agreement to permit additional flexibility in operating the Company’s business and address compliance issues and instances of non-compliance. The recent amendments caused changes to the following financial covenants: (i) the minimum fixed charge coverage ratios, (ii) the maximum ratio of funded indebtedness to earnings before interest, taxes, depreciation and amortization and (iii) the limitation of capital expenditures. As amended, the Amended Credit Agreement contains the following financial covenants:
•
A minimum fixed charge coverage ratio, which is .80 to 1.00 for the quarter ending March 31, 2005 and increasing over time thereafter to 1.15 to 1.00 for the quarter ending September 30, 2005 and for each quarter thereafter;
•
A maximum ratio of funded indebtedness to earnings before interest, taxes, depreciation and amortization which is 7.20 to 1.00 for the quarter ending June 30, 2005 and declining over time thereafter until reaching 3.75 to 1.00 for the quarter ending March 31, 2007 and for each quarter thereafter;
•
Limitation of capital expenditures of $35.0 million for the fiscal year ended December 31, 2004 which will revert to $25.0 million for fiscal year ending December 31, 2005 provided the Company applies specified proceeds of certain capital raising transactions to reduce outstanding obligations under the facility;
•
A minimum ratio of borrowers’ consolidated tangible assets to consolidated tangible assets of the Company’s domestic subsidiaries of 85%;
•
A minimum ratio of borrowers’ consolidated earnings before interest, taxes, depreciation and amortization of consolidated earnings before interest, taxes, depreciation and amortization of the Company’s domestic subsidiaries of 85%; and
•
Limitation of operating lease arrangements to $11.0 million per year.
As a result of the amendments discussed above, one of which served to eliminate the fixed charge coverage ratio and funded indebtedness to earnings before interest, taxes, depreciation and amortization covenants at December 31, 2004, the Company is in compliance with all covenants, including financial covenants, under all of the Company’s credit arrangements.
As part of the February 2005 amendment, the lenders received an assignment of rights under two promissory notes in the aggregate principal amount of $22.9 million, a pledge of certain stock from an affiliate of the Company and a guaranty from the Company’s President and Chief Executive Officer of the obligation under the facility up to an amount not exceeding $8.0 million. We also agreed to apply the net proceeds of certain capital events to reduce outstanding obligations under the facility.
Future debt maturities are as follows (in thousands):
6. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain of its manufacturing, warehouse and office facilities and transportation equipment under noncancellable operating and capital lease arrangements with terms of one to 20 years.
The future minimum payments under noncancellable operating leases are as follows (in thousands):
Rental expense for all operating leases was $9,709,000, $7,265,000 and $6,953,000 for 2004, 2003 and 2002, respectively.
The future minimum payments under capital leases are as follows (in thousands):
Litigation
We are involved in a number of legal proceedings arising in the ordinary course of business, none of which we believe will have a material adverse effect on our financial condition or results of operations.
Supply Agreements
In November 2003, the Company amended its primary North American styrene monomer requirements contract. The initial term of the contract extends through December 2009. Under the amended contract, the Company is required to purchase from one supplier 150 million pounds of its annual North American styrene monomer requirements through December 2006, decreasing to 100 million pounds annually through December 2009, and has certain rights to purchase additional styrene monomer.
In March 2005, the Company further amended its primary North American styrene monomer requirements contract. Based on this amendment, the agreement will terminate effective August 1, 2005. As a result of this amendment, effective December 31, 2004, the Company wrote-off $2.1 million in prepaid costs related to the agreement.
7. STOCKHOLDERS’ EQUITY
The Company is authorized to issue up to 11,650 shares of Voting Common Stock, 5,400 shares of Class B Nonvoting Common Stock, 5,650 shares of Nonvoting Common Stock and 2,000 shares of Series Preferred Stock. At December 31, 2004, there were issued and outstanding 600 shares of Voting Common Stock, 5,400 shares of Class B Nonvoting Common Stock and 245 shares of Nonvoting Common Stock. All shares have a par value of $0.10 except for shares of Class B Nonvoting Common Stock, which have a par value of $0.01.
8. OTHER EXPENSES
In 2004, the Company wrote-off $0.8 million in costs, primarily investment banking fees, relating to the Company’s proposed initial public offering of its common stock.
