-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wm2aym5x+6XpZ1tPP9dn/9+K6VCUhE+GKRh4gPUClgBe9KZ4Z6TZcupSXBnUZOF1 X1xqak7hHJPfflty0ChJYw== 0001047469-99-022553.txt : 19990624 0001047469-99-022553.hdr.sgml : 19990624 ACCESSION NUMBER: 0001047469-99-022553 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990528 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACKAGING RESOURCES INC CENTRAL INDEX KEY: 0000825790 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 363321568 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-81824 FILM NUMBER: 99637121 BUSINESS ADDRESS: STREET 1: ONE CONWAY PARK STREET 2: 100 FIELD DR STE 300 CITY: LAKE FOREST STATE: IL ZIP: 60045 BUSINESS PHONE: 7082966100 MAIL ADDRESS: STREET 1: 100 FIELD DRIVE STREET 2: STE 300 CITY: LAKE FOREST STATE: IL ZIP: 60045 10-K 1 10-K - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 -------------------------- For the fiscal year ended February 28, 1999 Commission file number 333-05885 PACKAGING RESOURCES INCORPORATED (Exact name of registrant as specified in its charter) DELAWARE 36-3321568 (State of Incorporation or organization) (IRS Employer Identification No.) One Conway Park 100 Field Drive, Suite 300 Lake Forest, Illinois 60045 (847) 295-6100 (Address, including zip code and telephone number, including area code, of registrant's principal executive offices) ------------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None. ------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- ------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of May 28, 1999, 1,000 shares of the registrant's common stock, $0.01 par value per share, were outstanding. None of the outstanding shares were held by non-affiliates. DOCUMENTS INCORPORATED BY REFERENCE Certain exhibits set forth in Item 14 of Part IV are incorporated by reference to the registrant's Registration Statement on Form S-1 (Commission File No. 333-05885) filed on June 13, 1996, Annual Report on Form 10-K (Commission File No. 333-05885) filed on May 28, 1998 and Quarterly Report on Form 10-Q (Commission File No. 333-05885) filed on October 7, 1998. - -------------------------------------------------------------------------------- TABLE OF CONTENTS PART I
Page No. ----- Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 8 Item 4. Submission to Matters to Vote of Security Holders . . . . . . . . 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 10 Item 7a. Quantitative and Qualitative Disclosures About Market Risk. . . . 15 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . 16 PART III Item 10. Directors and Executive Officers of the Registrant. . . . . . . . 16 Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . 18 Item 12. Security Ownership of Certain Beneficial Owners and Management. . 20 Item 13. Certain Relationships and Related Transactions. . . . . . . . . . 21 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . 23
1 PART I ITEM 1. BUSINESS. FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K includes forward-looking statements as that term defined in the Private Securities Litigation Reform Act of 1995. PRI has based these forward-looking statements on its current expectations and projections about future events. These forward-looking statements are subject to risks and uncertainties, including, among other things: - PRI's reliance on key customers and supply agreements - Trends and conditions in the rigid plastic packaging and plastic beverage cup industries, including fluctuations in resin costs - PRI's substantial debt - PRI's future capital needs and - PRI's ability to compete PRI undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, actual results may differ materially from those reflected in any forward-looking events. General Packaging Resources Incorporated (the "Company" or "PRI") is a leading developer, manufacturer and marketer of rigid plastic food packaging, serving primarily as a supplier of customized containers for national branded consumer products. The Company is the largest domestic manufacturer of shelf stable, multi-layer (impermeable to air and moisture) containers for nutritional supplements, frosting containers and reusable/disposable food storage containers. The Company also is the largest domestic designer and manufacturer of promotional beverage cups in the United States, marketing these products primarily to the fast-food and beverage industries. For the fiscal year ended February 28, 1999, the Company generated net sales of $136.6 million. Approximately 78% of the Company's net sales in such period were attributable to rigid plastic food packaging and 22% to promotional beverage cups. The Company's food packaging products are sold to over 200 customers, including manufacturers of national branded food, dairy and pharmaceutical products such as General Mills, Inc. ("General Mills"), including its Yoplait U.S.A. division ("Yoplait"), The Dannon Company, Inc. ("Dannon"), Ross Laboratories ("Ross Labs"), a division of Abbott Laboratories, Inc. ("Abbott Labs"), The Haagen Dazs Company, Inc. ("Haagen Dazs"), Pillsbury Company ("Pillsbury") and S.C. Johnson & Son, Inc. ("S.C. Johnson"). The Company is a major supplier of promotional beverage cups to over 250 companies in the fast-food, sports stadium and beverage industries, including McDonald's, Coca-Cola, Pepsi, Tricon Restaurant Services Group, Inc. ("Tricon"), Aramark and Burger King. PRI was formed as a Delaware corporation in 1984. In 1993, PRI became a wholly-owned subsidiary of Packaging Resources Group, Inc. ("Group"), a Delaware corporation that was formed at such time. 2 PRODUCTS AND CUSTOMERS The Company's products are divided into two categories: rigid plastic food packaging and promotional beverage cups. RIGID PLASTIC FOOD PACKAGING The Company serves a number of niche markets within the rigid plastic food packaging industry with products that include various sizes of refrigerated yogurt containers, multi-layer containers for nutritional supplements and infant formula, frosting cans and lids and reusable/disposable food storage containers. The Company also produces containers and lids for manufacturers of cream and ricotta cheeses, whipped toppings, concentrated soup bases, ice cream, coffee and snack products. The Company sells its food packaging products to over 200 customers throughout the United States, including the following manufacturers of nationally branded products:
General Mills Ross Labs (a division of Abbott Labs) The Dannon Company Yoplait (a division of General Mills) Pillsbury Haagen Dazs (a division of Pillsbury) S.C. Johnson & Son, Inc.
The Company supplies substantially all of the single-serving yogurt containers used by Yoplait and all of the eight ounce yogurt containers used by Dannon. The Company is the sole source supplier of the multi-layer plastic container used by Ross Labs for its ENSURE-Registered Trademark- nutritional supplement and SIMILAC-Registered Trademark- infant formula product lines. The Company is also the sole supplier of plastic frosting cans and lids for Pillsbury and General Mills. In June 1998, PRI also began serving as the sole supplier to S.C. Johnson of reusable/disposable food storage containers which are sold under the ZIPLOC-Registered Trademark- brand name. General Mills (including Yoplait), Dannon and Ross Labs represented approximately 26%, 15% and 13%, respectively, of the Company's total net sales in the fiscal year ended February 28, 1999. On December 31, 1999, the supply agreements relating to the Yoplait six ounce and Dannon eight ounce yogurt containers will terminate without being extended. The Company will, however, continue providing four ounce yogurt containers to Yoplait through 2003. See "Marketing and Sales". PROMOTIONAL BEVERAGE CUPS In June 1998, the Company began serving as the majority supplier to Tricon for a 32 ounce thermoform "Cruiser Cup" that has been introduced nationally in the Taco Bell chain of restaurants. This new disposable plastic cup is available for soft drinks and replaced all 32 ounce paper cups in the Taco Bell-Registered Trademark- system. In addition, the Company has recently entered into a five year agreement with PepsiCo Inc. for PRI to be the sole supplier of a new Twist 'N Go-Registered Trademark- beverage container that will be sold as a cup designed specifically to capture the fountain beverage take-out market. Shipments of this new container are expected to commence in the summer of 1999. The Company is also engaged in the design, manufacture and marketing of a wide assortment of injection molded promotional beverage cups ranging in size from 12 ounces to 64 ounces. Promotional beverage cups are marketed directly to fast-food and beverage companies, such as McDonald's, Burger King, Jack-in-the-Box, Coca-Cola, Pepsi and Tricon, as well as to specialty distributors for resale to fast-food and beverage companies, sports stadiums, movie theaters and food service companies. 3 MARKETING AND SALES The Company directs its sales effort by utilizing its technical expertise, diverse production capabilities (injection molding and linear melt phase thermoforming ("thermoforming")), graphics capabilities and marketing expertise to serve the needs of its new and existing customers. The Company's comprehensive, multiple-channel sales and marketing approach includes both the personnel in its technical centers (production/graphic) as well as its direct sales force. Sales representatives marketing rigid plastic food packaging solutions focus on companies that supply national branded consumer products, while representatives selling promotional beverage cups focus on soft drink manufacturers/distributors, fast food chains and stadium promoters. A substantial portion of PRI's sales are made pursuant to multi-year supply agreements. The following table summarizes key aspects of certain major supply agreements.
CUSTOMER PRODUCT EXPIRATION DATE Ross Products Division of Abbott Ensure, Isomil and Similac February, 2001 Laboratories plastic cans S.C. Johnson & Son, Inc. Ziploc -Registered Trademark- June, 2003 (1) containers and lids General Mills Operations, Inc. Six-ounce cups December, 1999 (2) (Yoplait) General Mills Operations, Inc. Four-ounce multi-pack cups February, 2003 (Yoplait) The Dannon Company, Inc. Eight-ounce cups December, 1999 (2) Tricon Restaurant Services Group, 32 oz. polystyrene cruiser cups May, 2000 (4) Inc. (3) and lids Pepsi-Cola Company Twist N' Go-Registered October, 2003 (5) Trademark- containers
(1) PRI commenced full-scale production under this agreement in June, 1998. (2) PRI has been advised that this agreement will not be extended or renewed upon termination. The Dannon eight-ounce cups and Yoplait six-ounce cups accounted for approximately 13% and 20%, respectively, of the Company's net sales during fiscal 1999. (3) Tricon Restaurant Services Group, Inc. is made up of the Pizza Hut, Taco Bell and Kentucky Fried Chicken restaurant chains. (4) PRI commenced full-scale production under this agreement in June, 1998. (5) PRI expects to commence full-scale production under this agreement in the Summer of 1999. The prices provided for in these supply agreements generally are based on volume levels and are subject to (i) adjustments for increases or decreases in resin prices and (ii) annual negotiated adjustments relating to cost elements other than resin price. Certain of these agreements also contain minimum volume purchase requirements by customers. The products manufactured under these agreements generally require the use of proprietary tooling and molds, some of which PRI owns. In certain cases, the tooling and molds PRI owns are subject to purchase options which may be exercised by the customer upon termination of the applicable supply agreement. Certain of these supply agreements prohibit PRI from selling similar containers to the customer's competitors during the respective terms of such agreements. All of PRI's supply agreements require it to satisfy certain product quality standards. While PRI anticipates that, except as noted above, it 4 will be able to extend or renew its existing supply agreements upon their expiration, no assurance can be given that PRI will be able to do so or that the terms of any such extension or renewal will be as favorable to PRI. MANUFACTURING The Company has production capabilities in injection molding and thermoforming. Because each of these processes offers advantages in achieving certain performance features such as structural strength, rigidity and graphics retention, the Company is able to be highly responsive to customer requirements and preferences by offering a broader range of packaging alternatives than many of its competitors. Injection molding involves the injection of molten plastic into multi-cavity male and female molds at extremely high temperatures and the application of pressure to force the plastic to take the desired form. The Company operates high speed injection molding machines utilizing modern multi-cavity hot and cold runner molds. The Company's four 660 ton clamp capacity injection molding machines are designed specifically to produce lightweight, thin-walled parts and are among the most technologically advanced machines of their kind. They are controlled by micro-processors that provide statistical process control and state-of-the-art diagnostic capabilities. Recently, the Company also purchased eight new 750 ton injection molding machines designed specifically to produce the components for the new Twist N' Go-Registered Trademark- beverage container for PepsiCo Inc. The Company has the in-house capability to design, test and produce production molds for its injection molding machines. Injection molding generally provides more flexibility in part design than other forming processes. The use of male and female molds allows both interior and exterior surfaces to incorporate special design features. In addition, injection molding results in highly uniform parts with surfaces that can be more easily textured, pigmented and decorated. Further, injection molding requires relatively little floor space, thus reducing associated overhead costs. In the thermoforming process, an extruded sheet formed from plastic resins is rolled over a multi-cavity female steel mold and heated to its precise melting point. Parts are then formed and cut with a vacuum mold in a single operation. As with injection molding, the process concludes with the molded product being ejected for automated handling and processing. Thermoforming employs molds with higher cavitations than are presently feasible in other manufacturing processes and, therefore, is a low-cost means of manufacturing customized packaging products for high volume markets. Moreover, thermoforming equipment can be retooled relatively quickly and inexpensively, making the process well-suited for production runs requiring fast changeover times. The Company has developed thermoforming technologies that enable substantially all unused portions of the extruded sheet to be immediately recycled into the manufacturing process, resulting in reduced product cost and waste. When employed in conjunction with co-extrusion, thermoforming permits the manufacture of shelf stable plastic containers with excellent rigidity and heat resistance properties. Under this process, materials that combine to incorporate the precise properties required by the customer are co-extruded into a multi-layer sheet and then thermoformed into a container. In the manufacture of shelf stable plastic packaging, the co-extruded sheet contains co-polymer materials such as vinyl alcohol which effectively prevents gas and moisture from permeating a container. The Company's thermoforming lines are used principally in the manufacture of yogurt containers, packaging for nutritional supplements and infant formula, reusable/disposable food storage containers, and promotional drink cups. The Company believes that its thermoforming and co-extrusion abilities are among the most advanced in the rigid plastic food packaging industry. The Company has the ability to produce state-of-the-art graphics on its' packaging and promotional cups. The Company uses advanced computer technology and color processing to create photograph-like images on pre-formed plastic containers and cups. Also, the Company has the technology and high-speed equipment to attach labels, including lenticular labels which provide live action video or animation on a cup, or souvenir cards to plastic cups. 5 The Company, like its competitors, is subject to rigorous quality control standards imposed by its customers. The Company has implemented a comprehensive quality assurance program, which includes computer-aided testing of parts for size, color, strength and, where appropriate, barrier properties. Using advanced laser measuring technology as well as state-of-the-art high speed vision systems, the Company is able to satisfy and exceed the most demanding customer requirements. Statistical quality control methods are also used to promote total customer satisfaction. The Company's manufacturing operations are conducted in five facilities. The Company's geographic coverage and the proximity of its facilities to major customers reduce transportation costs and enable the Company to more effectively serve its customers, many of which maintain "just-in-time" inventory systems. TECHNICAL CENTERS The Company's two technical centers feature extensive in-house design, engineering, tooling, prototype production and processing capabilities utilizing CAD/CAM technology. In addition to overseeing the ongoing maintenance and performance of the Company's manufacturing operations, these technical centers provide key support for the Company's marketing efforts. In this regard, the Company's in-house design and production engineers work closely with existing and potential customers in the preliminary stages of product design and development, in many instances using single cavity thermoforming and injection molding machines which are dedicated to product research and development to test prototype molds and packaging parts. Substantially all of the production molds used by the Company's injection molding and thermoforming operations are designed and manufactured/assembled at the Company's technical centers in New Vienna, Ohio and Coleman, Michigan. In the fiscal year ended February 28, 1999, the Company spent approximately $2.5 million on research and development activities. Management believes that the Company's in-house design, engineering and graphics capabilities are among the most extensive and sophisticated in the industry and significantly reduce the Company's tooling and equipment costs as well as product development time. COMPETITION The Company's business is highly competitive, with the degree of competition varying by product. Major competitive factors in the Company's business are product quality and differentiation, graphics design and print quality, innovation, service and price. As more companies adopt "just-in-time" inventory systems, delivery lead time has also taken on increased importance. Since the Company's products are shipped by customers' trucks or common carrier, the proximity of the manufacturing facility to the customer's plant can significantly affect the price of products. The locations of the Company's facilities make it well-positioned to serve national markets. Because the Company's products are bulky and shipping costs are relatively high, foreign competition has not been an important factor. The Company's main competitors in the rigid plastic packaging business are Landis Plastics, Inc., PolyTainer Inc. and Fabri-Kal Corp. In the promotional beverage cup business, the Company's principal competitors are Berry Plastics, Pescor, Sweetheart Cup Company, Inc., and Whirley Industries, Inc. 6 RAW MATERIALS The raw materials used by the Company for the manufacture of plastic containers and beverage cups are primarily resins in pellet form such as polyethylene, polypropylene and polystyrene. The Company's resin supplies are purchased under agreements with several suppliers for unspecified quantities. The price the Company pays for resin is determined at the time of purchase. The Company believes that its resin volume requirements are among the largest in the industry, and that its ability to purchase such materials in large quantity shipments enables it to obtain favorable pricing. Most of the plastic resins used by the Company are available from a variety of sources. The Company's current supply agreement with Ross Labs requires that it purchase one of several of the resins required for the shelf stable, multi-layer containers that the Company manufactures for Ross Labs exclusively from Exxon Corporation ("Exxon"). During the fiscal year ended February 28, 1999, this resin accounted for approximately 4.7% of the resins purchased by the Company. The Company has relied on Exxon as the sole source supplier of this particular resin since it began manufacturing products for Ross Labs in 1991 and has no reason to believe that Exxon will not continue to supply the Company with this resin. However, there can be no assurance that Exxon will be able to continue to supply the Company with adequate amounts of this resin on a timely basis in the future to allow the Company to meet its production requirements for Ross Labs containers. The unanticipated loss of Exxon as a supplier or a delay in its shipments could have a material adverse effect on the Company's business, financial condition and results of operations. PRI maintains a renewable one-year supply contract with Exxon which is scheduled to expire on February 29, 2000. With the exception of its relationship with Exxon, the Company does not believe that it is materially dependent upon any single source for any of its raw materials. The Company anticipates that it will be able to purchase sufficient quantities of resin for the foreseeable future. However, should any of its suppliers fail to deliver under their arrangements, the Company would be forced to purchase raw materials on the open market, and no assurances can be given that it would be able to make such purchases at prices which would allow it to remain competitive. Over 75% of the Company's net sales in the fiscal year ended February 28, 1999 were made pursuant to multi-year customer supply agreements that generally allow the Company to pass through increases in resin prices (and obligate the Company to pass on resin price decreases) to customers. The risk associated with resin price fluctuations in beverage cup sales not under long-term contracts is mitigated in many instances by the relatively short time period between product order and delivery (approximately 3 to 6 weeks). ENVIRONMENTAL MATTERS AND GOVERNMENT REGULATION The past and present operations of the Company and the past and present ownership and operations of real property by the Company are subject to extensive and changing federal, state and local environmental laws and regulations pertaining to the discharge of materials into the environment, the handling and disposition of wastes or otherwise relating to the protection of the environment. The Food and Drug Administration regulates the material content of direct-contact food containers and packages, including certain containers manufactured by the Company. The Company uses approved resins and pigments in its direct-contact food products. The Company, like all companies in the plastics industry, is also subject to federal, state, local and foreign legislation designed to reduce solid wastes by requiring, among other things, plastics to be degradable in landfills, minimum levels of recycled content, various recycling requirements, disposal fees and limits on the use of plastic products. In addition, various consumer and special interest groups have lobbied from time to time for the implementation of additional environmental protection measures. 7 PATENTS AND TRADEMARKS The Company owns a number of patents and trademarks. However, the Company believes that the design, innovation and quality of its products and its relationships with its customers are substantially more important to the maintenance and growth of its business than its patents and trademarks. Accordingly, the Company does not believe that its business is dependent to any material extent upon any single patent or group of patents. EMPLOYEES As of February 28, 1999, the Company had approximately 1,004 employees, of which 922 were engaged in production or production support, 48 in research, development and engineering, 19 in marketing and sales and 15 in corporate management and administration. None of the Company's employees are covered by a collective bargaining agreement. ITEM 2. PROPERTIES. The Company's operations are conducted through five facilities in five states within the United States. The Company's principal executive offices are located in Lake Forest, Illinois and are leased by the Company. The Company's facilities are designed to provide for efficient manufacturing, material handling and storage of its products and no facility is materially underutilized. Management believes that substantially all of the Company's property and equipment is in good condition and that it has sufficient capacity to meet its current manufacturing and distribution requirements. The following table provides certain information regarding the Company's operating facilities.
BUILDING FACILITY OWNERSHIP SQ. FEET FUNCTION LEASE EXPIRATION Coleman, MI Owned 148,000 Manufacturing/Technical Center _ Kansas City, MO Leased 280,000 Manufacturing October 31, 2005 Mt. Carmel, PA Owned 142,000 Manufacturing _ New Vienna, OH Owned 292,000 Manufacturing/Technical Center _ Phoenix, AZ Leased 178,000 Manufacturing August 31, 2008
The Company owns a 40,000 square foot building in Ft. Worth, Texas that is currently for sale. In addition, the Company is a lessee under a lease for a 133,000 square foot manufacturing facility that PRI formerly occupied in Cedar Grove, New Jersey. PRI has entered into a sub-lease with respect to the Cedar Grove facility that is scheduled to expire concurrently with the Company's underlying lease in June 2000. The owned facilities in Coleman, Michigan, Ft. Worth, Texas, Mt. Carmel, Pennsylvania, and New Vienna, Ohio are subject to a mortgage, and the leased facilities in Kansas City, Missouri and Phoenix, Arizona are subject to a leasehold mortgage, in favor of the trustee under the Indenture governing the Senior Secured Notes (as defined below) to secure the obligations under such Senior Secured Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operation-Liquidity and Capital Resources." ITEM 3. LEGAL PROCEEDINGS. Management does not believe that any of the litigation in which the Company is currently engaged will have a material adverse effect on the Company's business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. All of the outstanding common stock of the Company is held by Group. All of the outstanding common stock of Group is held by HPH Industries, Ltd. ("HPH"), which is wholly-owned by Howard P. Hoeper, the Chairman of the Board of Directors, Chief Executive Officer and President of Group and PRI. As of February 28, 1999, assuming the exercise of all outstanding warrants to acquire the common stock of Group ("Warrants"), HPH, Apollo Packaging Partners, L.P., a Delaware limited partnership and an affiliate of Apollo Advisors, L.P. ("Apollo"), and TCW/Crescent Mezzanine Partners, L.P. ("TCW Partners"), together with TCW/Crescent Mezzanine Trust ("TCW Trust"), would beneficially own 60%, 29.3% and 10.7% of such stock, respectively. TCW Partners and TCW Trust (and together with TCW/Crescent Mezzanine Investment Partners, L.P., the "TCW Entities") are affiliates of Trust Company of the West. The holders of at least 25% of the Warrants (or shares of capital stock of Group obtainable upon exercise of the Warrants) on up to three separate occasions may require Group, subject to certain conditions, to effect the registration of such securities under the Securities Act of 1933, as amended (the "Securities Act"). In addition to such demand registration rights, such holders also may, subject to certain limitations, require Group to register such securities if Group registers any of its equity securities under the Securities Act. See "Certain Relationships and Related Transactions - Equity Registration Rights Agreement." Except for a dividend of $31.8 million to the Company's sole stockholder in May 1996 from the net proceeds from the issuance of the Company's Senior Secured Notes (as defined below), no dividends have been declared on the Company's common stock nor does the Company intend to declare any such dividends in the forseeable future. The Indenture governing the Senior Secured Notes and the Credit Agreement (as defined below) restrict the Company's ability to pay dividends in respect of the Company's common stock based on, among other things, the Company's fixed charge coverage ratio and consolidated net income. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources." ITEM 6. SELECTED FINANCIAL DATA. The following selected financial data are derived from the financial statements of the Company which have been audited by KPMG LLP, independent auditors. The data should be read in conjunction with the financial statements, related notes and other financial information included herein and Management's Discussion and Analysis of Financial Condition and Results of Operations.
