Item 1. Description of Business.
General. PVC Container Corporation (the "Company") was incorporated in Delaware on June 14, 1968. The Company's major business activity is the manufacture and sale of plastic bottles and containers made primarily from high-density polyethylene ("HDPE"), polypropylene ("PP"), polyethylene terephthalate ("PET"), and polyvinyl chloride ("PVC") resins. Some of the HDPE bottles are fluorinated to improve the chemical resistance and barrier properties of the containers. The Company's plastic bottle business also produces for small volume, high tolerance technical blow molded containers.
The Company sells and markets its plastic bottles utilizing two wholly-owned subsidiaries, Novapak Corporation and Airopak Corporation. Novapak sells a general line of plastic bottles to the personal care, food, toner copier containers, medical diagnostic equipment and household chemical markets. Airopak sells a line of fluorinated containers primarily to the lawn and garden and industrial chemical markets. The Company operates in two reportable business segments: Plastic Containers and PVC Compounds. Of the Company's fiscal 2004 net sales, approximately 84% were derived from the Plastic Containers segment and approximately 16% were derived from the Compound segment. For additional financial information relating to the Company's reportable business segments, see Note 11 to the Company's Consolidated Financial Statements, which are presented elsewhere in this Annual Report.
PVC compounds are consumed by the Company to manufacture some of the Company's plastic bottles. These PVC compounds are produced and sold through the Company's wholly-owned subsidiary, Novatec Plastics Corporation, Inc. Novatec also manufactures a diverse range of rigid PVC compounds for non-bottle applications ("specialty compounds"), sold to manufacturers of plastic injection molded and extruded products for use in products such as fencing, furniture edgebanding, electrical wiring devices, and electronic housings.
Sales. The Company's plastic bottles are sold primarily to manufacturers of personal care products, food, household chemicals, and lawn and garden and industrial chemical products, private label manufacturers of similar products, and to bottle distributors who sell to such manufacturers. PVC compounds are consumed internally or sold to other plastic manufacturers. A limited amount of the company's total sales is made through commissioned sales representatives. During the fiscal year ended June 30, 2004, no one customer accounted for 10% or more of the Company's net sales.
Sales of the Company's plastic bottles and PVC bottle compounds have accounted for most of the Company's net income; sales of specialty compounds to non-bottle customers have accounted for the remainder of the Company's net income. Plastic bottles are offered in food grade and non-food grade materials, fluorinated or non-fluorinated, in clear and opaque colors and in a range of sizes from one ounce to 225 ounces. The Company produces plastic bottles utilizing its own molds in proprietary company designs ("stock bottles") and also produces on a contractual basis plastic bottles in molds owned by the customer, utilizing the customer's designs and specifications.
The sale of plastic bottles is generally a "regional" business. The majority of the Company's customers are within a 300-mile radius of the Company's manufacturing plants. Freight costs restrict shipping bulky plastic bottles long distances, although customers are willing to pay freight for specialty bottles of a unique design or fluorinated containers that are not available from local manufacturers. In contrast, the Company's PVC compounds, which are sold in the form of plastic pellets
and are denser than plastic bottles, can be shipped throughout the continental United States and Canada and tend to be more of a "national" business.
The Company's business is usually characterized by low customer demand during the months of July and August and the last half of December because buyers' plants often shut down during those periods. Some of the markets in which the Company sells are seasonal, such as Airopak's primary markets of lawn, garden, and agricultural chemicals. These markets are characterized by high demand in the period of December through June and low demand from July through November of each year.
Manufacturing Operations. The Company utilizes two basic processes to manufacture its plastic bottles - extrusion blow molding ("EBM") and injection stretch blow molding ("ISBM"). Plastic bottles made from HDPE, PP, or PVC resins are manufactured using the EBM process. EBM involves melting the plastic resins in an extruder and forming a plastic tube or parison that is placed inside a two- piece blow mold. The mold then closes and clamps around the tube and the tube is blown (inflated) with compressed air against the walls of the mold, forming the bottle to the shape of the mold. Some of the EBM production also incorporates proprietary technology to manufacture fluorinated HDPE plastic bottles.