In 2003, the Company recorded $0.8 million of personnel costs directly related to the extinguishment of long-term debt.
In 2002, the Company incurred $1.2 million in costs, primarily investment banking fees, relating to the exploration of the possible sale of its European specialty chemicals operations.
9. INCOME TAXES
The components of income (loss) before taxes by source of income are as follows (in thousands):
The provision (benefit) for income taxes for each of the three years in the period ended December 31, 2004 is as follows (in thousands):
The components of deferred taxes at December 31, 2004 and December 26, 2003 are as follows (in thousands):
The Company has $1.3 million of current taxes payable within accrued liabilities at December 31, 2004.
The provision (benefit) for income taxes varies from the amount determined by applying the United States Federal statutory rate to pre-tax income as a result of the following (in thousands):
As of December 31, 2004, the Company had approximately $114.3 million of net operating loss carryforwards for federal income tax purposes, which expire through 2023. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2004. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign operations that arose in 2004 and prior years because the Company currently does not expect those unremitted earnings to reverse and become taxable to the Company in the foreseeable future. A deferred tax liability will be recognized when the Company is no longer able to demonstrate that it plans to permanently reinvest undistributed earnings. As of December 31, 2004 the undistributed earnings of these subsidiaries were approximately $8.1 million.
On October 22, 2004, the American Jobs Creation Act (“the AJCA”) was signed into law. The AJCA provides for the deduction for U.S. federal income tax purposes of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. As the Company currently plans to permanently reinvest the undistributed earnings of its foreign subsidiaries, it does not expect that the ACJA will have a material impact on its financial position or results of operations. The AJCA also provides for a domestic manufacturing deduction for U.S. federal income tax purposes. We will not benefit from this deduction until the date in the future that our U.S. federal tax losses have been fully absorbed.
10. STOCK OPTION PLAN
The 1992 Equity Incentive Plan (the “Plan”) provides for the grant of nonqualified options to purchase shares of the Nonvoting Common Stock subject to certain limitations. Nonqualified stock options are issuable only to eligible officers and employees of the Company. There are no shares reserved for issuance under the Company’s Plan.
The per share exercise price of a stock option may not be less than 75% of the fair market value of the Nonvoting Common Stock, as determined by the board of directors, on the date the option is granted. Such options may be exercised only if the option holder remains continuously associated with the Company from the date of grant to a date not less than three months prior to the date of exercise. The exercise date of an option granted under the plan cannot be later than ten years from the date of the grant. Any options that expire unexercised or that terminate upon an optionee’s ceasing to be employed by the Company become available once again for issuance.
The following summarizes the stock option activity under the Plan:
Options for 676, 711 and 736 shares were exercisable at December 31, 2004, December 26, 2003 and December 27, 2002, respectively.
11. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) savings and profit sharing plan, which covers all employees who have at least 1,000 hours of service during the year. The Company will match employee contributions up to 2.8% of an employee’s annual salary. The Company may also, at the discretion of the board of directors, elect to make a profit sharing contribution. There have been no profit sharing contributions for the three years in the period ended December 31, 2004. Employer matching contributions to the plan amounted to $716,000, $625,000 and $709,000 for each of the three years in the period ended December 31, 2004, respectively.
Certain of the Company’s European subsidiaries maintain defined contribution benefit plans. Pension expense related to these plans was $1,549,000, $1,550,000 and $1,299,000 in 2004, 2003 and 2002, respectively.
12. RELATED PARTY TRANSACTIONS
A former director of the Company is of counsel to the law firm which serves as the Company’s primary legal counsel. During 2004, 2003 and 2002, the Company paid fees of $1,588,000, $697,000 and $472,000, respectively, to this firm.
The Company provides certain management services and rights to a related company. For the management services and rights, the Company receives fees and royalties and is reimbursed for all expenses advanced on behalf of the entity. During 2004, 2003 and 2002, the Company earned management fees, interest and royalties of $3.2 million, $0.8 million and $0.5 million, respectively. At December 31, 2004 and December 26, 2003, unpaid management fees, interest, royalties and expense advances totaled $0.1 million and $0.4 million, respectively.
The Company has made interest-bearing advances to Michael T. Kennedy, the Company’s Chief Executive Officer. As of December 31, 2004, outstanding principal and interest from these advances totaled $4.1 million.