Fiscal Year Ended ----------------------------------------------------------------- Feb. 28 Feb. 28 Feb. 29 Feb. 28 Feb. 28 1995 1996 1997 1998 1999 --------- --------- -------- ------- ------- (dollars in thousands) STATEMENT OF OPERATIONS DATA: Net sales $135,696 $132,852 $120,086 $121,303 $136,558 Cost of goods sold 113,928 110,544 98,942 99,998 111,338 -------- --------- -------- ------- ------- Gross profit 21,768 22,308 21,144 21,305 25,220 Selling, general and administrative expenses 8,407 6,864 6,983 5,897 6,244 Amortization of intangibles and other assets 3,102 2,434 712 712 712 Other expense (a) - - - 800 - Nonrecurring charge (b) 7,257 - - - - -------- --------- -------- ------- ------- Operating income 3,002 13,010 13,449 13,896 18,264 Interest expense 8,503 10,671 12,711 13,580 13,891 -------- --------- -------- ------- ------- Income (loss) before income taxes and extraordinary item (5,501) 2,339 738 316 4,373 Income tax expense (benefit) (1,980) 1,006 491 346 1,880 -------- --------- -------- ------- ------- Income (loss) before extraordinary item (3,521) 1,333 247 (30) 2,493 Extraordinary item, net (c) - - (1,139) - - -------- --------- -------- ------- ------- Net income (loss) $ (3,521) $ 1,333 $ (892) $ (30) $ 2,493 -------- --------- -------- ------- ------- -------- --------- -------- ------- ------- Total Assets $ 121,966 $ 110,639 $118,207 $ 121,079 $ 154,816 -------- --------- -------- ------- ------- -------- --------- -------- ------- ------- Long-Term Debt $ 77,627 $ 67,174 $110,000 $ 110,000 $ 130,668 -------- --------- -------- ------- ------- -------- --------- -------- ------- ------- OTHER OPERATING DATA: EBITDA (d) $20,751 $22,731 $21,488 $22,616 $27,028 Depreciation and amortization (e) 10,492 9,721 8,039 7,920 8,764 Capital expenditures 7,925 3,449 7,629 9,130 32,805 Ratio of earnings to fixed charges (f) (g) 1.21x 1.06x 1.02x 1.30x
9 (a) The other expense in the fiscal year ended February 28, 1998 represents the loss on the sale of the Louisiana, Missouri property. (b) The nonrecurring charges in the fiscal year ended February 28, 1995 include a charge of $6.4 million relating to the closing and consolidation of certain manufacturing facilities and the write-off of $894 in costs associated with a public debt offering that was not completed by the Company. (c) The extraordinary item in the fiscal year ended February 28, 1997 represents the write-off of unamortized financing fees and costs and the payment of certain premiums in connection with the refinancing that occurred in May 1996. See Notes 7 and 9 to the Company's financial statements contained herein. (d) EBITDA represents earnings (loss) before interest expense, provision (benefit) for income taxes, depreciation and amortization (excluding amortization of deferred financing costs), adjusted to exclude the other and nonrecurring charges and extraordinary items. EBITDA is presented because such data is used by certain investors to measure a company's ability to service debt. EBITDA should not be considered as an alternative to cash flow from operations as determined under generally accepted accounting principles, and does not necessarily indicate whether cash flow will be sufficient for cash requirements. (e) Depreciation and amortization as presented excludes amortization of deferred financing costs. (f) For purposes of this computation, earnings are defined as income before income taxes plus fixed charges. Fixed charges consist of interest (including amortization of deferred financing costs and debt discount or premium) and that portion of rental expense that is representative of interest (deemed to be one-third of operating lease rental expense). (g) The Company's earnings were inadequate to cover fixed charges for the fiscal year ended February 28, 1995 by $5.5 million. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The Company's fiscal year ends on the last day of February in each year. All references in this report to fiscal years refer to the fiscal year of the Company ended in the year indicated. For example, "fiscal 1999" refers to the fiscal year of the Company ended February 28, 1999. The Company is a leading developer, manufacturer and marketer of rigid plastic food packaging, serving primarily as a supplier of customized containers for national branded consumer products. The Company is the largest domestic manufacturer of shelf stable, multi-layer (impermeable to air and moisture) containers for nutritional supplements and infant formula, reusable/disposable food storage containers and promotional beverage cups. The promotional beverage cups are marketed primarily to the fast-food and beverage industries. During fiscal 1999, approximately 78% of the Company's net sales were attributable to packaging products and the balance related to sales of beverage cups. The Company expects that over the next year, its net sales will be divided more evenly between food packaging and promotional beverage cups. This shift away from packaging reflects, in part, the anticipated termination of certain business with Dannon and Yoplait and the replacement of this business with sales of promotional beverage cups to customers such as Tricon, Coca-Cola and Pepsi. 10 The following table sets forth, for the fiscal years indicated, the income statement of the Company expressed as a percentage of net sales:
1997 1998 1999 ---- ---- ---- Net sales by product category: Packaging products...................................................... 90.4% 87.3% 78.3% Promotional beverage cups............................................... 9.6% 12.7% 21.7% Net sales.................................................................. 100.0 100.0 100.0 Cost of goods sold......................................................... 82.4 82.4 81.5 ---- ---- ---- Gross profit............................................................... 17.6 17.6 18.5 Selling, general and administrative expenses............................... 5.8 4.9 4.6 Amortization of intangibles................................................ 0.6 0.6 0.5 Other expense.............................................................. - 0.6 - ---- ---- ---- Operating income........................................................... 11.2 11.5 13.4 Interest expense........................................................... 10.6 11.2 10.2 ---- ---- ---- Income before income taxes and extraordinary item.......................... 0.6 0.3 3.2 Income tax expense ........................................................ 0.4 0.3 1.4 --- --- --- Income before extraordinary item........................................... 0.2 - 1.8 Extraordinary item......................................................... (0.9) - - ---- ---- ---- Net income (loss) (0.7) - 1.8 ---- ---- ---- ---- ---- ----
RESULTS OF OPERATIONS The following discussion represents the analysis by the Company's management of the results of operations for fiscal 1997, 1998 and 1999. This discussion should be read in conjunction with the financial statements of the Company and the notes thereto included elsewhere. FISCAL 1999 COMPARED TO FISCAL 1998 NET SALES. Net sales increased $15.3 million, or 12.6%, from $121.3 million for fiscal 1998 to $136.6 million for fiscal 1999. Packaging sales increased $1.0 million, or 1.0%, from $105.9 million for fiscal 1998 to $106.9 million for fiscal 1999 primarily due to new sales of food storage containers to S.C. Johnson that were partially offset by lower selling prices related to declining resin prices. Net sales to Yoplait increased $1.7 million in fiscal 1999 compared to fiscal 1998, to an aggregate of $30.2 million due to higher unit volume. This increase was offset by a decrease in net sales to Ross Labs of $3.6 million, to an aggregate of $17.4 million, and a decrease in net sales to Dannon of $2.2 million, to an aggregate of $20.8 million, due to lower unit volumes and lower selling prices related to declining resin prices. Promotional sales increased $14.3 million, or 92.9%, from $15.4 million in fiscal 1998 to $29.7 million in fiscal 1999. This increase was due to higher volume including sales of the Company's new 32 ounce polystyrene "Cruiser Cup" to Tricon. GROSS PROFIT. Gross profit increased $3.9 million, from $21.3 million for fiscal 1998 to $25.2 million for fiscal 1999 due to higher sales. Gross margin increased from 17.6% in fiscal 1998 to 18.5% in fiscal 1999 primarily due to higher plant utilization resulting from increased sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased from $5.9 million during fiscal 1998 to $6.2 million for fiscal 1999, but decreased as a percentage of net sales from 4.9% to 4.6% due to the higher level of sales. 11 AMORTIZATION EXPENSE. Amortization expense of $0.7 million in fiscal 1999 remained unchanged compared to fiscal 1998. OTHER EXPENSE. In fiscal 1998, the Company recorded a $0.8 million loss related to the sale of the Louisiana, Missouri property. OPERATING INCOME. Operating income increased $4.4 million, from $13.9 million for fiscal 1998 to $18.3 million for fiscal 1999, and increased as a percentage of net sales from 11.5% to 13.4% due to the reasons noted above. INTEREST EXPENSE. Interest expense increased $0.3 million, from $13.6 million in fiscal 1998 to $13.9 million in fiscal 1999. The increase was due to borrowings in fiscal 1999 under the Company's Credit Agreement. INCOME TAXES. Income taxes increased from $0.3 million for fiscal 1998 to $1.9 million for fiscal 1999 due to higher earnings. The relationship of income tax expense to income before income taxes was higher in fiscal 1998 due to the provision for state income taxes. NET INCOME/(LOSS). For the reasons stated above, net loss was $30 in fiscal 1998 compared to net income of $2,493 in fiscal 1999. FISCAL 1998 COMPARED TO FISCAL 1997 NET SALES. Net sales increased $1.2 million, or 1.0%, from $120.1 million for fiscal 1997 to $121.3 million for fiscal 1998. Packaging sales decreased $2.7 million, or 2.5%, from $108.6 million for fiscal 1997 to $105.9 million for fiscal 1998. Net sales to Yoplait increased $2.4 million in fiscal 1998 compared to fiscal 1997, to an aggregate of $28.5 million due to higher unit volume. This increase was partially offset by a decrease in net sales to Ross Labs of $.3 million, to an aggregate of $21.0 million, primarily reflecting lower resin prices. Net sales to Dannon of $23.0 million in fiscal 1998 remained virtually unchanged compared to the prior fiscal year. Packaging sales were adversely impacted by the Company's loss of certain lower margin accounts, and lower prices in fiscal 1998 versus fiscal 1997. Promotional sales increased $3.9 million, or 34.2%, from $11.5 million in fiscal 1997 to $15.4 million in fiscal 1998. This increase was primarily due to a higher level of plastic drink cup promotions by the Company's principal customers during fiscal 1998 when compared to fiscal 1997. GROSS PROFIT. Gross profit increased $.2 million, from $21.1 million for fiscal 1997 to $21.3 million for fiscal 1998. Gross margins of 17.6% for fiscal 1998 remained unchanged from fiscal 1997. The increase in gross profit reflects the higher net sales levels noted above. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased from $7.0 million during fiscal 1997 to $5.9 million for fiscal 1998 and decreased as a percentage of net sales from 5.8% to 4.9% primarily due to lower salary expense. AMORTIZATION EXPENSE. Amortization expense of $0.7 million in fiscal 1998 remained unchanged compared to fiscal 1997. OTHER EXPENSE. In February 1998, the Company recorded a $0.8 million loss related to the sale of the Louisiana, Missouri property. OPERATING INCOME. Operating income increased $0.5 million, from $13.4 million for fiscal 1997 to $13.9 million for fiscal 1998, and increased as a percentage of net sales from 11.2% to 11.5%. INTEREST EXPENSE. Interest expense increased $0.9 million, from $12.7 million in fiscal 1997 to $13.6 million in fiscal 1998. The increase was primarily due to the issuance of the Senior Secured Notes (as defined below), which had a full year of interest expense in fiscal 1998 versus a partial year in fiscal 1997. INCOME TAXES. Income taxes decreased from $0.5 million for fiscal 1997 to $0.3 million for fiscal 1998. The relationship of income tax expense to income before income taxes was high in both fiscal years due to the provision for state income taxes. 12 NET LOSS. For the reasons stated above and the extraordinary write-off recorded in fiscal 1997 (as discussed below), net loss was $892 in fiscal 1997 compared to $30 in fiscal 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity needs arise primarily from capital investments, working capital requirements and interest payments on its indebtedness. The Company has met these liquidity requirements in past fiscal years primarily with funds provided by long-term borrowings, borrowings under the Credit Agreement and cash generated by operating activities. PRI issued $110.0 million in Senior Secured Notes due 2003 (the "Senior Secured Notes") in May 1996. The net proceeds from this issuance were used to repay all outstanding borrowings of the then existing senior secured credit facility (the "Old Credit Agreement") of $73.5 million and to fund a dividend of $31.8 million to the sole stockholder of the Company. In conjunction with this transaction, the Company also entered into a credit agreement (the "Credit Agreement") that, subject to certain borrowing conditions and limitations, provided for revolving credit borrowings of up to $20.0 million. During fiscal 1999, the Credit Agreement was amended to permit the Company to borrow an additional $10.0 million under the Credit Agreement through equipment acquisition term loans. On April 27, 1999, the Company further amended the Credit Agreement to increase the revolving credit capacity to a maximum of $22.5 million, and to reduce the amount of available equipment acquisition term loans to $7.5 million. As of February 28, 1999, there was $20.8 million of outstanding borrowings under the Credit Agreement. Cash provided by operating activities decreased to $5.7 million for fiscal 1999 from $9.6 million for fiscal 1998. The decrease resulted primarily from deposits made in fiscal 1999 on equipment to be delivered to PRI in fiscal 2000, and spending on equipment which will be purchased by a third party and leased to PRI in fiscal 2000. These deposits and spending more than offset the increased cash provided by higher net income and advanced payments received from customers for certain tooling projects. Capital expenditures were $7.6 million, $9.1 million and $32.8 million for fiscal 1997, 1998 and 1999, respectively. These expenditures, which expanded production capacity and reduced costs, include (i) the addition of new production lines and printing equipment, (ii) the expansion of the Company's manufacturing space and (iii) the engineering and manufacture of new production molds. PRI's estimated capital expenditures for fiscal 2000 are expected to range from $15.0 million to $20.0 million and will include new equipment and molds as well as plant modifications. During fiscal 1999, cash provided by financing activities was $20.8 million which included $17.0 million borrowed under the Revolving Credit Facility and $3.8 million borrowed through Equipment Acquisition Term Loans. Although there can be no assurances, the Company anticipates that its operating cash flow, together with borrowings under the Credit Agreement and other lines of credit, will be sufficient to meet its operating expenses, projected capital expenditures and debt service requirements as they become due. Instruments governing the Company's indebtedness, including the Credit Agreement and the Indenture governing the Senior Secured Notes, contain financial and other covenants that restrict, among other things, the Company's ability to incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company. Such limitations, together with the highly leveraged nature of the Company, could limit corporate and operating activities, including the Company's ability to respond to market conditions to provide for unanticipated capital investments or to take advantage of business opportunities. 13 SEASONALITY The Company's business is somewhat seasonal in nature with its fourth fiscal quarter historically the weakest due to lower consumer demand for refrigerated yogurt and soft drink products. The Company's working capital requirements historically have been relatively constant throughout the year but are subject to periodic fluctuations due to, among other things, large volume orders of promotional beverage cups that require increased inventories. INCOME TAX MATTERS At February 28, 1999, the Company had net operating loss carryforwards ("NOL's") of approximately $8.1 million which will expire at various dates from 2004 through 2012. Such NOL's are available to reduce future taxable income for Federal income tax purposes under a tax sharing agreement with HPH. See "Certain Relationships and Related Transactions - Tax Sharing Agreement." INFLATION The principal component of the Company's products is resin. In recent years, resin prices have fluctuated, in part, due to industry capacity, consumption levels of resins and changes in the cost of feed stocks. In the event of significant inflationary pressures, the cost of the Company's raw materials, including resins, may increase. Under supply agreements with customers that accounted for more than 75% of the Company's net sales in fiscal 1999, the Company has the ability to pass through resin price increases (as well as the obligation to credit any resin price decreases). In the case of sales which are not made pursuant to supply agreements containing such pass-through provisions, the Company historically has passed on increases in resin prices (as well as decreases in resin prices) to its customers through price adjustments. Sales prices for promotional beverage cups are generally determined in advance of a promotion and, accordingly, the Company bears the risk of resin price increases while producing such products. Because plastic resin is the principal component in the Company's products, the Company's financial performance is materially dependent on its ability to pass resin price increases on to its customers through contractual arrangements or otherwise. There can be no assurance that a significant increase in resin prices would not negatively impact the Company. IMPACT OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." The Company is required to comply with SFAS 133 beginning in fiscal 2001 and estimates its adoption will not have a material impact on the financial statements. IMPACT OF THE YEAR 2000 ON THE COMPANY'S OPERATIONS The year 2000 ("Y2K") issue refers generally to computer applications using only the last two digits to refer to a year rather than all four digits. As a result, these applications could fail or create erroneous results if they recognize "00" as the year 1900 rather than the year 2000. The Company has taken Y2K initiatives in the areas of information technology and third-party relationships. The Company has focused its efforts on the high-risk areas of computer hardware, operating systems and software applications. The principal risks to the Company relating to its information technology are failure to correctly bill customers and pay invoices. However, after completing modifications of its software applications, the Company's assessment and testing of existing equipment revealed that its hardware, network operating systems and software applications are Y2K compliant. 14 The Company has third-party relationships with customers and suppliers. Many of these third parties are publicly traded corporations and subject to disclosure requirements. The Company has begun assessment of major third parties' Y2K readiness while simultaneously responding to their inquiries regarding the Company's readiness. The principal risks to the Company in its relationships with third parties are the failure of third-party systems used to conduct business. Based on Y2K compliance work done to date, the Company has no reason to believe that key customers and suppliers will not be Y2K compliant in all material respects or that suppliers cannot be replaced within an acceptable timeframe. Additionally, the Company has obtained or is in the process of obtaining compliance certification from suppliers of key services. Contingency plans generally involve the development and testing of manual procedures or the use of alternate systems. Viable contingency plans are difficult to develop for potential third party Y2K failures. Based on the Company's current assessment of Y2K readiness relating to information technology and third parties, the Company has not implemented a Y2K contingency plan to date. However, the Company will continue to assess the need for such a plan. Currently, the Company believes its cost to successfully mitigate the Y2K issue has not been and is not anticipated to be material to the Company's financial position or results from operations. However, the Company's description of its Y2K compliance issue is based upon information obtained by management through evaluations of internal business systems and from inquiries of key customers and major suppliers concerning their compliance efforts. If key customers or major suppliers with whom the Company does business fail to adequately address their Y2K issues, the Company's financial position or results from operations could be materially adversely affected. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to market risks from changes in interest rates which may adversely affect its results of operations and financial condition. The Company seeks to minimize these risks through its regular operating and financing activities. The Company engages in neither speculative nor derivative financial or trading activities and is not exposed to market risks from changes in foreign currency exchange rates. The Company has exposure to interest rate risk related to certain instruments entered into for other than trading purposes. Specifically, borrowings under the Credit Agreement (both the equipment acquisition term loans and revolving credit facility) bear interest based on the Lenders' Reference Rate (as defined in the Credit Agreement) or LIBOR Rate plus an applicable margin. See Note 7 to the Company's financial statements. Changes in the Reference Rate or the LIBOR Rate could affect the cost of funds borrowed in the future. Based on borrowings outstanding under the Credit Agreement as of February 28, 1999, the Company estimates that a 1% increase in interest rates would result in an approximate $200,000 increase in annual interest expense. The Company's Senior Secured Notes due 2003 are at a fixed interest rate of 11-5/8%. As a result, a change in the fixed rate interest market could change the estimated fair market value of such notes. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements are included in this report beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Set forth below is certain information concerning the individuals who are directors and executive officers of the Company as of May 26, 1999.