The Company's PET bottles are manufactured using a two-step ISBM process. This process involves injection molding PET resins into a parison called a preform. These PET preforms are then used in a separate blow molding machine, where they are re-heated and blown into bottles, also utilizing a blow mold.
The Company also provides a variety of value added services such as bottle decoration. The Company's decorating capabilities include automatic silk screening for multiple color applications, pressure sensitive paper and plastic film labels, and therimage heat transfer labeling.
The Company operates plastic bottle manufacturing and warehousing facilities in Hazleton, Pennsylvania; Paris, Illinois; Manchester, Pennsylvania; Walterboro, South Carolina; Philmont, New York; and Kingston, New York. However, the Company has transferred most of the personnel and equipment from its Kingston, New York plant to its Philmont, New York facility and converted the Kingston plant to a warehouse. As indicated under "Properties", the Kingston facility is currently being offered for sale. A description of the Company's plastic bottle facilities are set forth below in Item 2
Item 2. Properties.
The Company's activities with respect to its continuing businesses are conducted at the seven facilities described in the following table:
1. In September 1998, the Company relocated its Eatontown, New Jersey manufacturing facilities to a new facility located in Hazleton, Pennsylvania on 10 acres of property owned by the Company. The Hazleton facility is a solid concrete tilt-up facility, sprinklered throughout, with 160,000 square feet of manufacturing and warehouse space. There are ten loading docks and a rail siding at the facility.
2. The Company's PVC compounding manufacturing facility is located at 275 Industrial Way West, Eatontown, New Jersey on 5.5 acres of real property owned by the Company. It contains manufacturing, research and development, warehouse, and administrative offices and is constructed from steel and concrete panels.
3. The facilities in Manchester are leased and consist of a manufacturing and warehouse facility having a total of approximately 145,221 square feet. The aggregate annual rent payable with respect to the manufacturing and warehouse space is $455,321 plus real estate taxes, utilities, and certain other charges payable under a lease that expires on April 30, 2013 (with the option of two additional five
year terms). Management believes these facilities are large enough to allow for future growth of the business there.
4. The Company commenced operations in 1993 in a new 62,500 square foot concrete plastic bottle manufacturing facility located in Paris, Illinois. The Company owns this facility and twenty acres of land on which it is located. Financing for this facility was obtained from the Edgar County Bank, the City of Paris, Illinois, and the Illinois Small Business Development Agency. In July 1997, the Company completed the construction of an additional 62,500 square feet of warehouse and manufacturing space. The Company financed this expansion through the issuance of Industrial Development Revenue Bonds by the City of Paris, Illinois in the aggregate principal amount of $3,500,000.
5. In October 1996, the Company completed construction and began operations in a new plastic bottle manufacturing plant in Walterboro, South Carolina. This facility consists of 61,430 square feet of warehouse and manufacturing space, located on 8.83 acres of property, owned by the Company. Financing for this facility was obtained through the South Carolina Economic Development Authority in the amount of $5,500,000.
6. On March 30, 1998, the Company acquired the plastic bottle manufacturing facilities of McKechnie Investments, Inc. The facility consists of 100,000 square feet of warehouse and manufacturing space located on 37 acres of property owned by the Company.
7. The Kingston facility consists of 34,000 square feet of manufacturing, warehouse, and office space and is located on approximately 6 acres of property (with 2.4 adjacent acres for expansion), that are owned by the Company. The manufacturing operations of this facility have been moved to the Philmont facility. The Kingston facility is being used at this time for warehouse purposes and is currently being offered for sale.
Item 3.
Item 3. Legal Proceedings.
There are no actions or claims pending against the Company, which, in the opinion of management, would adversely affect the business or financial condition of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Securityholders.
None
PART II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Securityholder Matters.
The Company's common stock trades on the OTC Bulletin Board under the symbol OTC:PVCC. The last trade of the common stock on September 15, 2004 was at a price of $1.70 per share. The following is a summary of the high and low close sales prices during the fiscal years of the Company ended June 30, 2004, and June 30, 2003:
As of September 15, 2004, the number of holders of record of the issued and outstanding common stock of the Company was approximately 400.
The Company has not declared or paid any cash dividends on the shares of common stock since fiscal 1997 and does not anticipate declaring or paying any such dividends in the foreseeable future. The Company intends to retain earnings for the operation of its business.
Item 6.