Michael T. Kennedy agreed to guarantee the Company’s obligations under the Amended Credit Agreement up to an amount not exceeding $8.0 million.
13. SEGMENT INFORMATION
The Company has two business segments that operate within three distinct geographic regions. The packaging and insulation segment produces food packaging and insulation products for distribution to the foodservice, insulation, and packaging industries. The specialty chemicals segment produces EPS for internal consumption by the packaging segment in addition to selling to third-party manufacturers. Each of these segments operates in the United States, Canada, and Europe. Financial results for the periods presented are not fully comparable because of the November 2003 Acquisition, which has been included in the Company’s Packaging segment since the effective date of the acquisition.
The following tables summarize the Company’s financial information and results of operations by segment and geographic region for fiscal years 2002 through 2004 (in thousands):
Operating:
14. SUPPLEMENTAL FINANCIAL INFORMATION
Radnor Holdings Corporation is a holding company that has no operations separate from its investment in subsidiaries. The Company’s $135.0 million of 11.0% Senior Notes due 2010 and $70.0 million of Senior Secured Floating Rate Notes due 2009 are fully and unconditionally jointly and severally guaranteed by substantially all of the Company’s domestic subsidiaries, all of which are 100% owned by the Company.
As a holding company, the Company is dependent upon dividends and other payments from its subsidiaries to generate the funds necessary to meet its obligations. Subject to certain limitations, the Company is, and will continue to be, able to control its receipt of dividends and other payments from its subsidiaries.
There are no direct prohibitions on the ability of the Company or any guarantor to obtain funds from its respective subsidiaries by dividend or by loan, but certain of the Company’s foreign subsidiaries’ credit agreements contain covenants, such as minimum debt to equity and current assets to current liabilities ratios, that indirectly limit the ability of these subsidiaries to transfer funds to the Company. As of December 31, 2004 and December 26, 2003, the net assets of these foreign subsidiaries totaled $33.7 million and $29.8 million, respectively.
The following condensed consolidating financial statements of Radnor Holdings Corporation and subsidiaries have been prepared pursuant to Rule 3-10 Regulation S-X:
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
December 31, 2004
(In thousands)
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Income
Fiscal year ended December 31, 2004
(In thousands)
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
December 26, 2003
(In thousands)
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Income
Fiscal year ended December 26, 2003
(In thousands)
RADNOR HOLDINGS CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Income
Fiscal year ended December 27, 2002
(In thousands)
INDEPENDENT AUDITORS’ REPORT
The Partners
Radnor Investments, L.P.:
We have audited the accompanying statement of assets, liabilities and partners’ capital of Radnor Investments, L.P. (the Partnership), including the statement of investments, as of December 31, 2002, and the related statements of operations, changes in partners’ capital and cash flows for the year then ended. These financial statements are the responsibility of the management of the Partnership. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the assets, liabilities and partners’ capital of Radnor Investments, L.P. as of December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
August 26, 2003
RADNOR INVESTMENTS, L.P.
Statement of Assets, Liabilities and Partners’ Capital
December 31, 2002
See accompanying notes to financial statements.
RADNOR INVESTMENTS, L.P.
Statement of Operations
Year ended December 31, 2002
See accompanying notes to financial statements.
RADNOR INVESTMENTS, L.P.
Statement of Changes in Partners’ Capital
Year ended December 31, 2002
See accompanying notes to financial statements.
RADNOR INVESTMENTS, L.P.
Statement of Cash Flows
Year ended December 31, 2002
See accompanying notes to financial statements.
RADNOR INVESTMENTS, L.P.
Statement of Investments
December 31, 2002
See accompanying notes to financial statements.
RADNOR INVESTMENTS, L.P.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Radnor Investments, L.P. (the Partnership), a Delaware limited partnership, was formed pursuant to an Agreement of Limited Partnership (the Partnership Agreement) for the purpose of making investments generally in privately-held companies in a variety of industries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared on the value method of accounting in accordance with accounting principles generally accepted in the United States of America for investment companies.