NAME AGE POSITION ---- ---- -------- Howard P. Hoeper 59 Chairman of the Board of Directors, Chief Executive Officer and President Jerry J. Corirossi 55 Executive Vice President - Finance & Administration, Chief Financial Officer, Secretary and Director Walter C. Riesen 68 Executive Vice President - Research & Development and Director Jeffrey E. Parker 49 Vice President - Manufacturing John D. Hoeper 31 Director Carol Hoeper 42 Director
Set forth below is a description of the business experience of each director and executive officer of the Company. HOWARD P. HOEPER. Mr. Hoeper has been Chairman of the Board, Chief Executive Officer and President of Group since its formation in 1993, and has served as Chairman of the Board and Chief Executive Officer of PRI since 1984. He was also elected President of PRI in 1989.Mr. Hoeper has been elected to serve as Chairman of the Board of each of Group and PRI until the next annual meeting of the stockholders or until his successor is elected and qualified. Mr. Hoeper is the sole shareholder of HPH, which owns all of the outstanding capital stock of Group. Mr. Hoeper is married to Carol Hoeper and the father of John D. Hoeper. JERRY J. CORIROSSI. Mr. Corirossi was promoted to Executive Vice President -Finance & Administration, Chief Financial Officer on October 1, 1998 and has been Secretary of the Company since 1989, and has been a Director of Group since its formation in 1993 and a Director of PRI since February 1990. Prior to then he had been Vice President - Finance & Administration, Chief Financial Officer and Secretary of the Company since 1989. Mr. Corirossi shall serve as a director of such companies until the next annual meeting of stockholders or until his successor is elected and qualified. Mr. Corirossi is a Certified Public Accountant and has over twenty-five years of financial managerial experience. WALTER C. RIESEN. Mr. Riesen was promoted to Executive Vice President - -Research & Development on October 1, 1998 and has been a Director of PRI since March 1999. Prior to then he had been Vice President - Manufacturing (Eastern Operations) since 1989. Mr. Riesen has more than twenty years of experience in the rigid plastics packaging industry with a concentration in the injection molding and pressure forming processes. JEFFREY E. PARKER. Mr. Parker was promoted to Vice President - Manufacturing on October 1, 1998. Prior to then he had been Vice President - Packaging Sales since 1997. Mr. Parker joined PRI as the Director of Quality Assurance in 1993 after 18 years in manufacturing and quality assurance at the Tupperware Company. Mr. Parker has more than twenty years of experience in the rigid plastic container industry. 16 JOHN D. HOEPER. Mr. Hoeper has been Vice President - Operations, Sales & Marketing of PRI since August 1998 and has been a Director of PRI since March 1999. From 1995 to August 1998 Mr. Hoeper was Director of Marketing. Prior to then he had been Marketing Analyst since 1990. John D. Hoeper is the son of Howard P. Hoeper. CAROL HOEPER. Ms. Hoeper has been the Vice President, Development of HPH Industries, Ltd. since July 1996 and has been a Director of PRI since March 1999. Carol Hoeper is married to Howard P. Hoeper. Effective April 24, 1998, Mr. Antony P. Ressler and Mr. David B. Kaplan resigned as Directors of PRI. Each of Messrs. Ressler and Kaplan had been designated by Apollo to serve as a Director of PRI in June 1993 pursuant to the Stockholders Agreement (as defined below). See "Certain Relationships and Related Transactions - Stock and Warrant Holders Agreement and Option." Each of Carol Hoeper and John D. Hoeper were elected to replace Messrs. Ressler and Kaplan in accordance with the terms of the Stockholders Agreement. Until April 1998, Messrs. Kaplan and Ressler had served as directors of Group and PRI pursuant to the Stock and Warrant Holders Agreement dated as of June 30, 1993 and amended as of September 24, 1996 (the "Stockholders Agreement"), which provides that two individuals designated by Apollo be elected as directors of Group and PRI so long as Apollo owns or has the right to acquire 15% or more of Group's voting securities (or one individual in the event Apollo owns or has the right to acquire between 10% and 14.99% of Group's voting securities). Apollo has not designated replacements for Messrs. Ressler and Kaplan to serve as Directors of Group and PRI. In addition, pursuant to the Stockholders Agreement, certain fundamental corporate actions proposed to be taken by Group or PRI require the approval of any Apollo designees serving as directors. See "Certain Relationships and Related Transactions - Stock and Warrant Holders Agreement and Option." Apollo has given an undertaking to Group that, if Group objects, no such designee will serve as a director of a direct competitor of the Company. Mr. Hoeper has agreed with Apollo and the TCW Entities that he will not compete directly or indirectly with the business carried on by the Company or any of its subsidiaries until the later of (i) two years following cessation of his employment with the Company or its subsidiaries and (ii) the date on which he and the members of his family do not own, directly and indirectly, at least 50% of Group's capital stock. 17 ITEM 11. EXECUTIVE COMPENSATION. The following table summarizes information concerning annual and long-term cash and non-cash compensation paid to or accrued for the benefit of the Chief Executive Officer and each of the three other most highly compensated executive officers of the Company (collectively, the "named executive officers") for all services rendered in all capacities to the Company for fiscal 1999. SUMMARY COMPENSATION TABLE
OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS (1) COMPENSATION(2),(3) COMPENSATION (4) ----------------------------- -------- --------- ------------------- ----------------- Howard P. Hoeper $397,800 $379,000 $600,000 $5,600 Chairman of the Board, Chief Executive Officer and President Jerry J. Corirossi 209,300 70,000 _ 5,600 Executive Vice President - Finance & Administration and Chief Financial Officer Walter C. Riesen 209,300 70,000 _ 5,600 Executive Vice President - Research & Development Jeffrey E. Parker 133,700 23,700 _ 4,700 Vice President - Manufacturing
___________ Notes: (1) Consists of discretionary bonus awards accrued in fiscal 1999 and paid in fiscal 2000 pursuant to PRI's Bonus Plan. See "Bonus Plan". (2) The Company does not have restricted stock award plans or long-term incentive plans and has not granted stock appreciation rights. (3) "Other Annual Compensation" for Mr. Hoeper consists of fees paid by PRI to HPH pursuant to a management agreement. See "Certain Relationships and Related Transactions - Management Agreement." None of the other named executive officers received reportable "Other Annual Compensation" in fiscal 1999. (4) Consists of contributions made by PRI on behalf of the named executive officers pursuant to the Pension Plan (as defined below). COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company's compensation policies are determined and executive officer compensation decisions are made by Mr. Hoeper, subject to the right of the directors designated by Apollo to approve the adoption of any employee stock option plan, stock bonus plan or any similar plan. Mr. Hoeper is the Chairman of the Board, Chief Executive Officer and President of the Company and indirectly owns, through his ownership of HPH, all of the outstanding capital stock of Group. See "Security Ownership of Certain Beneficial Owners and Management." 18 BONUS PLAN The Company maintains a cash bonus plan (the "Bonus Plan") for all of its executive officers and for certain other key management personnel. The bonus amount and the extent of participation in the Bonus Plan are discretionary. In the past, bonus awards to employees have been based on various qualitative and quantitative indicators of corporate and individual performance. The amounts of discretionary bonus awards accrued during fiscal 1999 are reflected in the Summary Compensation Table above. PENSION PLAN On September 30, 1985, the Company established a qualified defined contribution pension plan (the "Pension Plan") for the purpose of providing funds to its employees upon their retirement. Participation in the Pension Plan is open to substantially all of the Company's employees. The Pension Plan requires the Company to contribute a specified percentage of an employee's total compensation for each plan year, and such amounts are credited to each employee's individual account on an annual basis. If any employee retires at age 65, or at such later date as permitted under the Pension Plan, then the entire amount of his account becomes 100.0% vested as of that date. The amount in an employee's account will also be fully vested at the time of his death or total permanent disability. Distributions under the Pension Plan may be made in one lump sum payment, in designated installments, in installments based upon an employee's life expectancy at retirement, or in the form of an annuity, at the employee's election. If employment is terminated for any reason other than retirement, death or total and permanent disability, then his account will be deemed to have been 20.0% vested for each year of service. The amounts accrued for the benefit of the named executive officers pursuant to the Pension Plan during fiscal 1999 are reflected in the Summary Compensation Table above. 401(k) SAVINGS PLAN PRI has adopted a plan pursuant to Section 401(k) of the Internal Revenue Code (the "401(k) Plan") for employees that are age 18 or older and have been employed by PRI for at least three (3) months. Under the 401(k) Plan, each eligible employee is able to defer a portion of his or her salary each year on a before-tax basis. The portion deferred is paid by PRI to the trustee under the 401(k) Plan for the account of the participant. The Company does not match employee contributions or otherwise contribute to the 401(k) Plan on behalf of employee-participants. All employee-participant contributions are fully vested upon contribution. CHANGE OF CONTROL PLAN The Board of Directors adopted a Change of Control Plan in May 1999. Approximately 30 officers and managers participate in the plan, including all the individuals listed in the Summary Compensation Table. If a change in control (as described below) occurs, the participant is entitled to benefits from PRI. In general, those benefits include: (i) a lump sum payment of three (3) or two (2) (depending on the participant's position) times annual salary and average annual bonus over the previous three years; (ii) a lump sum payment equal to (a) employer contributions the participant would have received under the Company pension plan if employment had continued for two (2) or three (3) (depending on the participant's position) years at current compensation levels and (b) the difference between the participant's total account balance under the Company pension plan and the participant's vested account balance under the Company pension plan; and (iii) continuation of medical and other benefits for up to two (2) or three (3) (depending on the participant's position) years. In addition, PRI will compensate the participant for any excise tax liability as a result of payments under the plan. In general, the plan defines a change in control to include (a) the required sale by shareholders of either PRI or Group of their equity interests pursuant to Section 3.5(c) of the Stock and Warrant Holders Agreement and (b) a change in the majority of the Board of Directors of either PRI or Group. 19 INDEMNIFICATION OF DIRECTORS AND OFFICERS PRI's Certificate of Incorporation contains a provision permitted under the Delaware General Corporation Law (the "DGCL") eliminating (with limited exceptions) each director's personal liability for monetary damages for breach of any duty as a director. PRI's Certificate of Incorporation and Bylaws authorize PRI to indemnify its present and former directors and officers and to pay or reimburse expenses for such individuals in advance of the final disposition of a proceeding to the maximum extent permitted from time to time under the DGCL. The DGCL provides that indemnification of a person who is a party, or threatened to be made a party, to legal proceedings by reason of the fact that such a person is or was a director, officer, employee or agent of a corporation, or is or was serving as a director, officer, employee or agent of a corporation or other firm at the request of a corporation, against expenses, judgments, fines and amounts paid in settlement, is mandatory in certain circumstances and permissive in others, subject to authorization by the corporation's board of directors. PRI has entered into indemnification agreements with each of its directors and executive officers. The indemnification agreements require, among other things, that PRI indemnify such officers and directors to the fullest extent permitted by law, and advance to the officers and directors all related expenses, subject to reimbursement if it is subsequently determined that indemnification is not permitted. The indemnification agreements also require PRI to indemnify and advance all expenses incurred by officers and directors seeking to enforce their rights thereunder and cover officers and directors under the Company's directors' and officers' liability insurance. Although the indemnification agreements offer substantially the same scope of coverage afforded by provisions in PRI's Certificate of Incorporation and Bylaws, they provide greater assurance to directors and officers that indemnification will be available, because, as a contract, it cannot be unilaterally modified by the Board of Directors or by the stockholders to eliminate the rights it provides. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Group owns all of the outstanding capital stock of the Company. The following table sets forth certain information, as of February 28, 1999, regarding beneficial ownership of the capital stock of Group by each stockholder who is known by the Company to own beneficially more than 5% of the outstanding capital stock of Group. Except as identified below with respect to Mr. Hoeper, none of the executive officers or directors of Group beneficially own any shares of the capital stock of Group.
AMOUNT PERCENTAGE OF PERCENTAGE OF OWNED VOTING SECURITIES VOTING SECURITIES NAME AND COMPLETE MAIL ADDRESS (SHARES) OWNED OWNED (1) ------------------------------ -------- ----------------- ----------------- HPH Industries, Ltd. (2) 56,250 100% 60.0% One Conway Park 100 Field Drive Suite 300 Lake Forest, Illinois 60045 Apollo Packaging Partners, L.P. (3), (4) 27,500 _ 29.3% c/o Apollo Advisors, L.P. Two Manhattanville Road Purchase, New York 10577 TCW/Crescent Mezzanine Partners, L.P. (3), (5) 7,613 _ 8.1% 11100 Santa Monica Boulevard Suite 2000 Los Angeles, California 90025 TCW/Crescent Mezzanine Trust (3), (5) 2,387 _ 2.6% 11100 Santa Monica Boulevard Suite 2000 Los Angeles, California 90025 20
___________ Notes: (1) On a fully diluted basis, assuming the exercise of all of the Warrants (as discussed in note 3 below). (2) Through his ownership of HPH, Mr. Hoeper beneficially owns and exercises sole investment and voting rights with respect to 56,250 shares of capital stock of Group representing 100% of Group's outstanding capital stock. (3) Apollo and the TCW Entities own Warrants to purchase 27,500 and 10,000 shares of Group's capital stock, respectively (or 29.3% and 10.7% of such capital stock of Group, respectively, assuming full exercise of the Warrants). The Warrants are exercisable for an exercise price of $213.33 per share of capital stock of Group. The Warrants expire on June 30, 2003. Apollo and the TCW Entities also own an option to purchase additional shares of capital stock of Group under certain circumstances. See "Certain Relationships and Related Transactions - Stock and Warrant Holders Agreement and Option." (4) The general partner of Apollo is AIF II, L.P., the general partner of which is Apollo Advisors, L.P. The general partner of Apollo Advisors, L.P. is Apollo Capital Management, Inc., the directors and stockholders of which are Messrs. Leon D. Black and John J. Hannan. See "Directors and Executive Officers of the Registrant." Messrs. Black and Hannan disclaim any beneficial ownership of the capital stock of Group. (5) The general partner of TCW Partners and the managing owner of TCW Trust is TCW/Crescent Mezzanine, L.L.C. ("TCW/Crescent LLC"). Messrs. Robert D. Beyer and Jean-Marc Chapus are portfolio managers of TCW/Crescent LLC and exercise voting and dispositive powers on its behalf. Messrs. Beyer and Chapus disclaim any beneficial ownership of the capital stock of Group. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. MANAGEMENT AGREEMENT Since its inception, PRI has paid certain fees to HPH in exchange for financial and management consulting services and has reimbursed HPH for expenses incurred in connection with the performance of such services. HPH owns all of the outstanding capital stock of Group and is itself wholly-owned by Mr. Hoeper, the Chairman, Chief Executive Officer and President of Group and PRI. The aggregate amount of payments received by HPH during fiscal 1997, 1998 and 1999 in respect of such fees and reimbursements were approximately $662,000, $600,000 and $600,000, respectively. PRI and HPH entered into a management agreement pursuant to which HPH will receive a fixed payment for financial and management consulting services in the amount of $600,000 per fiscal year, subject to increase at the discretion of the Company and to the extent permitted by instruments governing indebtedness of PRI, including the Indenture governing the Senior Secured Notes, or decrease to the extent required by the terms of such indebtedness. Because of the personal nature of the services provided by HPH and Mr. Hoeper, the Company cannot determine whether it could obtain the same services on more favorable terms from a third party. TAX SHARING AGREEMENT The operations of Group and PRI are included in the Federal income tax returns filed by HPH. The three companies have entered into a tax sharing agreement (the "Tax Sharing Agreement") which apportions the consolidated income tax liability of the affiliated group. Under the Tax Sharing Agreement, the Federal income tax liability of PRI is calculated on a separate return basis and the amount so calculated, which in no event may exceed the group's consolidated tax liability for such year, is paid to HPH which then pays the group's taxes for such year. None of HPH, Group or PRI is liable for (or is due) any amount to (or from) the other even though the tax liability of the group may have been reduced by reason of the inclusion of Group or PRI as a member of the group. 21 STOCK AND WARRANT HOLDERS AGREEMENT AND OPTION HPH, Apollo, the TCW Entities, Mr. Hoeper and Group are parties to the Stockholders Agreement which, among other things, gives Apollo and the TCW Entities the pre-emptive right to acquire a portion of additional shares of capital stock of Group issued by Group, a right of first refusal on shares of capital stock of Group owned by HPH, the right to require Group to purchase their equity interests if Group has not had a public offering of voting stock prior to June 30, 1999 (to the extent permitted under the Credit Agreement and the Indenture governing the Senior Secured Notes) and, subject to certain exceptions, the right to participate in any sale of capital stock of Group by HPH. In addition, if at any time after June 30, 1999, the holders of a majority of the shares of capital stock of Group propose to sell their shares, they may require the other parties to the Stockholders Agreement to participate in such sale. The Stockholders Agreement also provides that Mr. Hoeper will not, as long as HPH owns at least 10% of Group, transfer any shares of capital stock of HPH, except pursuant to the laws of descent. If any shares of HPH capital stock are transferred pursuant to laws of descent, Apollo and the TCW Entities will have the right to require the descendants to purchase their equity interests in Group at the fair market value thereof. Group has granted Apollo and the TCW Entities an option to purchase at fair market value that number of shares of capital stock of Group which, when aggregated with the other shares owned by them or which they have the right to acquire, equal 51% of the outstanding shares on a fully diluted basis. The option is exercisable during the period of 180 days following the date on which Mr. Hoeper and his heirs do not own and have the right to vote all of the shares of HPH. The exercise of the option is conditioned upon a simultaneous offer by the holders to purchase at fair market value all shares of Group owned by HPH. The Stockholders Agreement also provides, among other things, that Apollo has the right to designate (i) two members of the Board of Directors of Group and PRI so long as it owns or has the right to acquire 15% or more of the voting securities of Group outstanding as of the date of consummation of the Stockholders Agreement (the "Initial Voting Securities") and (ii) one member of the Board of Directors of Group and PRI so long as it owns or has the right to acquire between 10% and 14.99% of the Initial Voting Securities. In addition, a majority of the Apollo designees serving as members of the Board of Directors of Group or PRI must approve certain fundamental corporate actions proposed to be taken by each such company, including (i) the sale of all or substantially all of its assets, (ii) a merger, consolidation or dissolution, (iii) an acquisition involving consideration of more than $10.0 million, (iv) certain transactions with affiliates, (v) an amendment to its Certificate of Incorporation or By-laws, (vi) the adoption of certain employee benefit plans and (vii) any material change in its line of business. The Stockholders Agreement terminates on June 30, 2003. EQUITY REGISTRATION RIGHTS AGREEMENT Group, Apollo and the TCW Entities are parties to the Equity Registration Rights Agreement dated as of June 30, 1993 (the "Equity Registration Rights Agreement"). Under the Equity Registration Rights Agreement, the holders of at least 25% of the Warrants (or shares of capital stock of Group obtainable upon exercise of the Warrants (collectively, the "Registrable Equity Securities")) on up to three separate occasions may require Group, subject to certain conditions, to effect the registration of the Registrable Equity Securities under the Securities Act. In addition to such demand registration rights, such holders also may, subject to certain limitations, require Group to register their Registrable Equity Securities if Group registers any of its equity securities under the Securities Act. Group has agreed to bear all expenses incident to the registration rights provided under the Equity Registration Rights Agreement, except that expenses incurred in connection with any second or third demand registration are to be allocated equally between Group and the selling securityholders. Group has also agreed to indemnify selling securityholders against certain liabilities, including liabilities under the Securities Act. 22 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)1 Financial Statements
PACKAGING RESOURCES INCORPORATED PAGE ---- Independent Auditors' Report............................................... F-1 Balance Sheets as of February 28, 1998 and 1999............................ F-2 Statements of Operations for the years ended February 28, 1997, 1998, and 1999................................................................... F-3 Statements of Stockholder's Equity (Deficit) for the years ended February 28, 1997, 1998, and 1999.......................................... F-4 Statements of Cash Flows for the years ended February 28, 1997, 1998, and 1999....................................................................... F-5 Notes to Financial Statements.............................................. F-6 (a)2 Financial Statement Schedule Independent Auditors' Report............................................... S-1 Schedule II -- Packaging Resources Incorporated's Valuation and Qualifying Accounts Information...................................................... S-2
All other Financial Statement Schedules are omitted as they are inapplicable, immaterial or the required information is included in the financial statements or notes thereto. (a)3 Exhibits
EXHIBIT NO. EXHIBIT - ------------ -------- 3.1 ** Amended and Restated Certificate of Incorporation of PRI 3.2(a) ** Amended and Restated By-Laws of PRI 3.2(b) Amendment to Amended and Restated By-Laws of PRI 4.1 ** Indenture dated as of May 17, 1996 between PRI and LaSalle National Bank, as Trustee, relating to the Senior Secured Notes (including form of certificate to be delivered in connection with transfers to institutional accredited investors) 4.2 ** Registration Rights Agreement dated as of May 17, 1996 between PRI and BT Securities Corporation and Donaldson, Lufkin & Jenrette Securities Corporation 4.3** Credit Agreement dated as of May 17, 1996 among PRI, the lenders Signatory thereto and LaSalle National Bank, as administrative agent 4.3(a)# Fifth Amendment dated as of August 5, 1998 to the Credit Agreement dated as of May 17, 1996 among PRI, the lenders signatory thereto and LaSalle National Bank, as administrative agent 4.3(b) Seventh Amendment dated as of April 27, 1999 to the Credit Agreement dated as of May 17, 1996 among PRI, the lenders signatory thereto and LaSalle National Bank, as administrative agent
23
10.5 ** Management Agreement dated as of May 17, 1996 between HPH Industries, Ltd. and PRI(1) 10.6 ** Agreement Apportioning the Consolidated Income Tax Liability of HPH Industries, Ltd. Affiliated Group effective as of May 17, 1996 among HPH, Group and PRI 10.7 ** The Dannon Company, Inc. 4 oz. Sprinkl'ins Dannon Cup Mold and Cup Manufacture Agreement between The Dannon Company, Inc. and PRI dated July 10, 1992, as amended April 4, 1994 and February 6, 1995* 10.8 ** The Dannon Company, Inc. 6 oz. Blended Cup Mold and Cup Manufacture Agreement between The Dannon Company, Inc. and PRI dated April 18, 1991, as amended July 10, 1992, April 4, 1994 and June 26, 1995* 10.9 ** The Dannon Company, Inc. 8 oz. Mold Manufacture and Cup Production Agreement between The Dannon Company, Inc. and PRI dated December 9, 1991, as amended October 27, 1992, April 4, 1994 and February 15, 1996* 10.9(a)** Extension Letter dated June 20, 1996 with respect to The Dannon Company, Inc. 8 oz. Mold Manufacture and Cup Production Agreement between The Dannon Company, Inc. and PRI* 10.10** The Dannon Company 8 oz. Mold Manufacture and Cup Production Agreement between The Dannon Company, Inc. and PRI (as successor to Miner Container of Texas, Inc.) dated January 15, 1992, as amended November 16, 1992* 10.11*** The Parts Supply Agreement dated January 1, 1998 between General Mills Operations, "Yoplait", and PRI* 10.11(a)*** The Multi-Pack Supply Agreement dated March 1, 1998 between General Mills Operations, "Yoplait", and PRI* 10.12 The Cans Supply Agreement dated as of March 1, 1998 between Ross Products Division, a Division of Abbott Laboratories, and PRI+ 10.13 ** Form of Indemnification Agreement dated as of May 17, 1996 between PRI and each of its directors and officers 10.14 ** Description of Annual Bonus Plan (1) 10.15 Packaging Resources Change of Control Plan (1) 10.16 The Sales and Purchase Agreement dated as of June 1, 1998 between Tricon Restaurant Services Group, Inc. and PRI+ 12.1 Statement re Computation of Ratios 27.1 Financial Data Schedule