Item 6. Selected Financial Data.
The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements, related notes and other financial information included in this report. The selected consolidated financial data set forth below as of June 30, 2004 and 2003 and for the years ended June 30, 2004, 2003 and 2002 have been derived from our audited financial statements included in this report. The selected consolidated financial data set forth below as of June 30, 2002, 2001, and 2000 and for the years ended June 30, 2001 and 2000 have been derived from our audited financial statements that are not included or incorporated by reference in this report. Our historical results are not necessarily indicative of the results that may be expected for any future period.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following information should be read in conjunction with the Company's consolidated financial statements and notes thereto included in this report.
GENERAL
To prepare our financial statements, management must make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent liabilities. On a continuous basis, management reviews its estimates, including those related to returns, bad debts, inventories, intangible assets, and long lived assets. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable. Actual results may differ from these estimates as conditions may vary from those we anticipated.
Critical Accounting Policies
Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of the Company's consolidated financial statements.
Bad Debt
The Company maintains allowances for doubtful accounts for estimated losses resulting from customers' failure to make mandatory payments. If the financial condition of the Company's customers were to erode, making them unable to make payments, additional allowances may be required.
Inventory
Inventories are valued at the lower of cost or market, using the first-in, first-out method. The Company provides reserves for estimated obsolescence of its inventory at an amount determined by assessing future demand and market conditions. If actual market conditions deteriorate, additional inventory reserves may be required. Any change to the reserve is reflected in cost of sales in the period the revision is made.
Revenue recognition
We recognize revenue when products are shipped to our customers. Sales are shown net of returns, allowances and discounts. The Company's policy is to reserve for returns once it has knowledge of the return. The change in product returns, allowances and cash discounts between fiscal 2004 and 2003 reflects an increase of $188,000, and a decrease of $293,000 between fiscal 2003 and 2002. The increase is consistent with the increase in revenues, cash discount policy and customer incentive programs. The decrease is a result of changes to customer incentive programs.
Income Taxes
The Company records the estimated future tax effects of differences between the tax basis of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss carry-forwards, if any. We follow specific guidelines regarding the recoverability of any tax assets recorded on the balance sheet and provide any necessary allowances as required.
A reconciliation of the income tax provision and the amount computed by applying the statutory federal income tax rate to earnings before income taxes is as follows:
The change in the effective tax rate from 2003 to 2004 is primarily attributed to the decrease in pre tax income, while the amount of meals, entertainment and other permanent differences remained consistent from year to year. The change in the effective tax rate from 2002 to 2003 is primarily attributed to the annual amortization of goodwill which was no longer required in 2003.
Operating Performance
In the discussion of the Company's result of operations that follows, the Company presents EBITDA, which it defines as earnings before interest, taxes, depreciation and amortization. The Company believes that the presentation of EBITDA provides useful information to investors because management uses EBITDA to assess our operating performance. Additionally, management believes that EBITDA is a measurement widely used in the Company's industry and accordingly provides this information to allow investors to analyze our performance relative to its competitors. However, EBITDA is not a measurement of operating performance computed in accordance with generally accepted accounting principles and this measure should not be considered in isolation or as a substitute for any measure of performance as determined in accordance with generally accepted accounting principles. EBITDA may not be comparable to similarly titled measures of other companies. The following table provides a reconciliation from net income (loss) to EBITDA.
Results of Operations
FISCAL 2004 COMPARED TO FISCAL 2003
The Company's net sales for the fiscal year ended June 30, 2004 were $97,747,000, an increase of approximately 8.1% from the fiscal 2003 total of $90,433,000. This increase in revenue reflects an increase in revenue in both our plastic bottle and compound segments.
The increase in the plastic bottle segment reflects a 32.4% growth in PET bottle sales resulting from the Company's continued innovations in PET blow molding technology, in an effort to expand its market share for this line of business. However, this growth was offset by a 4.7% decrease in general line HDPE and PVC extrusion blown bottle sales. Also, the Company's fluorinated specialty bottle business had strong growth of 7.4%.
Our plastic compound segment also achieved an 8.3% sales growth due to an overall stronger demand for PVC compounds.