Valuation of Investments
The Partnership’s investments are generally subject to restrictions on resale and generally have no established market. The Partnership values substantially all of its investments at fair value as determined in good faith by Radnor Investment Advisors, L.P. (the General Partner) in accordance with the Partnership’s valuation policy. The Partnership determines fair value to be the amount for which an investment could be exchanged in an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale. The Partnership’s valuation policy considers the fact that no ready market exists for substantially all of the entities in which it invests. The Partnership’s valuation policy is intended to provide a consistent basis for determining the fair value of the portfolio. The Partnership will record unrealized depreciation on investments when it believes that an investment has become impaired, including where collection of a loan or when the enterprise value of the company does not currently support the cost of the Partnership’s investments. Conversely, the Partnership will record unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore, the Partnership’s investment has also appreciated in value. Because of the inherent uncertainty of such valuation, estimated values may differ significantly from the values that would have been used had a ready market for these investments existed and/or the Partnership liquidated its position and the differences could be material.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Income Taxes
The Partnership itself is not subject to income taxes; each partner is severally liable for income taxes, if any, on his, her or its proportionate share of the Partnership’s net taxable income.
Capital Calls
The Partnership calls capital from certain of its partners in connection with proposed portfolio investments and to provide for partnership and organizational expenses specified by the Partnership Agreement. At the time the capital is called it is recorded as a capital contribution.
Recently Issued Accounting Standards
In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities an interpretation of ARB No. 51.” This Interpretation clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an entity holds a variable interest that it acquired prior to February 1, 2003. The Partnership continues to evaluate the impact, if any, that adopting FASB Interpretation No. 46 may have on its financial statements.
3. PARTNERSHIP AGREEMENT
The following summarizes certain matters related to the organization of the Partnership. Partners should refer to the Partnership Agreement for a more complete description of the Partnership terms.
The Partnership ceases to exist on December 31, 2047, unless earlier terminated in accordance with the Partnership Agreement.
The General Partner is not required to contribute capital to the Partnership. The General Partner must notify the limited partner when additional capital contributions to the Partnership are required. Within ten days thereafter, the limited partner shall notify the General Partner as to whether it agrees to make such additional capital contributions.
A Capital Account, as defined in the Partnership Agreement, is maintained on the books of the Partnership for each partner. The balance in each partner’s Capital Account is adjusted by the partner’s allocable share of net profit or loss, capital contributions and the amount of cash distributed to such partner, as set forth in the Partnership Agreement. Allocations of income, gains, losses and deductions of the Partnership are allocated among the capital accounts of the Partners, as set forth in the Partnership Agreement.
4. RELATED-PARTY TRANSACTIONS
The Partnership has paid certain administrative expenses on behalf of SkinHealth, Inc. and is entitled to reimbursement of these amounts. At December 31, 2002, $9,632 in advances was included in other receivables in the accompanying balance sheet.
5. COMMITMENTS AND CONTINGENCIES
During fiscal 2002, the Partnership committed to fund an additional $1,500,000 to Creative Networks International (the Netherlands) B.V. At December 31, 2002, $535,297 had been advanced to the company and was included in investments in the accompanying balance sheet.
6. INVESTMENTS
Creative Networks International (the Netherlands) B.V.
Creative Networks International (the Netherlands) B.V. and subsidiaries are a pay-television programming company whose major operation is a basic tier arts and entertainment channel on the Sky Italia (“Sky”) satellite platform in Italy. Sky, which is owned by Rupert Murdoch’s The News Corporation Limited and is akin to BSkyB in the United Kingdom, is currently the only pay-television platform in Italy after a merger with its only competitor, Vivendi Universal’s Telepiu, on July 15, 2003.
In September 1997, the Partnership invested approximately $55,000 to acquire 16 Class A Shares and 14 Class B Shares, representing 55.6% of the total outstanding shares and approximately 40.0% of the voting interest of Creative Networks International (the Netherlands) B.V. In July 2002, the Partnership converted its Class B shares into an equal number of Class A Shares, thereby increasing its total voting interest in Creative Networks International (the Netherlands) B.V. to approximately 55.6%. The total cost of the conversion, including the capital contribution and legal and accounting fees, totaled $941,811.
The Partnership’s investment at cost in Creative Networks International (the Netherlands) B.V. and its subsidiaries as of December 31, 2002 was $996,811. The Partnership’s investment was valued at $45,639,000 in the accompanying balance sheet, which approximated fair market value as of December 31, 2002.