24 ___________
+ The Registrant is filing contemporaneously herewith a request that certain portions of this agreement be given confidential treatment pursuant to Rule 406 of the Securities Act of 1933, as amended; an unredacted copy is being filed with the Securities and Exchange Commission. * The Registrant has omitted certain portions of this agreement for which the Registrant has obtained confidential treatment pursuant to Rule 406 of the Securities Act of 1933, as amended; unredacted copies have been filed with the Securities and Exchange Commission. ** Incorporated by reference to the similarly numbered exhibits to the Registration Statement on Form S-1 (Commission File No. 333-05885) filed on June 13, 1996. *** Incorporated by reference to the similarly numbered exhibits to the Annual Report on Form 10-K (Commission File No. 333-05885) filed on May 28, 1998. # Incorporated by reference to the similarly numbered exhibit to the Quarterly Report on Form 10-Q (Commission File No. 333-05885) filed on October 7, 1998. (1) A management contract or compensatory plan or arrangement. (b) Reports on Form 8-K. None
25 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholder of Packaging Resources Incorporated: We have audited the accompanying balance sheets of Packaging Resources Incorporated as of February 28, 1998 and 1999, and the related statements of operations, stockholder's equity (deficit), and cash flows for each of the years in the three-year period ended February 28, 1999. These financial statements are the responsibility of the management of Packaging Resources Incorporated. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Packaging Resources Incorporated as of February 28, 1998 and 1999, and the results of its operations and its cash flows for each of the years in the three-year period ended February 28, 1999, in conformity with generally accepted accounting principles. KPMG LLP Chicago, Illinois March 19, 1999 F-1 PACKAGING RESOURCES INCORPORATED BALANCE SHEETS FEBRUARY 28, 1998 AND 1999 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS 1998 1999 ---------- -------- Current assets: Cash and cash equivalents.............................................. $ 7,929 $ 1,672 Accounts receivable, net of allowance for doubtful accounts of $135 in 1998 and 1999, respectively...................................... 13,549 13,915 Inventories............................................................ 20,529 24,922 Prepaid expenses....................................................... 284 431 Deferred income taxes.................................................. 874 776 --------- -------- Total current assets...................................................... 43,165 41,716 Property, plant, and equipment, net....................................... 52,181 75,988 Intangibles, net.......................................................... 19,793 19,081 Other assets.............................................................. 5,940 18,031 --------- -------- $121,079 $154,816 --------- -------- --------- -------- LIABILITIES AND STOCKHOLDER'S DEFICIT Current liabilities: Current maturities of long-term debt................................... $ - $ 126 Accounts payable....................................................... 7,044 12,114 Accrued expenses....................................................... 9,805 10,195 Deferred revenue....................................................... 844 4,454 --------- -------- Total current liabilities................................................. 17,693 26,889 Long-term debt............................................................ 110,000 130,668 Deferred income taxes..................................................... 7,804 9,184 --------- -------- Total liabilities......................................................... 135,497 166,741 --------- -------- Stockholder's deficit: Common stock, $.01 par value; 1,000 shares authorized, issued, and outstanding in 1998 and 1999.............................. - - Additional paid-in capital............................................. - - Accumulated deficit.................................................... (14,418) (11,925) --------- -------- Total stockholder's deficit............................................... (14,418) (11,925) --------- -------- $121,079 $154,816 --------- -------- --------- --------
The accompanying notes are an integral part of these financial statements. F-2 PACKAGING RESOURCES INCORPORATED STATEMENTS OF OPERATIONS YEARS ENDED FEBRUARY 28, 1997, 1998, AND 1999 (DOLLAR AMOUNTS IN THOUSANDS)
1997 1998 1999 -------- -------- -------- Net sales.............................................. $120,086 $121,303 $136,558 Cost of goods sold..................................... 98,942 99,998 111,338 -------- -------- -------- Gross profit........................................... 21,144 21,305 25,220 Selling, general, and administrative expenses.......... 6,983 5,897 6,244 Amortization of intangibles and other assets........... 712 712 712 Other expense (note 8) ................................ - 800 - -------- -------- -------- Operating income....................................... 13,449 13,896 18,264 Interest expense....................................... 12,711 13,580 13,891 -------- -------- -------- Income before income taxes and extraordinary item................................. 738 316 4,373 Income tax expense .................................... 491 346 1,880 -------- -------- -------- Income (loss) before extraordinary item ............... 247 (30) 2,493 Extraordinary item - loss on early extinguishment of debt, net of tax.................................... 1,139 - - -------- -------- -------- Net income (loss)...................................... $ (892) $(30) $ 2,493 -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these financial statements. F-3 PACKAGING RESOURCES INCORPORATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) YEARS ENDED FEBRUARY 28, 1997, 1998, AND 1999 (DOLLAR AMOUNTS IN THOUSANDS)
TOTAL STOCK- COMMON ADDITIONAL ACCUMULATED HOLDER'S COMMON STOCK PAID-IN ACCUMULATED EQUITY STOCK WARRANTS CAPITAL DEFICIT (DEFICIT) --------- --------- ---------- ------------ --------- Balances at February 29, 1996................ $ -- $ -- $ 20,278 $ (2,013) $ 18,265 Dividends paid on common stock............... -- -- (20,278) (11,483) (31,761) Net loss .................................... -- -- -- (892) (892) --------- --------- ---------- ------------ --------- Balances at February 28, 1997................ -- -- -- (14,388) (14,388) Net loss .................................... -- -- -- (30) (30) --------- --------- ---------- ------------ --------- Balances at February 28, 1998................ -- -- -- (14,418) (14,418) Net income .................................. -- -- -- 2,493 2,493 --------- --------- ---------- ------------ --------- Balances at February 28, 1999................ $ -- $ -- $ -- $(11,925) $(11,925) --------- --------- ---------- ------------ --------- --------- --------- ---------- ------------ ---------
The accompanying notes are an integral part of these financial statements. F-4 PACKAGING RESOURCES INCORPORATED STATEMENTS OF CASH FLOWS YEARS ENDED FEBRUARY 28, 1997, 1998, AND 1999 (DOLLAR AMOUNTS IN THOUSANDS)
1997 1998 1999 -------- ------- -------- Cash flows from operating activities: Net income (loss)............................................... $ (892) $(30) $ 2,493 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization............................... 8,911 8,584 9,428 Write-off of financing costs............................... 1,139 - - Deferred income taxes...................................... 336 162 1,478 Loss on sale of property, plant, and equipment............. 11 800 162 Change in assets and liabilities: Accounts receivable...................................... (259) (2,571) (366) Inventories.............................................. (2) 867 (4,393) Prepaid expenses......................................... 577 (215) (147) Other assets............................................. 80 (1,658) (12,057) Accounts payable......................................... 2,612 1,817 5,070 Accrued expenses......................................... 4,924 1,405 390 Deferred revenue......................................... (303) 471 3,610 ------- ------- -------- Net cash provided by operating activities.......................... 17,134 9,632 5,668 ------- ------- -------- Cash flows from investing activities: Proceeds from sale of property, plant, and equipment ........... - 1,473 86 Proceeds from sale of leased equipment.......................... - 750 - Payment for purchase of the net assets from Miner Container............................................ (764) - - Capital expenditures............................................ (7,629) (9,130) (32,805) ------- ------- -------- Net cash used in investing activities.............................. (8,393) (6,907) (32,719) ------- ------- -------- Cash flows from financing activities: Net borrowings (payments) under credit agreement.............. (2,250) - 17,000 Net borrowings under equipment acquisition loans.............. - - 3,794 Retirement of indebtedness under old credit agreement......... (73,474) - - Net proceeds from Senior Secured Notes........................ 105,350 - - Payment of promissory notes................................... (850) (950) - Dividends paid................................................ (31,761) - - ------- ------- -------- Net cash provided by (used in) financing activities................ (2,985) (950) 20,794 ------- ------- -------- Net increase (decrease) in cash and cash equivalents............... 5,756 1,775 (6,257) Cash and cash equivalents at beginning of year..................... 398 6,154 7,929 ------- ------- -------- Cash and cash equivalents at end of year........................... $ 6,154 $ 7,929 $ 1,672 ------- ------- -------- ------- ------- -------- Supplemental disclosure of cash flow information - cash paid for: Interest...................................................... $ 7,590 $12,924 $13,152 Income taxes.................................................. $ 214 $ 251 $ 512
The accompanying notes are an integral part of these financial statements F-5 PACKAGING RESOURCES INCORPORATED NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 1997, 1998, AND 1999 (DOLLAR AMOUNTS IN THOUSANDS) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) DESCRIPTION OF BUSINESS Packaging Resources Incorporated (PRI or the Company) was organized in 1984 as a wholly owned subsidiary of HPH Industries, Ltd. (HPH). During fiscal 1994 PRI Holdings, Inc. (Holdings) acquired all of the common stock of PRI from HPH. During fiscal 1995 Holdings changed its name to Packaging Resources Group, Inc. (Group). Packaging Resources Group, Inc. is a wholly owned subsidiary of HPH. The primary business of PRI is the manufacture and sale of promotional beverage cups and plastic packaging for the food, dairy, and pharmaceutical industries. PRI has manufacturing facilities in Coleman, Michigan; Kansas City, Missouri; Mt. Carmel, Pennsylvania; Phoenix, Arizona; and New Vienna, Ohio. (B) CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of deposits with banks and short-term investments with original maturities of three months or less. (C) INVENTORIES Inventories are stated at the lower of first-in, first-out cost or net realizable value. (D) PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost. Depreciation on plant and equipment is calculated on the straight-line method over the following estimated useful lives of the assets:
Furniture and fixtures.............................. 5 years Molds............................................... 3-5 years Machinery and equipment............................. 13 years Buildings and improvements.......................... 35 years Land improvements................................... 35 years
Leasehold improvements are amortized ratably over the shorter of the lease term or estimated useful life of the assets. (E) INTANGIBLES Intangibles consist of patent costs, amortized over 14 years, and the excess of the cost over the fair value of net assets purchased, amortized over 40 years. The intangibles are amortized on a straight-line basis over their respective useful lives. Accumulated amortization was $5,290 and $6,002 at February 28, 1998 and 1999, respectively. At each balance sheet date, PRI evaluates the realizable value of intangibles on the basis of whether the intangibles are fully recoverable from projected, undiscounted net cash flows. Based on its most recent analysis, PRI believes no impairment of the carrying values of intangibles exists. F-6 PACKAGING RESOURCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) (F) OTHER ASSETS The costs of debt issuance are included in other assets and are amortized over the term of the related debt on the straight-line method. (G) INCOME TAXES PRI is included in the consolidated Federal income tax return of HPH. Federal income taxes are calculated on a separate company basis and remitted to HPH. Deferred income taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are recorded when it is more likely than not that such tax benefits will be realized. (H) RETIREMENT PLANS PRI has two defined contribution retirement plans covering substantially all of its employees. PRI's Money Purchase Retirement Plan is funded entirely by employer contributions based upon a defined percentage of participating employees' compensation. PRI also has a 401(k) plan where participants elect to have a designated percentage of their salary withheld and contributed to the plan. (I) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-7 PACKAGING RESOURCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) (2) INVENTORIES Inventories consist of the following at February 28, 1998 and 1999:
1998 1999 ------- ---------- Finished goods................................... $12,199 $ 13,216 Raw materials.................................... 3,856 5,404 Supplies and mold materials...................... 4,474 6,302 ------- ---------- Total............................................. $20,529 $ 24,922 ------- ---------- ------- ----------
(3) PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consist of the following at February 28, 1998 and 1999:
1998 1999 ------- ---------- Land............................................. $ 309 $ 309 Buildings........................................ 11,276 12,248 Machinery, equipment, and fixtures............... 84,649 104,319 Leasehold improvements........................... 1,944 1,946 Construction in-progress......................... 7,763 15,879 ------- ---------- 105,941 134,701 Less allowance for depreciation and amortization. (53,760) (58,713) ------- ---------- Total............................................ $ 52,181 $ 75,988 ------- ---------- ------- ----------
Construction in-progress includes building improvements and machinery and equipment which have not yet been placed in service, and molds which are in the process of being manufactured. Depreciation expense for the years ended February 28, 1997, 1998, and 1999 was $7,328, $7,208, and $8,051, respectively. F-8 PACKAGING RESOURCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) (4) OTHER ASSETS Other assets consist of the following at February 28, 1998 and 1999:
1998 1999 ------- ------- Debt issuance cost, net........................... $3,461 $2,795 Leased equipment, net............................. 745 745 Equipment deposits................................ 1,734 14,491 ------ ------ $5,940 $ 18,031 ------ ------ ------ ------
The debt issuance costs were incurred in connection with the 11-5/8% Senior Secured Notes described in note 7. The cost is being amortized over the remaining life of the notes. Amortization of these costs was $664 for each of the years ended February 28, 1998 and 1999. Leased equipment represents equipment leased and available for lease to PRI's customers. Equipment deposits represent deposits made on equipment to be delivered to PRI in the following fiscal year and equipment which will be purchased by a third party and leased to PRI. (5) LEASES PRI has several noncancelable operating leases for substantial portions of the Company's plant and office facilities and machinery and equipment. Leased plant and office facilities generally contain renewal options. Rental expense for operating leases for the years ended February 28, 1997, 1998, and 1999, aggregated $1,757, $1,554, and $1,672, respectively. Additionally, PRI has one facility which is being subleased. Future minimum lease payments and related sublease income under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of February 28, 1999 are:
OPERATING OPERATING LEASE SUBLEASE FISCAL YEAR PAYMENTS INCOME ----------- ---------------- ---------- 2000............................................. $ 1,701 $ (486) 2001............................................. 1,745 (162) 2002............................................. 1,829 - 2003............................................. 1,752 - 2004............................................. 1,548 - Thereafter....................................... 4,447 - ------- ------- Total minimum lease payments (income)............ $13,022 $(648) ------- ------- ------- -------
F-9 PACKAGING RESOURCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) (6) ACCRUED EXPENSES Accrued expenses consist of the following at February 28, 1998 and 1999:
1998 1999 -------- ------- Interest................................... $ 4,266 $ 4,358 Vacation................................... 1,038 1,038 Pension.................................... 936 1,161 Income taxes payable....................... 112 2 Other...................................... 3,453 3,636 ------- -------- $ 9,805 $ 10,195 ------- -------- ------- --------
(7) LONG-TERM DEBT On May 17, 1996, PRI issued $110,000 of 11-5/8% Senior Secured Notes due 2003. The funds from this issuance were used to repay all outstanding borrowings of the revolving credit loan and term loan and to fund a dividend to Group of $31,800. At this time, the Company also entered into a Senior Credit Facility which consists of a revolving credit facility and a letter of credit facility which permit borrowing at either LIBOR plus 2.00% or the prime rate plus 0.50% up to a maximum of $20,000 and $2,000, respectively. The Senior Credit Facility matures on July 31, 2001. During fiscal 1999, the Senior Credit Facility was amended to permit the Company to borrow an additional $10,000 against the revolving credit facility through equipment acquisition term loans. On April 27, 1999, the Company amended the Senior Credit Facility to increase the Revolving Credit Facility to a maximum of $22,500, and to reduce the amount of available Equipment Acquisition Term Loans to $7,500. The Company pays a commitment fee of 0.50% per annum on the average daily unused amount of the revolving credit facility. The Senior Secured Notes are secured by certain equipment, fixtures, and general intangibles, and mortgages on substantially all of the owned and certain of the leased real property of the Company, and proceeds therefrom. Obligations under the Revolving Credit Facility are secured by all of PRI's accounts receivable and raw materials and finished goods inventory, including any proceeds therefrom. The Equipment Acquisition Term Loans are secured by all of the eligible equipment. In August 1996, the privately placed notes were exchanged for notes registered with the Securities Exchange Commission. There were no changes in the amounts or terms of the notes. Long term debt consists of the following at February 28, 1998 and 1999:
1998 1999 -------- --------- Senior Secured Notes, interest at 11-5/8%, paid semi- annually on May 1 and November 1, payable in full in May of 2003..................................................... $110,000 $ 110,000 Revolving Credit Facility, interest at LIBOR plus 2%, maturing on July 31, 2001............................................. - 17,000 Equipment Acquisition Term Loans, interest at LIBOR plus 2.25%, due in 60 monthly installments commencing January 1, 2000.......................................................... - 3,794 -------- --------- 110,000 130,794 Less current maturities of long-term debt.......................... 126 -------- --------- $110,000 $130,668 -------- --------- -------- ---------
F-10 PACKAGING RESOURCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) PRI's credit agreements and other outstanding debt contain restrictions on incurring additional debt or liens, making investments, or making payments such as dividends, stock repurchases, or debt prepayments, and payments to affiliates. Aggregate maturities of long-term debt after February 28, 1999 are as follows:
FISCAL YEAR AMOUNT - ----------- --------- 2000..................................................... $ 126 2001..................................................... 759 2002..................................................... 17,759 2003..................................................... 759 2004..................................................... 110,759 Thereafter............................................... 632 -------- $130,794 -------- --------
(8) OTHER EXPENSE During fiscal 1998 an $800 loss was incurred related to the sale of the Louisiana, Missouri property. This property had previously been leased to a third party. (9) EARLY EXTINGUISHMENT OF DEBT During fiscal 1997, in connection with the issuance of the 11-5/8% Senior Secured Notes as discussed in note 7, the write-off of unamortized financing fees and costs associated with the early extinguishment of debt was recorded as an extraordinary item, net of taxes, in the accompanying statements of operations. F-11 PACKAGING RESOURCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) (10) INCOME TAXES Total income tax expense (benefit) for the years ended February 28,1997, 1998 and 1999 was allocated as follows:
1997 1998 1999 ----- ----- ------ Income from operations................................................. $ 491 $346 $1,880 Extraordinary item - loss on early extinguishment of debt.............. (728) - - ----- ----- ------ $(237) $346 $1,880 ----- ----- ------ ----- ----- ------
Income tax expense attributable to income before income taxes and extraordinary item for the years ended February 28, 1997, 1998, and 1999 consists of:
1997 ---- CURRENT DEFERRED TOTAL -------- --------- ------ Federal................................................................ $ - $ 271 $ 271 State.................................................................. 155 65 220 -------- --------- ------ $ 155 $ 336 $ 491 -------- --------- ------ -------- --------- ------
1998 ---- CURRENT DEFERRED TOTAL -------- --------- ------ Federal................................................................ $ -- $ 131 $ 131 State.................................................................. 184 31 215 -------- --------- ------ $ 184 $ 162 $ 346 -------- --------- ------ -------- --------- ------
1999 ---- CURRENT DEFERRED TOTAL -------- --------- ------ Federal................................................................ $127 $1,190 $1,317 State.................................................................. 275 288 563 -------- --------- ------ $402 $1,478 $1,880 -------- --------- ------ -------- --------- ------
F-12 PACKAGING RESOURCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) Income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 34% in 1997, 1998, and 1999 to income before income taxes and extraordinary item as a result of the following:
1997 1998 1999 -------- --------- ------ Computed "expected" tax expense ....................................... $ 250 $ 107 $ 1,487 Increase in income taxes resulting from: State income taxes, net of Federal income tax benefit.............................................. 145 143 372 Other, net....................................................... 96 96 21 -------- --------- ------ $ 491 $ 346 $ 1,880 -------- --------- ------ -------- --------- ------
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at February 28, 1997, 1998, and 1999 are presented below:
1998 1999 -------- ------- Deferred tax assets: Compensated absences............................................. $ 336 $ 317 Net operating loss carryforwards................................. 4,160 3,172 Alternative minimum tax credit carryforwards..................... 495 126 Other............................................................ 508 526 -------- ------- Total gross deferred tax assets........................................ 5,499 4,141 -------- ------- Deferred tax liabilities: Plant and equipment.............................................. (10,501) (10,518) Intangible assets................................................ (1,928) (2,031) Other............................................................ - - -------- ------- Total gross deferred tax liabilities................................... (12,429) (12,549) -------- -------- Net deferred liability................................................. $ (6,930) $ (8,408) -------- ------- -------- -------
PRI has not recorded a valuation allowance related to the deferred tax assets, as management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. At February 28, 1999 PRI has net operating loss carryforwards of approximately $8,100 which are available to reduce future taxable income for Federal income tax purposes under a tax sharing agreement with HPH. The operating loss carryforwards expire at various dates from 2004 through 2012. PRI also has alternative minimum tax credit carryforwards of approximately $126 which are available to reduce future Federal income taxes over an indefinite period under a tax sharing agreement with HPH. F-13 PACKAGING RESOURCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) (11) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and cash equivalents, receivables, accounts payable, and accrued expenses: The carrying amounts approximate fair value due to the short maturity of these instruments. Long-term debt: The carrying amounts approximate fair value as all of the obligations incur interest at a market rate. In addition, the significant terms of fixed rate obligations do not differ materially from those currently available to PRI. (12) RETIREMENT PLAN PRI has a defined contribution retirement plan covering substantially all employees. Contributions are based upon a defined percentage of compensation. Provisions for the plan's contributions amounted to $676, $630, and $757 for the years ended February 28, 1997, 1998, and 1999, respectively. Provisions of the plan include 20% vesting per year. (13) RELATED-PARTY TRANSACTIONS PRI has various transactions with Group and HPH. These transactions include management fees and reimbursements to HPH of $663, $600, and $600 for each fiscal year 1997, 1998, and 1999, respectively. Additionally, PRI paid dividends of $31,800 to Group on common stock in fiscal 1997. (14) BUSINESS AND CREDIT CONCENTRATIONS PRI operates solely in the United States and in one operating segment - the manufacture and sale of plastic food and beverage containers. PRI's business is substantially dependent on a limited number of large customers. In fiscal years 1997, 1998, and 1999, PRI's ten largest customers accounted for approximately 80%, 83%, and 80%, respectively, of its net sales. PRI's largest customers are General Mills (including Yoplait), Dannon, Ross Labs, and Tricon, which represented approximately 26.1%, 15.2%, and 12.7%, and 11.0%, respectively, of PRI's net sales for fiscal 1999. Accounts receivable for General Mills, Dannon, Ross Labs, and Tricon totaled $9,733 and $7,209 at February 28, 1998 and 1999, respectively. F-14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lake Forest, State of Illinois, on May 28, 1999. PACKAGING RESOURCES INCORPORATED By: /s/ Howard P. Hoeper ----------------------------------------- Howard P. Hoeper CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND PRESIDENT Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ------ /s/ Howard P. Hoeper Chairman of the Board, Chief Executive May 28, 1999 - --------------------------------- Officer and President (Principal Executive Howard P. Hoeper Officer) /s/ Jerry J. Corirossi Executive Vice President, Finance and May 28, 1999 - --------------------------------- Administration Jerry J. Corirossi (Principal Financial Officer and Principal Accounting Officer) /s/ Walter C. Riesen - --------------------------------- Director May 28, 1999 Walter C. Riesen /s/ John D. Hoeper - --------------------------------- Director May 28, 1999 John D. Hoeper /s/ Carol Hoeper - --------------------------------- Director May 28, 1999 Carol Hoeper
INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholder of Packaging Resources Incorporated: The audits referred to in our report dated March 19, 1999, included the related financial statement schedule as of February 28, 1999 and for each of the years in the three-year period ended February 28, 1999, included in the February 28, 1999 annual report on Form 10-K of Packaging Resources Incorporated. This financial statement schedule is the responsibility of Packaging Resources Incorporated's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. KPMG LLP Chicago, Illinois March 19, 1999 S-1 SCHEDULE II PACKAGING RESOURCES INCORPORATED VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED FEBRUARY 28, 1997, 1998, AND 1999
ADDITIONS ----------------------- BALANCE AT CHARGED TO CHARGED BEGINNING OF COSTS AND TO OTHER BALANCE AT DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD - ----------- -------------- ----------- --------- ---------- -------------- 1997 Allowance for Doubtful Accounts $156,000 $ ___ $ 2,000 $ (23,000) $135,000 1998 Allowance for Doubtful Accounts $135,000 $ ___ $ 56,000 $ (56,000) $135,000 1999 Allowance for Doubtful Accounts $135,000 $ ___ $ 10,000 $ (10,000) $135,000
S-2 EX-3.2(B) 2 EXHIBIT 3.2(B) Exhibit 3.2(b) AMENDMENT OF BY-LAWS OF PACKAGING RESOURCES INCORPORATED Section 2.4 of the By-laws of the Company shall be deleted in its entirety and replaced with the following: "Section 2.4 SPECIAL MEETINGS. Special meetings of the Board of Directors may be called at any time by the Chairman. Each special meeting shall be held at such date, time and place either within or without the State of Delaware as shall be fixed by the Chairman." Section 2.6 of the By-laws of the Company shall be deleted in its entirety and replaced with the following: "Section 2.6 QUORUM; VOTE REQUIRED FOR ACTION. Unless otherwise required by law, at each meeting of the Board of Directors, the presence of one-third of the total number of directors shall constitute a quorum for the transaction of business; PROVIDED, HOWEVER, that if Howard P. Hoeper does not have authority, directly or indirectly, to appoint a majority of the directors, the presence of all directors shall constitute a quorum for the transaction of business. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless the vote of a greater number is required by law or the certificate of incorporation; PROVIDED, HOWEVER, that if Howard P. Hoeper does not have authority, directly or indirectly, to appoint a majority of the directors, the vote of 66 2/3% of the directors shall be the act of the Board of Directors, unless the vote of a greater number is required by law or the certificate of incorporation. In case at any meeting of the Board of Directors a quorum shall not be present, the members of the Board of Directors present may by majority vote adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall attend." EX-4.3(B) 3 EXHIBIT 4.3(B) Exhibit 4.3(b) SEVENTH AMENDMENT TO CREDIT AGREEMENT SEVENTH AMENDMENT TO CREDIT AGREEMENT ("Seventh Amendment"), dated as of April 27, 1999 to the Credit Agreement, dated as of May 17, 1996, among Packaging Resources Incorporated, a Delaware corporation (the "Borrower"), the lender signatories thereto ("Lenders") and LaSalle National Bank, a national banking association ("LaSalle"), as agent for such Lenders ("LaSalle, in such capacity, the "Agent"). WHEREAS, the Borrower, the Lenders and the Agent have entered into that certain Credit Agreement dated as of May 17, 1996 as amended by that certain First Amendment to Credit Agreement, dated December 12, 1996, by and among the Borrower, the Lenders and the Agent ("First Amendment"), by that certain Second Amendment to Credit Agreement dated as of April 24, 1997, by and among the Borrower, the Lenders and the Agent ("Second Amendment"), by that certain Third Amendment to Credit Agreement dated August 27, 1997, by and among the Borrower, the Lenders and the Agent ("Third Amendment"), by that certain Fourth Amendment to Credit Agreement dated as of April 30, 1998, by and among the Borrower, the Lenders and the Agent ("Fourth Amendment"), by that certain Fifth Amendment to Credit Agreement and First Amendment to Security Agreement dated August 5, 1998 by and among the Borrower, the Lenders and the Agent and by that certain Sixth Amendment to Credit Agreement dated February 25, 1999 by and among the Borrower, the Lenders and the Agent (said Credit Agreement, as amended, is hereinafter referred to as the "Credit Agreement"); WHEREAS, the Borrower, the Lenders and the Agent wish to amend and modify certain of the provisions of the Credit Agreement pursuant to the terms hereof; NOW THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained and contained in the Credit Agreement, the parties hereto hereby agree as follows: 1. DEFINITIONS. Except as otherwise provided herein, capitalized terms used herein without definition shall have the meanings set forth in the Credit Agreement. * * * 2. REVOLVING CREDIT FACILITY COMMITMENT AND BORROWING LIMIT. Section 2.2 of the Credit Agreement is deleted and the following is inserted in its stead: "Section 2.2 REVOLVING CREDIT FACILITY COMMITMENT AND BORROWING LIMIT. (a) The Revolving Loan shall not at any time, when taken together with the Letter of Credit Usage at such time (after giving effect to any concurrent reimbursement of a Letter of Credit with the proceeds of a Revolving Advance pursuant to Section 4A.1(c) hereof) exceed the least of (i) Twenty-Two Million Five Hundred Thousand Dollars ($22,500,000) ("Revolving Credit Facility Commitment"), (ii) the Borrowing Base as of such time and (iii) the maximum amount permitted by the Senior Note Documents (the least of (i), (ii) and (iii) being the "Borrowing Limit"). (b) Subject to the limitations of Sections 2 and 3 hereof, the Borrower may borrow, repay (without premium or penalty) and reborrow the Revolving Loan. The portion of the Revolving Loan to be funded by each Lender shall not exceed in aggregate principal amount at one time outstanding, and no Lender shall have any obligation to make its pro rata share of any Revolving Advance which shall result in such Lender's share of the Revolving Loan at such time PLUS such Lender's share of the Letter of Credit Usage at such time being in the aggregate in excess of, the revolving commitment amount set forth opposite such Lender's name on Schedule 1.1 to the Seventh Amendment (as such amount may be reduced from time to time in accordance with the terms hereof, for each Lender its "Revolving Commitment"). (c) The Revolving Commitment of each Lender shall be reduced upon each reduction of the Revolving Credit Facility Commitment. The amount of the reduction for each Lender shall be equal to such Lender's pro rata share (based on its percentage interest in the Revolving Credit Facility Commitment) of the reduction in the Revolving Credit Facility Commitment. 3. EQUIPMENT ACQUISITION LOANS. Section 2.3.1 of the Credit Agreement is hereby deleted and the following is inserted in its stead: "Section 2.3.1 EQUIPMENT ACQUISITION LOANS. During the period between the Fifth Amendment Effective Date and the date which is the earlier of (i) the Maturity Date and (ii) eighteen months after the Fifth Amendment Effective Date, each Lender agrees, for so long as no Default or Event of Default exists, to make such Lender's PRO RATA share of equipment acquisition loans (each such loan an "Equipment Advance" and the outstanding principal balance of all Equipment Advances from time to time, the "Equipment Loan") to the Borrower to finance, in part, the purchase by the Borrower of Eligible Equipment. The aggregate principal amount of the Equipment Commitments is Seven Million Five Hundred Thousand Dollars ($7,500,000). Subject to all of the terms and conditions of this Agreement, each Lender agrees, for so long as no Default or Event of Default exists, to make Equipment Advances to the Borrower from time to time, as requested by the Borrower in accordance with the terms of Section 2.4 hereof, up to a maximum principal amount at any time outstanding equal to the product of (A) Seven Million Five Hundred Thousand Dollars ($7,500,000), multiplied by (B) such Lender's PRO RATA share of the Equipment Commitments. In no event (x) shall any one request by the Borrower for Equipment Advances be in the amount of less 2 than One Million Dollars ($1,000,000) or, (y) shall the amount of any one request by Borrower for Equipment Advances exceed sixty-seven percent (67%), the hard cost (invoice price less taxes and delivery) of the Eligible Equipment, the purchase of which is to be financed, in part, with the proceeds of the applicable Equipment Advance. Prior to the funding of any Equipment Advance, the Borrower shall provide the Agent with (i) copies of the invoices or other comparable documentation for the Eligible Equipment, the purchase of which is to be financed, in part, with the proceeds of such proposed Equipment Advance together with such other supporting details as reasonably requested by Agent, and (ii) properly executed UCC-1 Financing Statements describing, in sufficient detail to meet the requirements of the Uniform Commercial Code for perfection of purchase money security interests, such Eligible Equipment. All such Equipment Advances shall be secured by all of the Eligible Equipment, the purchase of which was financed, in part, by the proceeds of Equipment Advances. The principal amount of all Equipment Advances shall be due on the Maturity Date or as otherwise provided in the Equipment Note or as otherwise provided herein, provided that Borrower may prepay, without penalty or premium, the outstanding principal balance of any Equipment Advance. The Equipment Advances shall be evidenced by promissory notes to be executed and delivered by the Borrower to the Lenders on or prior to the Fifth Amendment Effective Date, the form of which is attached hereto and made a part hereof as Exhibit 2.3.1 (the "Equipment Note(s)"), shall bear interest as specified in Section 2.6 and shall be repayable in accordance with the terms hereof and of the Equipment Notes. On the date which is eighteen months after the Fifth Amendment Effective Date, the outstanding Equipment Advances shall be converted into term loans. The principal amount of such Equipment Advances so converted to a term obligation shall be amortized on the basis of sixty (60) equal monthly payments, commencing on the first day of the calendar month after the calendar month in which the conversion occurs. The foregoing notwithstanding, the entire principal balance of all Equipment Advances shall be due and payable on the Equipment Maturity Date." 4. AMENDED AND RESTATED REVOLVING NOTE AND EQUIPMENT ACQUISITION NOTE. It shall be a condition precedent to the effectiveness of this Seventh Amendment that Borrower shall have executed and delivered to LaSalle National Bank, as the sole Lender, an amended and restated Revolving Note in the form of Exhibit 2.3 to the Credit Agreement in the aggregate principal amount of Twenty-Two Million Five Hundred Thousand Dollars ($22,500,000) and an amended and restated Equipment Acquisition Note in the form of Exhibit 2.3.1 to in Credit Agreement in the aggregate principal amount of Seven Million Five Hundred Thousand Dollars ($7,500,000). Upon receipt of such amended and restated Revolving Note and Equipment Note, LaSalle National Bank shall return the Revolving Note and Equipment Acquisition Note previously delivered by Borrower to LaSalle National Bank marked "amended and superseded". 5. SCHEDULE 1.1. Schedule 1.1 attached to the Credit Agreement is hereby deleted and Schedule 1.1 attached to this Seventh Amendment is hereby inserted in its stead. 6. CONTINUING EFFECT. Except as otherwise specifically set out herein, the provisions of the Loan Agreement shall remain in full force and effect. 3 7. COUNTERPARTS. This Seventh Amendment may be executed in any number of separate counterparts, each of which shall, collectively and separately, constitute one agreement. IN WITNESS WHEREOF, this Seventh Amendment has been duly executed as of the date first written above. PACKAGING RESOURCES INCORPORATED, LASALLE NATIONAL BANK, as Borrower as Agent and Lender By: /s/ Jerry J. Corirossi By: George L. Kumis -------------------------------------- ----------------------------- Name: Jerry J. Corirossi Name: George L. Kumis ------------------------------- -------------------------- Executive Vice President- Finance & Adminitration Title: and Chief Financial Officer Title: Senior Vice President ------------------------------- ---------------------- 4 SCHEDULE 1.1
REVOLVING MAXIMUM MAXIMUM COMMITMENT REVOLVING EQUIPMENT LENDER PERCENTAGE COMMITMENT COMMITMENT ------ ---------- ---------- ---------- LaSalle National Bank 100% $22,500,000 $7,500,000
5 EX-10.12 4 EXHIBIT 10.12 EXHIBIT 10.12 ROSS PRODUCTS DIVISION CANS SUPPLY AGREEMENT This CANS SUPPLY AGREEMENT ("Agreement") is made as of March 1, 1998, between PACKAGING RESOURCES INCORPORATED, a Delaware corporation ("PRI"), and ROSS PRODUCTS DIVISION of ABBOTT LABORATORIES, an Illinois corporation ("ROSS"). WITNESSETH: WHEREAS, PRI desires to sell to ROSS, and ROSS desires to purchase from PRI, barrier plastic CANS for use in ROSS' production of its product. WHEREAS, PRI and ROSS are willing to enter into such an arrangement on the terms and subject to the conditions set forth in this Agreement: NOW, THEREFORE, in consideration of the promises and the mutual agreements set forth herein, and for other good and valuable consideration the receipt and adequacy of which is hereby acknowledged, the parties agree as follows: 1. PURCHASE AND SALE OF CANS. (a) Pursuant to the provisions and conditions of this Agreement, PRI shall sell barrier plastic CANS, as more particularly described in EXHIBIT A hereto ("CANS"), to ROSS, and ROSS shall purchase [*] of their requirements for CANS and take delivery of CANS from PRI. ROSS agrees to make a good faith effort to purchase a total of [*] CANS per year; however, such quantities shall only apply so long as CANS are employed in the sale of ROSS product lines including, but not limited to, product lines commonly known as Pediatric and Nutritional products. If ROSS' total purchases of CANS exceed [*] for any contract year, PRI agrees to reduce the price per thousand on the sale of all CANS in excess of the [*] by [*] of the current selling price. (b) Notwithstanding the foregoing, the quantity of CANS, PRI shall be obligated to sell ROSS, in any one month, shall not exceed [*] CANS. In the event that ROSS' orders exceed this amount, PRI will make a reasonable effort to fill all orders for quantities exceeding such amount. (c) Purchases and sales of CANS hereunder shall be made pursuant to ROSS' written purchase orders, on forms mutually agreed to by the parties, received by PRI. Each such purchase order shall be governed by the provisions and conditions of this Agreement and, to the extent consistent with this Agreement, the terms of the applicable purchase order. (d) ROSS shall explore expanded use of the CANS and shall not convert to metal cans any product currently packaged in CANS unless the CANS fail to perform or ROSS' business interests require that the CAN volume be moved to a ROSS manufacturing facility that utilizes only the metal can. (e) PRI will perform and bear the cost of all routine maintenance on ROSS' tools to include routine inspection, periodic cleaning and polishing, and recalibration of all tooling main assemblies (mold bases and trim shoe assemblies) and major overhauls, at a minimum of every two (2) years, of the main mold base and trimming assemblies to include seals, shafts, die pins and bushings. Routine maintenance, as referred to above, shall not include, and ROSS shall be responsible for, the replacement of the "Tool Parts" related to the production of the CAN ("Tool Parts" to be defined herein as only the following parts of the Tool: Mold Cavities, Flange Squeezers, Mold Plugs, Trim Punches and Trim Die Plates). When and if these Tool Parts cannot be used to maintain the dimensional specifications of the CANS, they will be replaced by PRI and ROSS will be invoiced, according to the payment terms in Paragraph 2 (c), for such worn tool parts. The ROSS costs for these tool parts are not to include PRI labor. (i.e. PRI pays / absorbs PRI labor). ROSS shall not be responsible for any costs of such replacement of these tooling parts arising out of the negligence of PRI. The costs for replacement tool parts to ROSS will not exceed in any agreement year an amount equal to [*] per thousand CANS produced in that same agreement year. Replaced tool parts will be made available to ROSS at ROSS' request. 2. PURCHASE PRICE. (a) The delivered price of CANS through February 28, 1999, shall be as described in EXHIBIT B hereto - the "Pricing Schedules. The price effective as of March 1, 1999, will be reduced by [*] per one thousand CANS. (b) Price changes for increases in "Resin" costs shall be implemented only when incurred by PRI and then only in accordance with the current resin escalator figures included in the attached Pricing Schedules. All resin price increases shall be implemented only after thirty (30) days written notice to ROSS. No price changes shall result from non-resin cost increases incurred by PRI during the term of this Agreement. (c) Within thirty (30) days after the later of (i) ROSS' receipt of PRI's invoice, or (ii) delivery of the CANS subject to such invoice, ROSS shall pay the applicable invoice in full. If payments are transferred to PRI within five (5) days after the later of (i) and (ii) above with regard to CANS shipped to Columbus or eight (8) days for CANS shipped to Casa Grande, PRI shall allow ROSS to deduct one (1) 2 percent of the total invoice amount. All payments shall be sent to PRI at the address specified by PRI from time to time. (d) In the event ROSS fails to pay any invoice hereunder as scheduled, PRI shall be entitled to exercise any right it may have at law or in equity in connection therewith. 3. SHIPMENTS AND FORCE MAJEURE. (a) PRI shall ship CANS sold pursuant to this Agreement F.O.B. PRI's facility(s) ("The Facility"). Title and risk of loss for any CANS sold hereunder shall pass from PRI to ROSS upon delivery to ROSS at The Facility. (b) All CANS shall be subject to inspection upon delivery by PRI to ROSS. Any CANS which do not comply with specifications in EXHIBIT A, as it may be modified from time to time, and with standards established pursuant to Section 7 hereof may be rejected by ROSS. ROSS shall give written notice to PRI of any such rejection within thirty (30) days from the date of delivery. To the extent the CANS supplied thereunder do not meet the specifications and standards agreed to by the parties pursuant to Section 7 hereof and ROSS gives PRI written notice of such failure within thirty (30) days of delivery, ROSS' sole remedy hereunder shall be to have the defective CANS returned to PRI at PRI's expense and PRI shall, within thirty (30) days of its receipt of such defective CANS, replace such CANS (FOB ROSS' facility) or refund (or credit) the entire amount paid for such CANS, as elected by ROSS. The preceding sentence shall not be construed to limit the exercise of ROSS' rights arising under section 9. (c) Failure of either party to perform its obligations under this Agreement shall not subject such party to any liability to the other if such failure is caused by acts such as but not limited to acts of God, fire, explosion, flood, drought, war, riot, sabotage, embargo, strikes or other labor trouble, or compliance with any order or regulation of any government entity acting with color of right. During any period of force majeure in which PRI is unable to fulfill ROSS' orders for CANS, ROSS may purchase CANS from other sources and, if such period exceeds six (6) months, ROSS shall have the right to terminate this Agreement upon written notice to PRI. 4. INCREMENTAL OPPORTUNITIES. ROSS agrees to explore in good faith the following incremental opportunities. The decision to act on these opportunities is solely at ROSS' discretion: (a) Explore with PRI the possibility of converting Jevity product from the current metal can to CANS in Casa Grande. 3 (a) Explore with PRI the possibility of converting Jevity product from the current metal can to CANS in Casa Grande. (b) Provide PRI first right of refusal for the 1 lb. and/or 2 lb. plastic powder cans should they become commercial during the Term. (c) Provide PRI the opportunity to become a qualified supplier for the ReadiCup Barrier Sheet project in Altavista. (d) Explore with PRI the possibility to supply CANS to replace 4 oz. Pediatric Powder Cans currently packed in 8 oz. metal cans. (e) Allow PRI to quote on current or new plastic parts as they are reviewed and/or developed, such as the current ReadiCup Sheet, nipple rings, Human Milk Fortifier Sheet, and Volufeed projects. 5. TERM AND TERMINATION. (a) The term of this Agreement shall be from March 1, 1998, for a period of three (3) years hereof to February 28, 2001. (b) Either party shall have the right to terminate this Agreement following sixty (60) days' written notice to the other party of a material breach of this Agreement by such other party if such breach has not been remedied within such sixty (60) days. (c) This Agreement shall terminate at the option of either party hereto in the event, and at any time, that either party shall (i) become insolvent within the meaning of any bankruptcy or insolvency laws, (ii) have a receiver or trustee appointed, or (iii) made an assignment for the benefit of creditors. (d) In the event PRI terminates this Agreement pursuant to Section 5(b), ROSS shall be obligated to pay to PRI an amount equal to the monthly amortization amount for each piece of equipment listed on EXHIBIT C from the date of the termination (pro-rated for the first month) through the remainder of the Term. Monthly payments are due within thirty (30) days following the end of the month amortized. PRI shall use its best effort to mitigate such payments by using such equipment in other manufacturing activities, and payments received by PRI from third parties relating to the use of such equipment shall offset and be credited against amounts due from ROSS hereunder. Notwithstanding the foregoing, title to all equipment listed on EXHIBIT C remains with PRI and ROSS shall have no further liability with respect to the equipment listed on EXHIBIT C upon expiration of the Term. The parties further agree that EXHIBIT C hereto may be amended only upon mutual consent of the parties from time 4 (f) Failure to terminate under any of the foregoing grounds or to exercise any right or remedy hereunder shall not constitute a waiver of the right to terminate on that or other grounds or to exercise such other right or remedy in the future. 6. FORECASTS. At the beginning of each calendar month during the term of this Agreement, ROSS shall provide PRI a three (3) month forecast of ROSS' non-binding estimated requirements of CANS. 7. QUALITY CONTROL. PRI shall comply with all approved Product Specifications including FDA good manufacturing practices. Changes to Product Specifications shall be subject to written agreement between ROSS and PRI. With regard to its activity under this Agreement, each party shall comply with all applicable laws, rules and regulations. 8. WARRANTIES AND LIMITATIONS OF DAMAGE. (a) PRI warrants that all the CANS sold and delivered pursuant to this Agreement shall conform to specifications agreed to by the parties in EXHIBIT A, and will be free from defects in workmanship and material when delivered. (b) PRI hereby disclaims any and all implied warranties of mechantability and fitness for a particular purpose. (c) PRI and ROSS agree that neither ROSS nor PRI shall be responsible for consequential or incidental damages arising under this Agreement. 9. INDEMNIFICATION. (a) ROSS shall indemnify, defend and hold PRI, and its officers, directors, partners and shareholders, and each of them, harmless from and against all claims, lawsuits, charges, actions, causes of action, liabilities, judgments, losses, damages, expenses (including actual reasonable attorneys' fees and costs) arising from or in connection with ROSS' handling, transportation or use of the CANS, or the products to be sold within the CANS, except to the extent arising from PRI's negligence or willful misconduct or breach of this Agreement. (b) PRI shall indemnify, defend and hold ROSS, its affiliates, and their respective officers, directors, partners and shareholders and each of them, harmless from and against all claims, lawsuits, charges, actions, causes of action, liabilities, judgments, losses, damages, expenses (including actual reasonable attorneys' fees and costs) arising from or in connection with PRI's manufacture of the 5 CANS or breach of this Agreement, except to the extent arising from ROSS' negligence or willful misconduct or breach of this Agreement. (c) If the indemnified party expects to seek indemnification under this Article, it shall promptly give notice to the indemnifying party of the basis for such claim of indemnification. If indemnification is sought as a result of any third party claim or suit, such notice to the indemnifying party shall be within fifteen (15) days after receipt by the indemnified party of such claim or suit (Abbott Laboratories, One Abbott Park Road, Abbott Park, Illinois 60064-3500, Attention Risk Management, D-317). Each party shall cooperate fully with the other party in the defense of all such claims or suits, and no settlement or compromise shall be binding on a party hereto without its prior written consent. (d) Section 9 shall survive expiration or termination of this Agreement. 