During fiscal 2002, the limited partner contributed a $5,042,380 debt security due from Creative Networks International (the Netherlands) B.V. to the Partnership. The Partnership subsequently established a revolving line of credit with Creative Networks International (the Netherlands) B.V., which enables Creative Networks International (the Netherlands) B.V. to borrow up to a maximum of $1,500,000. Interest accrues on the outstanding principle amount at an annual rate equal to the prime rate plus 2.50% and compounds monthly. As of December 31, 2002, the outstanding principal balance under both the debt security and the line of credit was $1,071,084 and was included in investments in the accompanying balance sheet.
SkinHealth, Inc.
SkinHealth, Inc. is an operator of retail, self-pay cosmetic dermatology and skin rejuvenation centers based inside dermatology practices. The company partners with respected dermatologists and offers its clients cosmetic and aesthetic services as well as a full line of skin care products. The company has targeted the Boston, Massachusetts region for its first market.
Since July 1999, the Partnership invested $2,092,388 to acquire approximately 31.1% of the issued and outstanding shares of common and preferred stock of SkinHealth, Inc.
The Partnership’s investment at cost in SkinHealth, Inc. as of December 31, 2002 was $2,092,388. The Partnership’s investment was valued at $717,741 in the accompanying balance sheet, which approximated fair market value as of December 31, 2002.
On May 4, 2000, the Partnership advanced SkinHealth, Inc. $200,000 under a promissory note. Interest accrues on the outstanding principal at a rate of 10.0% and compounds annually. All interest accrued from inception through the third anniversary date shall be added to the principal and repaid in 16 equal principal installments on the first day of each calendar quarter commencing on April 1, 2003. As of December 31, 2002, the original $200,000 was included in investments while the $58,198 of accrued interest was included in interest receivable in the accompanying balance sheet.
On August 20, 2002, the Partnership established a grid note with SkinHealth, Inc., which enables SkinHealth, Inc. to borrow up to a maximum of $25,000. Interest accrues on the outstanding principal amount at an annual rate equal to the prime rate as published from time to time by Bank of America plus 1.0%. As of December 31, 2002, the outstanding principal balance under the grid note was $10,000 and was included in investments in the accompanying balance sheet.
Radnor Ventures, LLC
Radnor Ventures, LLC was formed for the sole purpose of investing, through e-Healthcare Partners, LLC, in healthcare-related companies - Internet Healthcare Group (“IHCG”) and Lumenos, Inc. (“Lumenos”), respectively.
IHCG is a holding company partnered with Internet Capital Group of Wayne, Pennsylvania and is focused exclusively on healthcare and insurance. By acquiring stakes in partner companies and integrating them into a collaborative network, IHCG seeks to exploit technology enhanced opportunities within the healthcare segment of the U.S. economy.
In April 2000, the Partnership invested $150,000 to acquire approximately 11.3% of the member units of Radnor Ventures, LLC.
The Partnership’s investment at cost in Radnor Ventures, LLC as of December 31, 2002 was $150,000. The Partnership’s investment was valued at $23,687 in the accompanying balance sheet, which approximated fair market value as of December 31, 2002.
Prism e-Solutions, LLC
Prism e-Solutions, LLC is a start-up software company that plans to deliver a variety of software products to end users via the internet.
Since inception, the Partnership invested $125,000 to acquire 140 member units of Prism e-Solutions, LLC.
The Partnership’s investment in Prism e-Solutions, LLC as of December 31, 2002 was $125,000. The Partnership’s investment was valued at cost as of December 31, 2002.
7. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS’ REPORT
On January 31, 2005, the limited partner’s interest in Radnor Investments, L.P. was converted into a note receivable, bearing interest at an annual rate equal to the Prime Index reported by Bloomberg plus one percent (1%) with interest compounded daily. Immediately following the conversion, the limited partner assigned its remaining interests as a limited partner in Radnor Investments, L.P. to Radnor Investment Advisors, Inc., the general partner of its general partner, Radnor Investment Advisors, L.P. In addition, Radnor Investments, L.P. merged with Radnor Investment Advisors, L.P. As a result of these transactions, effective January 31, 2005, all investment interests previously held by Radnor Investments, L.P. are now maintained by Radnor Investment Advisors, L.P.