10. ENTIRE AGREEMENT. This Agreement memorializes and constitutes the final expression and the complete and exclusive statement between the parties with respect to the subject matter hereof (except Purchasing Orders for ROSS tooling when not inconsistent with this Agreement). There are no writings, conversations, representations, warranties or agreements that the parties intend to be a part hereof except as expressly set forth in this Agreement. This Agreement represents the entire agreement between the parties and supersedes all previous written or oral agreements or discussions between the parties and any other person or legal entity concerning the transactions contemplated herein. 11. AMENDMENTS AND WAIVERS. No change in, amendment to, or waiver of this Agreement, or any part hereof, shall be valid unless in writing and signed by both parties thereby obligated. 12. NO THIRD PARTY BENEFIT. The parties acknowledge and agree that the provisions of this Agreement are for the sole benefit of the parties hereto, and are not for the benefit, directly or indirectly, of any other person or entity, except for Abbott Laboratories. 13. GOVERNING LAW AND VENUE. The validity of this Agreement and any of its provisions and conditions, as well as the rights and duties of the parties, shall be interpreted and construed pursuant to and in accordance with the internal laws, and not the law of conflicts, of the State of Illinois. The parties irrevocably submit to the jurisdiction of any Illinois or United States Federal court sitting in the Northern District of Illinois for any action filed to enforce, construe or interpret this Agreement. The parties further waive any objection to venue in such State on the basis of forum non conveniens. 14. HEADINGS. Section headings have been inserted in this Agreement as a matter of convenience only; such section headings are not a part of this Agreement and shall not be used in the interpretation of this Agreement. 6 15. SEVERABILITY. If any one or more of the provisions of this Agreement are held to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality, and enforceability of any such provision or provisions in every other respect and of the remaining provisions of this Agreement shall not be in any way impaired. 16. TIME OF THE ESSENCE. Time is hereby expressly made of the essence with respect to the performance and satisfaction of each of the provisions and conditions of this Agreement. 17. GENDER AND NUMBER. Wherever the context so requires, all words used in the singular shall be construed to include the plural, and vice versa, and words of any gender shall include any other gender, or any entity. 18. NO ASSIGNMENT. This Agreement shall not be assigned, in whole or in part, without the express written consent of the parties hereto, provided, however, that ROSS may assign this Agreement without the consent of PRI to any wholly owned subsidiary of Abbott Laboratories. 19. NOTICES. No notices, request, demand, instruction or other documents to be given hereunder to any party shall be effective or any purpose unless telecopies (with answer back) or personally delivered to the person at the appropriate address set forth below (in which event, such notice shall be deemed effective only upon such delivery) or when delivered by mail, sent by registered or certified mail, return receipt requested or recognized private mail carrier, as follows: If to PRI: Packaging Resources Incorporated One Conway Park 100 Field Drive, Suite 300 Lake Forest, Illinois 60045 ATTN: Jeffrey E. Parker If to ROSS: ROSS Products Division 625 Cleveland Avenue Columbus, Ohio 43215 ATTN: Ralph Giangiordano And a copy to: Brian Taylor, Division Counsel ROSS Products Division 625 Cleveland Avenue Columbus, Ohio 43215 Notice given by mail shall be deemed to have been given ninety-six (96) hours after deposit of same in any United States Post Office box, postage prepaid, addressed as set forth above. Notice given via overnight courier shall be deemed to have been given upon verified delivery by such courier. The addresses and 7 addressees for the purpose of this section may be changed by giving written notice of such change in the manner herein provided for giving notice. 20. NON-DISCLOSURE. PRI and ROSS agree not to disclose the existence of this Agreement or use the name of the other in any publicity or advertising without the other party's written consent. 21. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided, this Agreement, and each of its provisions, covenants, and conditions, shall apply to, bind, and inure to the benefit of the parties and their respective successors-in-interest, and permitted assigns. No party shall assign this Agreement in whole or part or subcontract or delegate any of its obligations hereunder, to any third party without the prior written consent of the other party: provided however that ROSS shall have the right to assign this Agreement to a ROSS affiliate without the need for such consent. 22. FURTHER ASSURANCES. Each party shall perform or cause to be performed any further acts and execute and deliver any documents that may be reasonably necessary or advisable to carry out the provisions of this Agreement. 23. EXHIBITS INCORPORATED. All EXHIBITS referred to in this Agreement are hereby incorporated and made a part of this Agreement except that if there is any inconsistency between this Agreement and the provisions of any EXHIBIT, the provisions of this Agreement shall control. 24. COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which together shall constitute one original document. 25. ALTERNATIVE DISPUTE RESOLUTION. Any controversy or dispute that arises in connection with this Agreement shall first be presented for resolution to the respective presidents of the ROSS and PRI. If no resolution is reached within thirty (30) days thereafter, then such controversy or dispute shall be resolved by binding Alternative Dispute Resolution in the manner described in EXHIBIT E, which shall be the sole mechanism and forum for resolution of such controversy or dispute. 26. YEAR 2000 COMPLIANCE. ROSS expects that all of its suppliers will be Year 2000 compliant. As such, PRI warrants that all hardware and software used by it in the manufacture and supply of materials and/or provision of services hereunder, and in its business relationship with ROSS, shall (I) have no lesser functionality with respect to records containing dates before or after January 1, 2000, than previously with respect to dates prior to January 1, 2000. 8 PACKAGING RESOURCES INCORPORATED a Delaware Corporation By: /s/ Jeffrey E. Parker ---------------------------------------- Title: V.P. Sales 7/27/98 ------------------------------------ ROSS PRODUCTS DIVISION LABORATORIES ABBOTT LABORATORIES an Illinois Corporation By: /s/ Ralph Giangiordano ---------------------------------------- Title: 7/30/98 ------------------------------------ 9 EXHIBIT A-1 [*] EXHIBIT A-2 - --------- PACKAGING - --------- RESOURCES - --------- ROSS SHIPPING SPECIFICATION REVISION I 106499PA January 18, 1996 PALLET: 44.0 in. x 56.0 in. Hardwood Stringer Pallet (per specification). SLIP SHEET: 44.0 in. x 56.0 in. 50 mil (50 point) Chipbaord slip sheets with rounded or cut corners (per specification). PALLET CAP: 44.125 in. x 56.125 in. Plastic Cap. Frame: (TOP FRAME) (1.0 in. x 3.375 in.) (per specification). TOP SHROUD: 2 x 275 lb. C-Flute Corrugated - 72.0 in. x 42.0 in. 4 Panel Shroud. LARGE SIDE PADS: 2 x 275 lb. C-Flute Corrugated - 15.0 in. x 56.0 in. Pad SMALL SIDE PADS: 2 x 275 lb. C-Flute Corrugated - 15.0 in. x 44.0 in. Pad STRETCH WRAP: 60 ga. x 20 inch. wide Sigma +4 Grade BANDING: 0.4375 in. x 0.025 in. Gerrard Machine Grade Black Polypropylene Strapping (Break strength 500 lbs.) LABELING: 1 Label must be shown on each of the four sides of the pallet, plus 1 additional label will be placed on the top of the pallet (5 total labels per pallet). Line 5 - White Labels, Line 6 - Blue Label, Line 7 - Yellow labels. DESCRIPTION The cans are automatically palletized onto slip sheets in a staggered/nested pattern: 358 parts per layer, 27 layers per pallet. Every layer will be on a slip sheet, with one additional slip sheet placed on the top (27th) layer. The corrugated shroud halves are tapped at the corners and placed on top of the top slip sheet. Side pads are taped to the slip sheet above the fifth layer above the pallet. The pallet cap is placed on top of the top shroud and the five labels are placed on the sides and top of the pallet. The assembled pallet is banded in 4 directions and stretch wrapped. EXHIBIT A-3 - --------- PACKAGING - --------- RESOURCES - --------- ROSS SHIPPING SPECIFICATION REVISION I 106499PA January 18, 1996 Page 2 BILL OF MATERIALS
1 Pallet 28 Slip Sheets 2 Corrugated Top Shrouds 2 Large Corrugated Side Panels 2 Small Corrugated Side Panels 1 Pallet Cap/Top Frame 5 Labels 93ft Banding 75ft Stretch Wrap
PART TOTALS
358 Cans/Layer 27 Layers/Pallet 9666 Cans/Pallet 22 Pallets/Truck 212652 Cans/Truck Load
EXHIBIT A-4 [*] - --------- PACKAGING - --------- RESOURCES - --------- EXHIBIT B ISSUED: February 1, 1998 PACKAGING RESOURCES INCORPORATED Pricing Schedule EFFECTIVE MARCH 1, 1998 New Contract Pricing Reflects [*] Price Reduction and New EDI Payment Terms [*] no longer being deducted from Reserve Fund SUPERSEDES PRICE CHANGE OF MARCH 13, 1997 ROSS LABORATORIES ----------------- Ship to: Columbus, Ohio Casa Grande, Arizona (#107870)
Columbus $/M Casa Grande $/M Part Description (Delivered) (Delivered) POLYPROPYLENE - OPAQUE (C304IHC-OP) (C304IHG-OP) 211 x 8 oz. Barrier Plastic Can [*] [*] [*]
Title: FOB Packaging Resources Point of Manufacture Freight: Packaging Resources Arranges for, Prepays and Absorbs Terms: 1% Net 5 Days for Columbus and 1% Net 8 Days for Casa Grande Sale Subject to Credit Approval Current Resin Escalators/De-escalators - -------------------------------------- Price change for each $0.01/lb change in resin is as follows: [*] for each $0.01/lb of Exxon 9122 [*] for each $0.01/lb of Exxon 7341 [*] for each $0.01/lb of Evalca 151B [*] for each $0.01/lb of Evalca 100B [*] for each $0.01/lb of Adhesive [*] for each $0.01/lb of Stabilize [*] for each $0.01/lb of Color Pricing effective only when *APPROVED* stamp appears above Tooling Owned by Ross Laboratories. Routine maintenance performed by and paid for by Packaging Resources. Part replacement after normal life is paid for by Ross per agreement. Includes [*]. - --------- PACKAGING - --------- RESOURCES - --------- EXHIBIT B ISSUED: February 1, 1998 PACKAGING RESOURCES INCORPORATED Pricing Schedule EFFECTIVE MARCH 1, 1998 New Contract Pricing Reflect [*] Price Reduction and New EDI Payment Terms [*] no longer being deducted from Reserve Fund SUPERSEDES PRICE CHANGE OF MARCH 13, 1997 ROSS LABORATORIES ----------------- Ship to: Columbus, Ohio Casa Grande, Arizona (#107870)
Columbus $/M Casa Grande $/M Part Description (Delivered) (Delivered) POLYPROPYLENE - TRANSLUCENT (C304IHC-TR) (C304IHG-TR) 211 x 8 oz. Barrier Plastic Can [*] [*] [*]
Title: FOB Packaging Resources Point of Manufacture Freight: Packaging Resources Arranges for, Prepays and Absorbs Terms: 1% Net 5 Days for Columbus and 1% Net 8 Days for Casa Grande Sale Subject to Credit Approval Current Resin Escalators/De-escalators - -------------------------------------- Price change for each $0.01/lb change in resin is as follows: [*] for each $0.01/lb of Exxon 9122 [*] for each $0.01/lb of Exxon 7341 [*] for each $0.01/lb of Evalca 151B [*] for each $0.01/lb of Evalca 100B [*] for each $0.01/lb of Adhesive [*] for each $0.01/lb of Stabilize [*] for each $0.01/lb of Color Pricing effective only when *APPROVED* stamp appears above Tooling Owned by Ross Laboratories. Routine maintenance performed by and paid for by Packaging Resources. Part replacement after normal life is paid for by Ross per agreement. Includes [*]. March 1, 1998 EXHIBIT C ROSS LABORATORIES CANS SUPPLY AGREEMENT
Unamortized Capital Investment ------------------- (As of 2/28/98) Line 1 Complete Thermoforming Line [*] Including: Amortization ------------ Co-Extrusion Sheetline [*] Thermoformer Trim Press Chillers Monitoring System Dryers Granulator Conveyer System Vision System Palletizer Line 2 Complete Thermoforming Line [*] Including: Amortization ------------ Co-Extrusion Sheetline [*] Thermoformer Trim Press Chillers Monitoring System Dryers Granulator Conveyer System Vision System Palletizer Line 3 Complete Thermoforming Line [*] Including: Amortization ------------ Co-Extrusion Sheetline [*] Thermoformer Trim Press Chillers Monitoring System Dryers Granulator Conveyer System Vision System Palletizer
10 EXHIBIT E ALTERNATIVE DISPUTE RESOLUTION The parties recognize that a bona fide dispute as to certain matters may arise from time to time during the term of this Agreement which relates to either party's rights and/or obligations. To have such a dispute resolved by this Alternative Dispute Resolution ("ADR") provision, a party first must send written notice of the dispute to the other party for attempted resolution by good faith negotiations between their respective presidents (or their equivalents) of the affected subsidiaries, divisions, or business units within twenty-eight (28) days after such notice is received (all references to "days" is to calendar days). Any negotiations regarding a dispute shall be treated as settlement negotiations for purposes of the Federal Rules of Evidence and any similar state rules of evidence. Such negotiations shall not be admissible in any subsequent ADR hearing. If the matter has not be resolved within twenty-eight (28) days of the notice of dispute, or if the parties fail to meet within such twenty-eight (28) days, either party may initiate an ADR proceeding as provided herein. The parties shall have the right to be represented by counsel in such a proceeding. 1. To begin an ADR proceeding, a party shall provide written notice to the other party of the issues to be resolved by ADR. Within fourteen (14) days after its receipt of such notice, the other party may, by written notice to the party initiating the ADR, add additional issues to be resolved within the same ADR. 2. Within twenty-one (21) days following receipt of the original ADR notice, the parties shall select a mutually acceptable neutral to preside in the resolution of any disputes in this ADR proceeding. If the parties are unable to agree on a mutually acceptable neutral within such period, the parties shall request the President of the Center for Public Resources ("CPR"), 366 Madison Avenue, New York, New York 10117 to select a neutral pursuant to the following procedures: (a) the CPR shall submit to the parties a list of not less than five (5) candidates within fourteen (14) days after receipt of the request from the parties, along with a CURRICULUM VITAE for each candidate. No candidate shall be an employee, director, or shareholder of either party or any of their subsidiaries or affiliates. Such list shall include a statement of disclosure by each candidate of any circumstances likely to affect his or her impartiality. (b) Each party shall number the candidates in order of preference (with the number one (1) signifying the greatest preference) and shall deliver the list to the CPR within seven (7) days following receipt of the list of candidates. If a party believes a conflict of interest exists regarding any of the candidates, that party shall provide a written explanation of the conflict to the CPR along with its list showing its order of preference for the candidates. Any party failing to return a list of preferences on time shall be deemed to have no order of preference. (c) If the parties collectively have identified fewer than three (3) candidates deemed to have conflicts, the CPR immediately shall designate as the neutral the candidate for whom the parties collectively have indicated the greatest preference. If a tie should result between two candidates, the CPR may designate either candidate. If the parties collectively have identified three (3) or more candidates deemed to have conflicts, the CPR shall review the explanations regarding conflicts and, in its sole discretion, may either (i) immediately designate as the neutral the candidate for whom the parties collectively have indicated the greatest preference, or (ii) issue a new list of not less than five (5) candidates, in which case the procedures set forth in subparagraphs 2(a)-2(c) shall be repeated. 3. No earlier than twenty-eight (28) days or later than fifty-six (56) days after selection, the neutral shall hold a hearing to resolve each of the issues identified by the parties. The ADR proceeding shall take place at a location agreed upon by the parties. If the parties cannot agree, the neutral shall designate a location other than the principal place of business of either party or any of their subsidiaries or affiliates. 4. At least seven (7) days prior to the hearing, each party shall submit the following to the other party and the neutral: (a) a copy of all exhibits on which such party intends to rely in any oral or written presentation to the neutral; (b) a list of any witnesses such party intends to call at the hearing, and a short summary of the anticipated testimony of each witness; (c) a proposed ruling on each issue to be resolved, together with a request for a specific damage award or other remedy for each issue. The proposed rulings and remedies shall not contain any recitation of the facts or any legal arguments and shall not exceed one (1) page per issue. (d) a brief support of such party's proposed rulings and remedies, provided that the brief shall not exceed twenty (20) pages. This page limitation shall apply regardless of the number of issues raised in the ADR proceeding. Except as expressly set forth in subparagraphs 4(a)-4(d), no discovery shall be required or permitted by any means, including depositions, interrogatories, requests for admissions, or production of documents. 5. The hearing shall be conducted on two (2) consecutive days and shall be governed by the following rules: (a) Each party shall be entitled to five (5) hours of hearing time to present its case. The neutral shall determine whether each party has had the five (5) hours to which it is entitled. (b) Each party shall be entitled, but not required, to make an opening statement, to present regular and rebuttal testimony, documents or other evidence, to cross-examine witnesses, and to make a closing statement. Cross-examination of witnesses shall occur immediately after their direct testimony, and cross-examination time shall be charged against the party conducting the cross-examination. (c) The party initiating the ADR shall begin the hearing and, if it chooses to make an opening 2 statement, shall address not only issues it raised but also any issues raised by the responding party. The responding party, if it chooses to make an opening statement, also shall address all issues raised in the ADR. Thereafter, the presentation of regular and rebuttal testimony and documents, other evidence, and closing arguments shall proceed in the same sequence. Except when testifying, witnesses shall be excluded from the hearing until closing arguments. (d) Settlement negotiations shall not be admissible under any circumstances. Affidavits prepared for purposes of the ADR hearing also shall not be admissible. As to all other matters, the neutral shall have sole discretion regarding the admissibility of any evidence. 6. Within seven (7) days following completion of the hearing, each party may submit to the other party and the neural a post-hearing brief in support of its proposed rulings and remedies, provided that such brief shall not contain or discuss any new evidence and shall not exceed ten (10) pages. This page limitation shall apply regardless of the number of issues raised in the ADR proceeding. 7. The neutral shall rule on each disputed issue within fourteen (14) days following completion of the hearing. Such ruling shall adopt in its entirety the proposed ruling and remedy of one of the parties on each disputed issue but may adopt one party's proposed rulings and remedies on some issues and the other party's proposed rulings and remedies on other issues. The neutral shall not issue any written opinion or otherwise explain the basis of the ruling. 8. The neutral shall be paid a reasonable free plus expenses. These fees and expenses, along with the reasonable legal fees and expenses of the prevailing party (including all expert witness fees and expenses), the fees and expenses of a court reporter, and any expenses for a hearing room, shall be paid as follows: (a) If the neutral rules in favor of one party on all disputed issues in the ADR, the losing party shall pay one hundred percent (100%) of such fees and expenses. (b) If the neutral rules in favor of one party on some issues and the other party on other issues, the neutral shall issue with the rulings a written determination as to how such fees and expenses shall be allocated between the parties. The neutral shall allocate fees and expenses in way that bears a reasonable relationship to the outcome of the ADR, with the party prevailing on more issues, or on issues of greater value or gravity, recovering a relatively larger share of its legal fees and expenses. 9. The rulings of the neutral and allocation of fees and expenses shall be binding, non-reviewable, and non-appealable, and may be entered as a final judgment in any court having jurisdiction. 10. Except as provide in paragraph 9 or as required by law, the existence of the dispute, any settlement negotiations, the ADR hearing, any submissions (including exhibits, testimony, proposed rulings, and briefs), and the rulings shall be deemed Confidential Information. The neutral shall have the authority to impose sanctions for unauthorized disclosure of Confidential Information. 3 EX-10.15 5 EXHIBIT 10.15 Exhibit 10.15 PACKAGING RESOURCES CHANGE OF CONTROL PLAN Packaging Resources Group, Inc. and Packaging Resources Incorporated hereby establish and adopt the Packaging Resources Change of Control Plan (the "Plan") effective as of May 7, 1999 (the "Effective Date"), to provide additional employment security for certain employees in the event of a Change in Control (as defined in Section 1.2). ARTICLE I DEFINITIONS Whenever used herein, the following terms shall have the meanings hereinafter set forth: 1.1 "ANNUAL COMPENSATION" shall mean the sum of (a) the Eligible Employee's salary rate in effect on the date of the Change in Control, and (b) the average annual bonus paid to the Eligible Employee during the three year period immediately preceding the Change in Control pursuant to any annual bonus or incentive plan maintained by an Employer. 1.2 "CHANGE IN CONTROL" shall be deemed to occur on the earlier of (a) the date that shareholders of either Employer are required under Section 3.5(c) of the Warrant Agreement to sell their "Equity Interests" (as defined in the Warrant Agreement) or (b) the date on which Incumbent Directors shall cease to constitute a majority of the Board of Directors of each Employer. 1.3 "COMPENSATION MULTIPLE" shall mean (a) three for each Eligible Employee employed by the Employer at a Vice President level or higher and (b) two for each Eligible Employee employed by the Employer at a Director level. 1.4 "ELIGIBLE EMPLOYEE" shall mean each employee of the Employers who as of the date of a Change in Control is employed by the Employer at a Director level or higher. 1.5 "EMPLOYERS" shall mean Packaging Resources Group, Inc. and Packaging Resources Incorporated and any successor to either. 1.6 "EMPLOYMENT TERMINATION" shall mean the effective date on which an Employer terminates the Eligible Employee's employment with the Employers without Good Cause or the Eligible Employee voluntarily terminates such employment with Good Reason. 1.7 "GOOD CAUSE" shall mean: (a) the Eligible Employee's willful or intentional breach of any of his employment duties or obligations to an Employer resulting in a financial detriment that is material to the Employers as a whole or (b) the Eligible Employee is convicted of a felony or misdemeanor that materially damages the reputation, business or property of an Employer. For purposes of clauses (a) and (b) of this definition: (i) no act, or failure to act, on the Eligible Employee's part shall be deemed "willful" unless done, or omitted to be done, by the Eligible Employee not in good faith and without reasonable belief that the Eligible Employee's act, or failure to act, was in the best interest of the Employers; and (ii) in the event of a - 1 - dispute concerning the application of this provision, no claim by the Employers that Cause exists shall be given effect unless the Employers establish to at least a majority of the Incumbent Board, by clear and convincing evidence, that Good Cause exists. 1.8 "GOOD REASON" shall exist if, without the Eligible Employee's express written consent: (a) an Employer reduces the nature, scope, level or extent of the Eligible Employee's responsibilities from the nature, scope, level or extent of such responsibilities prior to the Change in Control, or an Employer fails to provide the Eligible Employee with adequate office facilities and support services to perform the nature, scope, level or extent of the Eligible Employee's responsibilities; (b) an Employer reduces the Eligible Employee's salary below his or her salary in effect as of the date of the Change in Control; (c) an Employer requires the Eligible Employee to relocate the Eligible Employee's principal business office or principal place of residence from its location on the Effective Date, or assigns to the Eligible Employee duties that would reasonably require such relocation; or (d) an Employer fails to continue in effect any cash or stock-based incentive or bonus plan, pension plan, welfare benefit plan, or other benefit plan, program or arrangement, unless the aggregate value (as computed by an independent employee benefits consultant selected by an Employer) of all such compensation, pension and welfare benefit plans, programs and arrangements provided to the Eligible Employee is not materially less than their aggregate value as of the date of the Change in Control. 1.9 "INCUMBENT DIRECTOR" shall mean each director on the Boards of Directors of the Employers on the Effective Date. A individual who becomes a director on the Boards of Directors of the Employers, and whose nomination was approved by a vote of at least a majority of the Incumbent Directors shall become an "Incumbent Director;" provided, however, that in no event will a director appointed to the Boards of Directors pursuant to Section 3.5(c) of the Warrant Agreement be an "Incumbent Director." 1.10 "PENSION PLAN" shall mean each pension plan (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) maintained or contributed to by an Employer. 1.11 "WARRANT AGREEMENT" shall mean the Stock and Warrant Holders Agreement dated as of June 30, 1993, as amended as of September 24 1996, among Packaging Resources Group, Inc., Howard P. Hoeper, HPH Industries, Ltd., Apollo Packaging Partners, L.P. and certain affiliates of Trust Company of the West. -2- 1.12 "WELFARE BENEFIT PLAN" shall mean each welfare plan (as defined in Section 3(1) of ERISA) maintained or contributed to by an Employer, including, but not limited to a plan that provides health (including medical and dental), life, accident or disability benefits or insurance, or similar coverage. ARTICLE II PAYMENTS AND BENEFITS UPON A CHANGE IN CONTROL 2.1 PAYMENTS UPON A CHANGE IN CONTROL. Within 30 days of a Change in Control, the Employers shall make a lump sum cash payment to the Eligible Employee equal to the sum of the following: (a) the Eligible Employee's Annual Compensation multiplied by the Compensation Multiple. (b) the sum of (i) the Employer contributions the Eligible Employee would have received under the Pension Plan in which the Eligible Employee participated as of the Change of Control as in effect immediately prior to the Change in Control if the Eligible Employee's employment had continued for the number of years equal to the Compensation Multiple following his or her Employment Termination at the Eligible Employee's Annual Compensation rate, and (ii) if the Eligible Employee is not fully vested in his benefits under any Pension Plan as of his or her Employment Termination, the difference between the Eligible Employee's total account balance under each Pension Plan and the Eligible Employee's vested account balance under each the Pension Plan. 2.2 WELFARE BENEFIT PLANS. If (a) within one year after a Change in Control, the Eligible Employee's employment with the Employers terminates for any reason, or (b) within two years after a Change in Control, an Employer terminates the Eligible Employee's employment with the Employers without Good Cause or the Eligible Employee voluntarily terminates such employment with Good Reason, the Employers shall provide Welfare Benefits to the Eligible Employee according to this Section. For each Welfare Benefit Plan in which the Eligible Employee was eligible to participate at the time of the Change in Control, for the period beginning on the Eligible Employee's Employment Termination and ending the number of years equal to the Compensation Multiple after such date, the Eligible Employee shall continue to participate in such Welfare Benefit Plan on the same basis and at the same cost to the Eligible Employee as immediately prior to the Change in Control (or, if more favorable to the Eligible Employee, as was the case at any time thereafter), or, if any benefit or coverage cannot be provided under a Welfare Benefit Plan because of applicable law or contractual provisions, the Employers shall provide the Eligible Employee with substantially similar benefits and coverage for such period. Immediately following the expiration of the continuation period required by the preceding sentences, the Eligible Employee shall be entitled to elect continued group health benefit plan coverage in accordance with Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), ("COBRA -3- coverage"). The COBRA coverage shall be consecutive to the benefits and coverage otherwise provided for in this Section. 2.3 ELIGIBLE EMPLOYEE'S DEATH. If the Eligible Employee dies after a Change in Control but before the complete payment of any amount or benefit required under this Plan, the Employers will pay such amount or benefit to the Eligible Employee's surviving spouse, or if there is no surviving spouse, to the Eligible Employee's estate. ARTICLE III CERTAIN ADDITIONAL PAYMENTS BY THE EMPLOYERS 3.1 GROSS-UP. Anything in this Plan to the contrary notwithstanding, in the event that any payment, benefit or distribution by or on behalf of the Employers to or for the benefit of any Eligible Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Plan or otherwise, but determined without regard to any additional payments required under this Article) (the "Payments") is determined to be an "excess parachute payment" pursuant to Code Section 280G or any successor or substitute provision of the Code, with the effect that the Eligible Employee is liable for the payment of the excise tax described in Code Section 4999 or any successor or substitute provision of the Code (the "Excise Tax"), then the Employers shall pay to the Eligible Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by the Eligible Employee, after deduction of any Excise Tax on the Payments and any federal, state and local income and employment taxes and Excise Tax on the Gross-Up Payment, shall be equal to the total Payments. 3.2 DETERMINATION OF GROSS-UP. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Payments shall be treated as "parachute payments" (within the meaning of Code Section 280G(b)(2)) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Eligible Employee and selected by the accounting firm that was, immediately prior to the Change in Control, the Employers' independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Code Section 280G(b)(4)(A), and (ii) all "excess parachute payments" within the meaning of Code Section 280G(b)(1) shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Code Section 280G(b)(4)(B)) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax. For purposes of determining the amount of the Gross-Up Payment, the Eligible Employee shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Eligible Employee's residence, or if higher, in the state and locality of the Eligible Employee's principal place of employment, on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of -4- this Section), net of the maximum reduction in federal income taxes that could be obtained from deduction of such state and local income taxes. 3.3 FINAL DETERMINATION. In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Eligible Employee shall repay to the Employers, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Eligible Employee to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income or employment tax deduction) plus interest on the amount of such repayment at 120% of the rate provided in Code Section 1274(b)(2)(B). In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Employers shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Eligible Employee with respect to such excess) at the time that the amount of such excess is finally determined. The Eligible Employee and the Employers shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Payments. ARTICLE IV MISCELLANEOUS 4.1 MITIGATION AND SET-OFF. An Eligible Employee shall not be required to mitigate his damages by seeking other employment or otherwise. The obligations of the Employers under this Plan shall not be reduced in any way by reason of any compensation or benefits received (or foregone) by an Eligible Employee from the Employers or from sources other than the Employers after such Eligible Employee's Employment Termination, or any amounts that might have been received by such Eligible Employee in other employment if he sought such employment. An Eligible Employee's entitlement to benefits and coverage under this Plan shall continue, and shall not be affected, if he obtains other employment after his Employment Termination, provided that any such benefit or coverage shall not be furnished if the Eligible Employee expressly waives the specific benefit or coverage by giving written notice of waiver to the Employers. 4.2 LEGAL EXPENSES. If an Eligible Employee incurs legal or other fees and expenses in an effort to secure or preserve his rights under the Plan, the Employers shall, regardless of the outcome of such effort, reimburse the Eligible Employee for such fees and expenses and shall pay the Eligible Employee a tax gross-up payment for the taxes he incurs with respect to the reimbursement of such fees and expenses. The Employers shall reimburse an Eligible Employee for such fees and expenses on a monthly basis within 10 days after his request for reimbursement accompanied by evidence that the fees and expenses were incurred. If an Eligible Employee's claim, or his defense of a claim by the Employers, does not prevail (after -5- exhaustion of all available judicial remedies) and the Employers establish before a court of competent jurisdiction, by clear and convincing evidence, that the Eligible Employee had no reasonable basis for his claims hereunder, or for his response to the claim of the Employers, and acted in bad faith, such Eligible Employee shall not be entitled to further reimbursement for fees and expenses under this Section with respect to such claim and such Eligible Employee shall refund to the Employers any amounts previously reimbursed under this Section with respect to such claim. 4.3 LATE PAYMENTS. If the Employers fail to pay any amount provided under this Plan when due, the Employers shall pay interest on such amount at an annual rate equal to thirteen percent (13%). Notwithstanding the foregoing, if the interest rate determined under the preceding sentence exceeds the highest legally-permissible interest rate, then the interest rate shall be the highest legally-permissible interest rate. 4.4 INTERPRETATION. The validity, interpretation and construction of this Plan shall be governed by the laws of the State of Delaware without regard to the conflict of law principles thereof. 4.5 WITHHOLDING. The Employers may withhold from any payment that is required under this Plan amounts legally required to satisfy applicable withholding requirements under any federal, state or local law. 4.6 AMENDMENT OR TERMINATION. Prior to a Change in Control, this Plan may be amended or terminated at any time or from time to time by a majority of the Incumbent Directors. After a Change in Control, this Plan may be amended or terminated at any time or from time to time by the Boards of Directors of the Employers. Notwithstanding the foregoing, no modification, amendment or termination of the Plan after a Change in Control shall alter or impair an Eligible Employee's rights under the Plan if the Eligible Employee was employed by an Employer on the date of the Change in Control. Without limiting the foregoing, this Plan shall terminate on January 1, 2004 in the event a Change of Control has not theretofore occurred. 4.7 FINANCING. Cash payments under this Plan are general obligations of the Employers, and the Eligible Employees shall have only an unsecured right to payment thereof out of the general assets of the Employers. Notwithstanding the foregoing, the Employers may, by agreement with one or more trustees selected by the Employers, create a trust on such terms as the Employers shall determine to make payments to the Eligible Employees in accordance with the terms of this Plan. 4.8 SEVERABILITY. In the event that any provision or portion of this Plan is determined to be invalid or unenforceable for any reason, the remaining provisions of this Plan shall be unaffected thereby and shall remain in full force and effect. -6- EX-10.16 6 EXHIBIT 10.16 Exhibit 10.16 SALES AND PURCHASE AGREEMENT PACKAGING RESOURCES INCORPORATED AND TRICON RESTAURANT SERVICES GROUP, INC. THIS AGREEMENT has been entered into and made as of the 1st day of June 1998, by and between TRICON Restaurant Services Group, Inc ("TRSG"), a wholly-owned subsidiary of TRICON Global Restaurants, Inc, for and on behalf of itself, as well as, Taco Bell Corp. ("TBC"), and their respective subsidiaries, commonly owned affiliates, licensees, franchisees, or successors and assigns, as their interests may appear, hereinafter collectively referred to as "Affiliates", with an office at 14841 Dallas Parkway, Dallas, Texas 75240 and Packaging Resources Incorporated ("PRI"), One Conway Park, 100 Field Drive, Suite 300, Lake Forest, Illinois 60045. WHEREAS, TRSG desires to purchase certain polystyrene cups and lids from PRI for its customers, including the Affiliates, as set forth on Exhibit A ("Products"); and, WHEREAS, PRI desires to sell polystyrene cups and lids to TRSG and to the Affiliates as set forth herein. NOW THEREFORE, in consideration of the mutual promises of performance by PRI and TRSG and for other good and valid consideration, the receipt and sufficiency of which is hereby acknowledged, PRI and TRSG agree to the following terms and conditions. 1. TERM AND TERMINATION. This Agreement shall commence on the day and year stated above, and shall continue for a term of two (2) years thereafter, unless earlier terminated as set forth herein. In the event of a material breach by either party of a representation, warranty, guarantee, or covenant made by the other party, which breach is capable of cure and is not cured by the breaching party within thirty (30) days following the breaching party's receipt of written notice which specifies the breach, this Agreement may be terminated. In such event, termination will be deemed to occur at the end of such thirty (30) day period; provided, however, that such right to cure shall not apply to any breach which is not capable of cure or is substantially the same as a breach for which the breaching party had previously received a notice of default pursuant to this Section during the six (6) month period immediately preceding the occurrence of the breach in question, in which event termination will be deemed to occur immediately upon the breaching party's receipt of written notice thereof from the non-breaching party. In the event that PRI fails to have product available for TRSG approved distributors for a period of 48 hours or more arising out of PRI's breach under this agreement, TRSG shall have the option to secure goods from other sources to ensure un-interrupted supply to restaurants. Sourcing will resume with PRI when product is again available and meets specifications, during the 30 day cure period. PRI shall be responsible for all 1 incremental FOB and freight costs associated with securing products from alternative sources while supply interruption persists. In addition, this agreement may be terminated with two (2) months written notice for the following reasons: A. If PRI provides a lower cost of any of the products outlined in this agreement to a competitor (e.g. QSR concept with more than 100 outlets) of TRSG according to the terms and conditions for section 3B. B. TRSG may terminate the agreement with respect to a particular product if TBC discontinues the sale of that particular product. The agreement remains in full force and effect for all products that have not been discontinued, e.g. if TBC discontinues lids only, this agreement remains in full force and effect with respect to the cup products. TRSG shall pay for and take delivery of all remaining inventory as required by termination provisions set forth in section 2. 2. QUANTITY. A. TRSG agrees to purchase annually at least [*] of its actual requirements of the Products or similar size and design, thermoformed polystyrene cup products and lids (both Base Business and Promotional as defined on Exhibit A) from PRI between June 1st, 1998 and June 1st, 1999, provided however that PRI shall not be obligated to produce move than [*] Products per week in Year 1. Subject to TRSG's purchase requirements. PRI agrees to use good faith efforts (i.e. normal manufacturing practices, conditions, and schedules without overtime) to build printed min/max inventory levels as soon as allowable in Year 1 within a range of [*] Base Business Cups/Lids (as defined in Exhibit A) (minimum) and [*] Base Business Cups/Lids (maximum). Within ninety (90) days of termination of this Agreement for any reason TRSG shall pay PRI for, and agrees to take delivery of, all on-hand printed inventory, up to [*] Base Business Cups/Lids, produced pursuant to the foregoing min/max provision. B. For the period from June 1st, 1999 through June 1st, 2000 ("Year 2"), TRSG agrees to purchase at least [*] of its requirements for Products or similar size and design, thermoformed polystyrene cup Products and lids (both Base Business and Promotional as defined on Exhibit A) from PRI. PRI also has the unilateral option to sell TRSG an additional [*] of TRSG's actual requirements for the Products, provided that PRI agrees to meet competitive prices according to the terms set forth in Section 3(D). If PRI exercises its option: 1. PRI shall not be obligated to produce more the [*] Products per week in Year 2. 2. Subject to TRSG's purchase requirements, PRI agrees to use good faith efforts (as defined in Section 2(A)) to build printed min/max inventory levels in Year 2 2 within a range of [*] Base Business Cups/Lids (minimum) and [*] Base Business Cups/Lids (maximum). 3. Within ninety (90) days of termination of this Agreement for any reason, TRSG shall pay PRI for, and agrees to take delivery of, all on-hand printed inventory, up to [*] Base Business Cups/Lids produced pursuant to the foregoing min/max provision. If PRI does not exercise its option to sell the additional [*] of Products to TRSG, weekly production and min/max levels from Year 1 remain in effect through June 1st, 2000. C. The above min/max volumes are for Base Business Cups and Lids only and are subject to reduction within a reasonable period of time, depending upon shipment requirements, based on updated forecasting information submitted in writing from TRSG. PRI will maintain a minimum of four weeks of inventory and a maximum of eight weeks of inventory based on the revised forecast from TRSG. D. Promotional cups will be produced based on volume requirements requested by TRSG and accepted by PRI at the time TRSG places the Promotional order and are not part of the min/max provision mentioned in 2 A and B. E. All purchases of Products hereunder shall be made pursuant to purchase orders/release orders generated by TRSG, of its designee, and transmitted by paper, telephonically, or electronically. The purchase price and payment for Products shall be made in accordance with Section 3 below. All the terms and conditions of this Agreement shall apply to every purchase order/release order issued. In the event of a conflict between the terms and conditions of this Agreement and a purchase order/release order, the terms and conditions of this Agreement shall prevail. 3. PRODUCTS AND PRICING. A. TRSG and PRI agree that the polystyrene cups and lids, covered by this Agreement are itemized in Exhibit "A" ("Products"), along with the parties' agreement on pricing for said Products between June 1st, 1998 and June 1st, 1999. B. PRI agrees that, during the term of this Agreement and in consideration for TGR's annual minimum purchase commitment, the pricing for the Products (considering the same or like grade and quality of resin, rebates, and other terms and conditions) purchased will be as favorable as, or better than, the pricing the Products are being sold by PRI to other similarly situated buyers. In the event PRI sells Products to another buyer at a lower price for the same or similar quantities and same or like terms and conditions, PRI is obligated to promptly offer the lower price, in writing, to TRSG. PRI warrants that the price for Products, listed on Exhibit A shall be complete and no additional charges of any type shall be added without TGR's prior written agreement. 3 C. PRI agrees to guarantee pricing for items in Exhibit "A" throughout the first year of the agreement. After which, PRI will adjust pricing quarterly (up or down) for fluctuations in the cost of High Impact Polystyrene ("HIPS") resin. The HIPS baseline price ("Baseline Price") will be the HIPS price quoted in MONTHLY PETROCHEMICAL & PLASTICS ANALYSIS, published by Chemical Data, Inc., as of June 1, 1999. The product price will not be adjusted unless the quoted HIPS price moves outside of a range of [*] per pound upward or downward from the Baseline Price. On June 1, 1998, and on the first day of each succeeding quarter through the remainder of the term of the Agreement, the Product price will be adjusted according to the resin escalator/de-escalators on Exhibit A if the HIPS price published in MONTHLY PETROCHEMICAL & PLASTICS ANALYSIS thirty (30) days prior to the start of the quarter is outside of the total [*] range set forth above. This price increase or decrease will be calculated on a [*] per lb. escalator/de-escalator, as specified in Exhibit A. D. If PRI exercises its option to supply [*] of TRSG's requirements pursuant to Section 2 (B), PRI agrees to match good faith competitive prices as of June 1st, 1999. Any competitive price comparison must be documented for a TSRG-approved supplier and the same product specifications, technological requirements, quantities, and other terms and conditions. The price arranged as of June 1st, 1999 would remain in effect through June 1st, 2000, subject only to resin adjustments provided in Section 3(C). If PRI does not exercise its option to sell the additional [*] of Products to TRSG, the price in effect at the [*] level as of June 1st, 1999, will remain in effect throughout June 1st, 2000, subject only to resin adjustments provided in Sections 3(C). E. TRSG, or its designee shall pay for Products on the terms of 1% ten (10) days, net thirty (30) days. Products will be delivered to distribution centers servicing TBC restaurants, FOB Plant of Manufacture. 4. ADDITIONAL COMMITMENTS. A. PRI agrees to provide artwork and print plate services according to the terms and conditions contained in Exhibit C subject to PRI's capacity constraints as they may exist at the time TRSG requests the service. B. TRSG agrees to use reasonable efforts to provide PRI the "best" available information concerning Product usage, market conditions, promotional initiatives, and Product deletions in an effort to allow PRI to efficiently supply and manage inventory levels and costs. C. TRSG and PRI agree to create a joint product development process, review cost savings hereunder, whereby savings will be shared on a 50/50 basis except where PRI unilaterally commits within its sole discretion to provide the capital investment, in which case PRI will receive 100% of the savings until the capital investment is recovered and at which point 4 the savings will be shared 50/50; and set priorities, track and measure progress and results of the foregoing efforts. 5. NOTICES. All notices pertaining to this Agreement shall be in writing, and shall be deemed to have been duly given if hand delivered or mailed by certified or registered mail, postage prepaid, and if addressed to the party at the address shown on the face hereof or if addressed to such other address as may be furnished in writing by either party. 6. SPECIFICATIONS. Specifications are attached hereto as Exhibit A. PRI agrees to manufacture the Products in compliance with such specifications. In the event PRI fails to comply with said specifications, TRSG shall have the right to reject that Product as a nonconforming product. No specification or specifications provided by TRSG or any Affiliate with respect to any Product shall constitute a warranty, expressed or implied, against any claims for infringement of patents, copyrights, trademarks, or other intellectual property rights of any third party, and neither TRSG nor any Affiliate shall be responsible to PRI, as indemnitor or otherwise, for or on account of any such claim or liability. 7. ARTWORK AND WORDING. Except to the extent caused by PRI's negligence or willful misconduct, TRSG assumes all responsibility for the content of all artwork and wording printed on the Products, including the assurance that such complies with all governmental and/or regulatory (federal, local, or state) regulations and law concerning the Products. TRSG agrees to indemnify and hold PRI harmless for any claims by any party arising out of any deficiency or misstatement in labeling of the Products not caused by the negligence or willful misconduct of PRI. 8. ASSIGNMENT. Neither this Agreement, nor its rights or obligations, are assignable or transferable to any other party, except with the written consent of the non-assigning party, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, however, TRSG shall have the absolute right to assign or transfer this Agreement, indivisibly, to any of the Affiliates, or to its successor in the context of a spin-off or other reorganization involving TRSG or any of the Affiliates. Such an assignment or transfer shall not relieve the assigning party of any of its rights or obligations hereunder unless specifically agreed to by the other. 9. NOTICES GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS. 10. WAIVER. No provision of this Agreement may be waived by either party except in writing. Failure of either party to enforce any provision hereof shall not be deemed to constitute a waiver of such provision with respect to future breaches thereof. 11. WARRANTIES. PRI makes no warranty of any kind, either express or implied, by fact or by law, other than as set forth below: 5 A. WARRANTY OF CONFORMITY TO LAW. PRI warrants that the Products have been or will be manufactured, processed, fabricated, and/or produced and may be shipped, sold and used in a customary manner without violation of any law, ordinance, rule or regulation of any governmental body, including without limitation: 1. the Fair Labor Standards Act; 2. the Federal Consumer Product Safety Act; 3. the Federal Insecticide, Fungicide, and Rodenticide Act; 4. the Food, Drug, and Cosmetic Act; 5. the Federal Hazardous Substances Act; 6. the Occupational Safety and Health Act of 1970; and 7. the Equal Employment Opportunity Act and/or any rules or regulations promulgated pursuant thereto. B. WARRANTY OF MATERIALS AND WORKMANSHIP. PRI warrants that the Products shall be free from defects in design and manufacture. C. WARRANTY OF COMPLIANCE WITH SPECIFICATIONS. PRI warrants that the Products delivered to TRSG and Affiliates pursuant to this Agreement will be of PRI's standard quality and will meet in every respect the Product specifications set forth in Exhibit A attached hereto. No deviations from such specifications shall be made unless previously authorized, in writing, by TRSG or an Affiliate. D. WARRANTY OF TITLE. PRI warrants that it has the right to transfer good and merchantable title to the Products; that the Products now are, and on delivery will be, free from all security interests and other liens and encumbrances, and that TRSG will have peaceful possession and quiet enjoyment of the Products. E. WARRANTY AGAINST INFRINGEMENT. PRI warrants that neither the unprinted nor unlabelled Products nor their normal use or resale will infringe any patents, copyrights, trademarks, or other intellectual property rights now existing or hereafter issued by the United States of America or any foreign country. PRI further warrants that the words it thermoforms into the bottom of the cup products do not infringe any patents, trademarks copyrights, or intellectual property now existing. PRI hereby agrees that upon prompt notification by TRSG of the commencement of any claim, suit or proceeding against TRSG alleging infringement of any patent, trademark, copyright or intellectual property rights subject to the warranty above, not otherwise arising from a patent, trademark, copyright or intellectual property rights held by TRSG, PRI shall defend, and indemnify and hold TRSG and Affiliates harmless against any such claim, suit, or proceeding, at PRI's sole expense. PRI hereby agrees that if the Products are held to constitute an infringement of any such patent, trademark, copyright, or intellectual property rights or the use of the Products are enjoined due to such infringement, PRI shall, at its sole 6 expense, either procure for TRSG and Affiliates the right to continue use of the Products or replace the Products with non infringing Products of similar quality and quantity, or modify the Products to the extent necessary to cause them to be non infringing without materially affecting their value to TRSG, or remove the Products and refund to TRSG the price thereof including transportation and installation; provided however, that nothing in this paragraph shall limit or otherwise affect any remedy in law or equity that TRSG may have against PRI for breach of any warranty or other obligation herein. TRSG warrants that graphic designs, pictures, or wording it submits to PRI for printing or labeling on the Products do not infringe any patents, copyrights, trademarks, or other intellectual property rights now existing or hereafter issued by the United States of America or any foreign country. If TRSG breaches the foregoing warranty, it shall indemnify PRI pursuant to Section 23. F. SAMPLE OR MODEL. PRI warrants that the Products shall conform to samples furnished to TRSG which is made a basis of the bargain. G. SURVIVAL OF WARRANTIES. All warranties, express and/or implied, shall survive inspection, delivery, acceptance, and payments by TRSG, subject to the Agreement's limitation of actions provision which is contained at Section 14. 12. RIGHT TO INSPECT. The parties agree that TRSG may, from time to time, inspect the Products during their manufacture, processing, construction, and/or preparation upon reasonable notice to PRI at PRI's place of business. TRSG may, in addition to the described inspections, make any further reasonable inspections it may desire, including but not limited to, inspection at the time of delivery and/or completion of the Products. 13. EXCUSE OF PERFORMANCE. No liability shall result from delay in performance caused by act of God, fire, flood, war, government action, or other circumstances beyond the control of the party affected. Quantities so affected may be eliminated from this Agreement at the discretion of the party affected without liability to the other. 14. LIABILITY. Any action for breach of this Agreement must be commenced within one (1) year after the cause of action in question accrues. Neither party shall be liable to the other for any incidental or consequential damages. 15. CAPTIONS. The captions used herein are inserted only as a matter of convenience and for reference and in no way define, limit, or describe the scope of the intent of any Paragraph hereof. 16. SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision thereof, and 7 this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein.-- 17. OTHER DOCUMENTS. The terms, conditions, and provisions of any invoice, billing statement, confirmation, receipt, or other similar document relating to this Agreement, other than a written addendum or amendment hereto, shall be subject and subordinate to the terms, provisions, and conditions of this Agreement and, in the event of a conflict between the terms, conditions, and provisions of any such document and of this Agreement, the terms, conditions, and provisions of this Agreement or subsequent agreement shall govern. 18. AUTHORIZATION. The parties represent and warrant that they have the full and complete authority to enter into and perform this Agreement. The individuals executing this Agreement on behalf of the parties represent and warrant that he or she have the full and complete authority to do so and that the parties will be bound thereby. 19. MEDIATION. All claims, disputes, and controversies arising out of or in relation to the performance, interpretation, application, or enforcement of this Agreement, including but not limited to, breach thereto, shall be referred to mediation before, and as a condition precedent to, the initiation of arbitration. If during mediation, a party ("offering party") makes a written offer of compromise to another party which is not accepted by said party ("refusing party") and the refusing party fails to obtain a more favorable judgment or award in arbitration, the refusing party shall pay all of the offering party costs and expenses, including reasonable attorney's fees, incurred from the time the offer is refused. All applicable statutes of limitation and defenses based upon the passage of time shall be tolled while the mediation procedures described herein are pending. The parties will take such action, if any, required to effectuate such tolling. Each party is required to continue to perform its obligations under this contract pending final resolution of any dispute in mediation or arbitration arising out or connected to this contract. 20. ARBITRATION. Any disputes unresolved by mediation and arising out of, or in connection with, this Agreement shall be settled exclusively by arbitration in Dallas, Texas, in accordance with the commercial arbitration rules of the American Arbitration Association by one arbitrator selected in accordance with such rules. All documents and hearings in such arbitration shall be prepared in the English language and each party shall bear its own cost of presenting its case, including one half (1/2) the cost of the arbitrator unless Paragraph 19 is applicable. 21. INTEGRATION. This Agreement and Exhibits constitutes the entire agreement between the parties relating to the subject matter hereof and may be amended only by writing signed by the party to be bound. No oral modification of this Agreement or Exhibits shall have any legal effect. 22. CONFIDENTIALITY. The parties agree to the terms and conditions of the attached Confidentiality Agreement which is referenced as Exhibit B and incorporated herein. 8 23. INDEMNIFICATION. To the extent PRI shall fail to meet the specifications agreed to by the parties in accordance with Section 6 with respect to Products, PRI agrees to defend, indemnify and hold harmless TRSG and the Affiliates, from and against any and all claims, suits, losses, damages, regulatory proceedings, liabilities, and\or expenses (including reasonable attorney's fees and costs) of every kind whatsoever (collectively "Claims") which may arise from or be connected with the breach of any representation, warranty, covenant, or other obligation of PRI contained in this Agreement. To the extent the Products supplied hereunder comply with the specifications agreed to by the parties in accordance with Section 6, TRSG shall indemnify, defend, and hold PRI harmless from and against any and all demands, claims, actions, suits, and proceedings which may at any time be brought against PRI and any all liabilities, losses, damages, costs, and expenses (including, but not limited to reasonable attorneys' fees and other legal costs and expenses) arising from or in connection with the handling, transportation, or use of the Products or the items to be sold within the Products and/or the breach of any obligation of TRSG contained in this Agreement. The provisions of this Section 23 shall survive the expiration or earlier termination of this Agreement. 24. PRODUCT RECALLS. In the event that TRSG or any Affiliate reasonably determines that it is necessary to recall any Products manufactured or provided by PRI hereunder (I) for any reason bearing on their safety, or (ii) for any material non- conformance of the Products with specifications agreed to by the parties in accordance with Section 6. PRI agrees to comply with recall procedures reasonably established from time to time by TRSG or the Affiliates. Furthermore, PRI agrees to bear all costs and expenses incurred by it in complying with such recall procedures. If TRSG and PRI are unable to agree on whether the recall is necessary as required herein, the parties shall advance equally the cost of the recall (including the cost of any immediate recall solutions necessary for any Product not yet delivered) and the parties shall initiate the dispute resolution process described in Section 19 and 20 above. 25. ADVERTISING OR PUBLICITY OR ENDORSEMENTS. PRI agrees to disclose and coordinate with TRSG any public announcement of this Agreement. However, PRI retains the unilateral right to control final content of any public announcement as required by law upon sole judgment of its legal counsel. PRI shall not use the name of TRSG on any product or services which is directly related to this Agreement or in any advertising, sales brochures, sales presentations, trade shows, service proposals without the prior written consent of TRSG. Such consent shall not be unreasonably withheld. By entering into this Agreement, TRSG does not directly or indirectly endorse any product or services provided by PRI, its successors, or licensees and no official endorsement should be inferred. PRI shall not in any way imply that this Agreement is an endorsement of any such product or service. 9 IN WITNESS WHEREOF, and in agreement hereto the undersigned individuals representing their respective companies have executed this Agreement. "TRICON Restaurant Services Group" "Packaging Resources Incorporated" "TRSG" "PRI" By: /s/ Jack Kennedy By: /s/ H.P. Hoeper ------------------------------- ------------------------------- Title: V.P. Title: Pres. C.E.O. ---------------------------- ---------------------------- Date: 10/12/98 Date: 10/26/98 ----------------------------- ----------------------------- APPRVD AS TO FORM BY: /s/ WMS -------- LAW DEPT. 10 EXHIBIT "A" "PRODUCTS" PRICING
CUP DISPOSABLE CATEGORY SIZE DESCRIPTION VOLUME CUP LID - ----------- ------------- --------------- ----------- ----------- ----------- Base 32 oz. 1-6 colors [*] [*] [*] Business Cruiser Per Design Cups/Lids (Thermoformed) Base 32 oz. Therimage [*] [*] [*] Business Cruiser Standard Per Design Cups/Lids (Thermoformed) Base 32 oz. Therimage [*] [*] [*] Business Cruiser Color Change Per Design Cups/Lids (Thermoformed) Base 32 oz. Game Label [*] [*] [*] Business Cruiser Application Per Design Cups/Lids (Thermoformed) (See attached Exhibit A-1)
PRICING NOTES - PRINTED CUP 1) Cup prices are based on minimum order of [*] (one design). 2) Prices are quoted per thousand cups and include the following: A) Case pack of 500 for 32 oz. Cups. B) Case Pack of 1,500 for lids. C) Line art charges and/or Process art charges. D) Prices are F.O.B. Plant of Manufacture (i.e. freight is not included in prices). E) Floor loading only. PRICING NOTES - THERIMAGE CUP 1) Pricing includes white cup, therimage label and therimage label application. 2) Pricing DOES NOT include cylinder artwork charges. 3) Art charges - cylinders: ONE IMAGES
Line Cylinders (17") [*] Line Cylinders (31") [*] -------------------- Process Cylinders (17") [*] Process Cylinders (31") [*] -----------------------
4) Prices are F.O.B. Kansas City (i.e. freight is not included in prices). 5) Therimage color change includes maximum of two color change colors.
CUP DISPOSABLE CATEGORY SIZE DESCRIPTION VOLUME CUP LID - ----------- -------------- --------------- ----------- ----------- ----------- Promotional 32 oz. 1-6 Colors [*] [*] [*] Cups/Lids Cruiser Cup per Design (Thermoformed) Promotional 32 oz. 1-6 Colors [*] [*] [*] Cups/Lids Cruiser Cup per Design (Thermoformed) Promotional 32 oz. Therimage [*] [*] [*] Cups/Lids Cruiser Cup Standard per Design (Thermoformed) Promotional 32 oz. Therimage [*] [*] [*] Cups/Lids Cruiser Cup Color Change per Design (Thermoformed) Promotional 32 oz. Game Label [*] [*] [*] Cups/Lids Cruiser Cup Application Per Design (Thermoformed) (See attached Exhibit A-1)
PRICING NOTES - PRINTED CUP 1) Same as above for Base Business cups EXCEPT pricing DOES NOT include Line art and/or Process art charges; such additional charges are as follows: A) Line Art - [*] per color B) Process Art - [*] per design PRICING NOTES - THERIMAGE CUP 1) Same as above for Base Business cups. EXHIBIT "A" "PRODUCTS" [LOGO] TACO BELL PACKAGING SPECIFICATION Date Written: 6/1/98 Specification Number: 0134 Author: A. Marvel PCN# TBD - ------------------------------------------------------------------------------- TITLE: Cup Lid for 32 oz Cruiser Cup (Packaging Resources Incorporated) DESCRIPTION: Thermoformed Plastic Snap On Cup Lid for Disposable Cruiser Cup MATERIAL: High Impact Polystyrene Blue Color Concentrate (Ferro CS682261 - FDA) DIMENSIONS: Outside Diameter [*] Lid Weight Target [*] Lid Weight Minimum [*] Lid Wall Thickness Minimum [*] DRAWING NUMBER/SUPPLIER: Reference Packaging Resources Lid Drawing #766C, revision B dated 5-28-98 PRINTING: Embossed per approved drawing PACKING INSTRUCTIONS: 1500 Lids/Case 100 Lids/Sleeve 15 Sleeves/Case ADDITIONAL INFORMATION: Supplier must comply with FDA GMP practices in manufacturing, processing, packaging and storage of Taco Bell products. This lid specification is to be used only with the [*] lip diameter 32 oz. Cruiser Cup. - ------------------------------------------------------------------------------- APPROVAL: /s/ Alex J. Marvel 6/1/98 Alex Marvel National Packaging Manager ---------------------------- EXHIBIT "A" "PRODUCTS" [LOGO] TACO BELL PACKAGING SPECIFICATION Date Written: 6/3/98 Specification Number: 0138 Author: A. Marvel PCN# TBD - ------------------------------------------------------------------------------- TITLE: Cup Lid for 32 oz Cruiser Cup (Packaging Resources Incorporated) DESCRIPTION: Thermoformed Plastic Snap On Cup Lid for Disposable Cruiser Cup MATERIAL: High Impact Polystyrene Blue Color Concentrate (Ferro CS682261 - FDA) DIMENSIONS: Outside Diameter [*] Lid Weight Target [*] Lid Weight Minimum [*] Lid Wall Thickness Minimum [*] DRAWING NUMBER/SUPPLIER: Reference Packaging Resources Lid Drawing #TBD PRINTING: Embossed per approved drawing PACKING INSTRUCTIONS: 1500 Lids/Case 100 Lids/Sleeve 15 Sleeves/Case ADDITIONAL INFORMATION: Supplier must comply with FDA GMP practices in manufacturing, processing, packaging and storage of Taco Bell products. This lid specification is to be used only with the [*] lip diameter 32 oz. PRI Cruiser Cup. - ------------------------------------------------------------------------------- APPROVAL: /s/ Alex J. Marvel 6/3/98 Alex Marvel National Packaging Manager ---------------------------- EXHIBIT "A" "PRODUCTS" [LOGO] TACO BELL PACKAGING SPECIFICATION Date Written: 2/15/98; 5/20/98 (updated) Specification Number: 0132 Author: A. Marvel PCN# TBD - ------------------------------------------------------------------------------- TITLE: Plastic Cruiser Cup, 32 oz (Packaging Resources Company) DESCRIPTION: A printed disposable 32 oz. white plastic cup MATERIAL: High impact polystyrene White concentrate DIMENSIONS: Height [*] Rim Diameter [*] Base Diameter [*] Diameter under stack shoulder [*] Rim thickness [*] Maximum Cup weight [*] Fill Volume (to brim) [*] Side wall caliper [*] Minimum DRAWING NUMBER/SUPPLIER: Reference Packaging Resources Drawing #106758, Revision B, dated 5/21/98 PRINTING: 6 color maximum printing per approved artwork Dry offset lithographic printing PACKING INSTRUCTIONS: Polybagged @ 500 cups per case 25 cups/stack 20 stacks/case ADDITIONAL COMMENTS: The supplier must comply with FDA GMP practices in the manufacturing, processing, packaging and storage of Taco Bell Products. - ------------------------------------------------------------------------------- APPROVAL: /s/ Alex J. Marvel 5/21/98 Alex Marvel National Packaging Manager ---------------------------- EXHIBIT "B" PACKAGING RESOURCES, INCORPORATED AND TRICON RESTAURANT SERVICES GROUP, INC. MUTUAL CONFIDENTIALITY AND NONDISCLOSURE AGREEMENT This Agreement in letter form follows discussions with TRICON Global Restaurants Inc. ("TRSG") concerning the feasibility of a business relationship between TRSG, for and on behalf of itself, as well as, Taco Bell Corporation ("TBC") and their respective subsidiaries, commonly owned affiliates, licensees, franchisees, or successors and assigns, as their interests may appear, hereinafter collectively referred to as "Affiliates" and Packaging Resources, Incorporated ("PRI") relating to TRSG's desire to purchase polystyrene cups and lids from PRI. To permit TRSG and PRI to jointly pursue this objective, it may be necessary for TRSG or PRI to disclose to the other certain confidential and proprietary business and technical information relating to our respective businesses. In furtherance of this joint project, and to protect the confidential and proprietary information of both PRI and TRSG, it is agreed we will keep confidential (and not make any unauthorized use or disclosure, prior to, during, or subsequent to the relationship between the companies without prior written consent) the fact that we have entered into this relationship, any knowledge or information of a confidential or proprietary nature acquired by us from the other during the course of our relationship, including information relating to the business (including the detail, operation, layout, or design of equipment or manufacturing facilities), research, or engineering activities of our companies, to our manufacturing processes, formulas, and ingredients, or trade secrets, or to our sources of supply or lists of customers, or to our marketing, or product plans, or contemplated actions in those areas. We agree to limit access to any confidential or proprietary information only to our agents and employees directly involved in the relationship having a bona fide need to such access. We further agree to take such steps as may be reasonable with them to insure their awareness of these obligations. It is understood that the foregoing obligations of confidence, nondisclosure, and nonuse do not apply to (a) information already known to either TRSG or PRI prior to the date of this Agreement and not subject to any nondisclosure covenants, (b) information publicly available or which becomes publicly available without a breach of this or any other Agreement by either 11 company, (c) information rightfully received from a third party, or (d) information independently developed by either company prior to receipt of such information from the other. The obligations in this Agreement regarding confidentiality shall continue during its terms and for a period of two (2) years thereafter. All confidential and proprietary information shall remain the property of the disclosing company; all documents, copies, and other tangible property made, or received, by our companies during the course of the relationship based on or related to such information will be the sole property of the disclosing company. Neither company shall acquire any rights in such property (or the intellectual property rights of the other), nor be obligated to enter into any other business relationship, on account of this Agreement, unless otherwise agreed to in writing. Upon written demand, the receiving company will expeditiously deliver to the disclosing company all tangible forms of this information. This letter represents the entire Agreement between PRI and TRSG with respect to the subject matter; it will be governed by the laws of Texas and its terms may not be varied, except in writing signed by both parties. Any action or proceeding which arises out of or relates to this Agreement shall be brought only in a state or federal court located within Dallas County, Texas. TRICON RESTAURANT SERVICES GROUP, INC. PACKAGING RESOURCES INCORPORATED By: /s/ Jack Kennedy By: /s/ H.P. Hoeper ---------------------------------- ---------------------------- Title: VP. Title: Pres. C.E.O. ------------------------------- ------------------------- Date: 10/12/98 Date: 10/26/98 --------------------------------- -------------------------- 12 EXHIBIT "C" FINAL [LOGO] March 26, 1998 Curtis and Alex, Achieving a consistent level of graphics among multiple suppliers is an important component to the success of the Taco Bell polystyrene cup program. Packaging Resources shares your opinion that realization of this goal is best achieved through the use of a lead graphics supplier. In undertaking this role, Packaging Resources understands its role to include the following: - Evaluate initial artwork and perform any necessary revisions - Generate and supply color proofs to all parties (Taco Bell, Solo, Sandusky, Design firm) - Supply films to other suppliers (Solo, Sandusky) that meets their specific printing requirements - Supply printing plates where necessary (process art) to other suppliers (Solo, Sandusky) - Provide initial target cups to other suppliers (Solo, Sandusky) A more detailed explanation of how Packaging Resources envisions its role in the Taco Bell polystyrene cup program, including costs and timing, is as follows: ARTWORK Dry offset printing is a unique process that has different requirements from conventional paper printing. As such, and in order to minimize delays, it is important that Packaging Resources be involved in the planning stages of any artwork design. Although requirements will vary from job to job, the attached Line Art Design Specifications (Exhibit 1) and Process Art Design Specifications (Exhibit 2) provide guidelines as to acceptable artwork. Any deviations from these attached guidelines could result in additional costs and delays. PRE-PRESS Upon receipt of artwork meeting the defined specifications, Packaging Resources will undertake in 10 working days the following steps: CUSTOMER ARTWORK EVALUATION Packaging Resources will analyze the artwork design and determine the following: - Can this design be printed successfully or are changes required? - Is the design line or process art? - Basic print area sizes - Size and location of graphic elements - Number of and designations of Pantone colors - Required customer approved target proof and originals (Process design only) COMMUNICATION WITH ALL INVOLVED PARTIES Packaging Resources will communicate to Taco Bell, Solo, Sandusky, and the involved design firm our questions, concerns and recommendations concerning the received artwork ANY NECESSARY ARTWORK REVISIONS The above stated pre-press procedure is performed at no cost to you. However, if significant artwork revisions are required, costs as defined on the attached Line Art Design Specifications or Process Art Design Specifications will apply. [LETTERHEAD] PRI COLOR PROOFING Upon receipt of customer approved artwork, Packaging Resources will generate color proofs at the following cost: 1st color proof [*] Each additional color proof [*] If upon receipt of the color target proof you require significant "artistic" changes (i.e. changing size and/or location or graphic elements, copy changes, photo retouching, etc.), costs as defined by the Line Art Design Specifications and Process Art Design Specifications will be incurred. Even though the amount of time required for these revisions will vary depending on the amount of work necessary, the PRI color proofing system offers an opportunity for both time and cost savings on color proof revisions. Packaging Resources can generally complete most revisions and provide a revised color proof within 24 hours (this turnaround time can further be reduced to as little as a couple of hours if the customer is on-site). In comparison, Chromalin proofs as supplied by a third party vendor on the recent Taco Bell Godzilla project cost [*] for a 1st color proof and took two days to turnaround. Although the Packaging Resources color proofing system provides the closest representation of Pantone colors available; you should refer to the attached Pantone color chips for the actual target ink colors. For line art designs, the provided color chips will serve as the target colors. For process art designs, the PRI color proof will serve as the color target proof for your cup. FILM Upon receipt of an approved target color proof, Packaging Resources will begin film preparation. Film produced for Solo and Sandusky will take into account their individual plate and press specifications (film for both will be right reading, emulsion down). Film preparation procedures will differ between line art and process art and are defined as follows: LINE ART - - 5 working days for film preparation - - [*] per color plus mail charges - - Film and target printed cup supplied to Solo and Sandusky After the first few initial designs, it is Packaging Resources belief that we will have developed a better understanding of other supplier plates and presses and therefore, we will be able to reduce our film preparation time to 3 days. PROCESS ART - - 10 working days for film preparation - - Maximum film charge of [*] (this charge will vary depending on the design elements and can be as much as [*] less) - - Taco Bell press proof at Packaging Resources facility (refer to Exhibit 3 - PRI Press Proof Policy for specific guidelines) - - Film, target printed cup and initial printing plates ([*] per plate plus freight charges) to Solo and Sandusky within 24 hours of cup approval [LETTERHEAD] In addition, Packaging Resources would like to be represented at all press proofs in which our film is used. We believe that this will help eliminate any miscommunication between suppliers and further ensure the desired consistency. Packaging Resources looks forward to its role in making the Taco Bell polystyrene cup program a success. If you should have any questions or need of further information, please do not hesitate to contact me. Sincerely, /s/ Steve Walker Steve Walker Manager of Graphics cc: Donna Kahre - Tricon Joe Fox - Sandusky Paul Buhnerkemper - Solo EX-12.1 7 EXHIBIT 12.1 EXHIBIT 12.1 PACKAGING RESOURCES INCORPORATED STATEMENT RE COMPUTATION OF FINANCIAL RATIOS
Fiscal Year Ended -------------------------------------------------------------- Feb. 28 Feb. 29 Feb. 28 Feb. 28 Feb. 28 1995 1996 1997 1998 1999 ---------- ------- ------- ------- ------ (dollars in thousands) EBITDA: Net income (loss) before extraordinary item and cumulative effect of change in accounting principle.......................................... (3,521) 1,333 247 (30) 2,493 Income tax expense (benefit).......................... (1,980) 1,006 491 346 1,880 Interest expense...................................... 8,503 10,671 12,711 13,580 13,891 Depreciation and amortization......................... 10,492 9,721 8,039 7,920 8,764 Other expense......................................... -- -- -- 800 -- Nonrecurring charge................................... 7,257 -- -- -- -- ------ ------ ------- ------- ------- EBITDA................................................... 20,751 22,731 21,488 22,616 27,028 ------ ------ ------- ------- ------- ------ ------ ------- ------- ------- Earnings to fixed charge ratio: Fixed charges: Interest expense before deferred financing costs.................................. 7,655 9,011 11,839 12,916 13,227 Interest element of rentals (1).................... 849 687 586 518 557 Amortization of deferred financing cost............ 848 1,660 872 664 664 ------ ------ ------- ------- ------- Total fixed charges................................... 9,352 11,358 13,297 14,098 14,448 Earnings: Net Income (loss) before extraordinary item and cumulative effect of change in accounting principle........................................... (3,521) 1,333 247 (30) 2,493 Income tax expense (benefit).......................... (1,980) 1,006 491 346 1,880 Fixed charges......................................... 9,352 11,358 13,297 14,098 14,448 ------ ------ ------- ------- ------- Total earnings........................................... 3,851 13,697 14,035 14,414 18,821 ------ ------ ------- ------- ------- ------ ------ ------- ------- ------- Ratio of earnings to fixed charges....................... - (2) 1.21 1.06 1.02 1.30 ------ ------ ------- ------- ------- ------ ------ ------- ------- -------
(1) Deemed to be approximately one-third of rental expenses. (2) In fiscal 1995, earnings were insufficient to cover fixed charges by $5,501. EX-27.1 8 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINES SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEETS AND STATEMENTS OF OPERATIONS FROM THE COMPANY'S FORM 10-K FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR FEB-28-1999 MAR-01-1998 FEB-28-1999 1,672 0 14,050 (135) 24,922 41,716 134,701 (58,713) 154,816 26,889 110,000 0 0 0 (11,925) 154,816 136,558 136,558 111,338 111,338 6,956 0 13,891 4,373 1,880 2,493 0 0 0 2,493 0 0
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