Cost of goods sold as a percentage of net sales increased to 80.6% in fiscal 2004 from 79.0% in fiscal 2003. The increase in cost of goods sold was caused primarily by increased raw material costs, and unabsorbed direct labor and factory overhead costs for the temporary loss of productivity due to the integration of equipment and personnel transferred from our Kingston, New York facility to our Philmont, New York facility. With other cost increases anticipated, we are dedicated to increased emphasis on cost containment, strategic sourcing, reduction in manufacturing overhead and better manufacturing yields.
Selling, general and administrative ("SG&A") expenses were $10,694,000, or 10.9% of net sales, for the fiscal year ended June 30, 2004, as compared to $9,615,000, or 10.6% of net sales, for fiscal 2003. SG&A expenses have increased and are mainly attributed to increased computer services, professional fees associated with the potential sale of the Company (a proposed transaction that has now been abandoned) and consulting fees related to operational improvements.
Depreciation and amortization expense increased by $241,000 from fiscal 2003, primarily associated with new capital equipment in our PET bottle line. The annual amortization of goodwill which would have approximately $293,000 is no longer required in 2004 as a result of adopting FASB Statement No. 142, effective July 1, 2002.
The Company recorded a $476,000 pre-tax charge for restructuring and loss on the sale of its Ardmore, Oklahoma facility. The restructuring involved the transfer of most of the personnel and equipment from the Kingston, New York facility to the Philmont, New York plant and conversion of the Kingston facility to a warehouse.
EBITDA decreased from approximately $9,444,000 in fiscal 2003 to $8,051,000 in fiscal 2004. This entire decrease was a result of the Company plastic container segment's higher raw material costs, unabsorbed direct labor and factory overhead costs for the temporary loss of productivity due to the integration of equipment and the transfer of personnel from our Kingston, New York facility to our Philmont, New York facility, as well as professional fees that were incurred for assistance in implementing operational improvements.
Income from operations for fiscal year ended June 30, 2004 decreased to $1,555,000, or 1.6% of net sales, compared to $3,340,000, or 3.7% of net sales, in fiscal 2003 due to reasons discussed above.
Net interest expense decreased $78,000 during the fiscal year ended June 30, 2004. This net decrease is mainly attributed to lower interest rates and reduction in debt.
Other income represents the profit generated on the sale of various production equipment taken out of service during fiscal 2004.
Net loss for fiscal year ended June 30, 2004 was $65,000 or $.01 per diluted share compared to a profit of $873,000 or $.12 per diluted share for fiscal 2003 due to factors discussed above.
FISCAL 2003 COMPARED TO FISCAL 2002
The Company's net sales for the fiscal year ended June 30, 2003, were $90,433,000, an increase of approximately 8% from the fiscal 2002 total of $84,076,000. The increase in revenue reflects an 11% increase in plastic bottle sales, offset by a 6% decrease in merchant compounds.
Growth in plastic bottle sales benefited from strong demand for PET bottles by 27% resulting from the Company's recent innovations in PET blow molding technology. In addition, the Company's fluorinated specialty bottle business also had strong growth of 19%.
Although PVC compound revenue declined, sales actually increased by 7% on a unit volume basis, primarily because the Company engaged in more "toll manufacturing" in fiscal 2003 than in fiscal 2002. In toll manufacturing, the Company uses customer-provided raw materials and collects only conversion costs and profit. Our Novatec plastic compound business experienced an overall weaker demand for rigid PVC compounds during this past fiscal year.
Cost of goods sold as a percentage of net sales increased to 79.0% in fiscal 2003 from 77.3% in fiscal 2002. The cost of virtually all plastic resins used in both the bottle and compound businesses increased dramatically, exacerbated by the turmoil in the energy markets as a result of political events in the Middle East. This has had an adverse effect on all areas of the Company's business, but particularly our PVC compounding business. Start-up expenses associated with the addition of new capacity in our PET bottle line also contributed to the higher cost of goods sold.
SG&A expenses were $9,615,000, or 10.6% of net sales, for the fiscal year ended June 30, 2003, as compared to $9,934,000, or 11.8% of net sales, for fiscal 2002. SG&A expenses have decreased primarily due to improved monitoring of accounts receivable. This monitoring reduced the Company's exposure to uncollectible accounts and, accordingly, its provision for bad debts.
Depreciation and amortization expense for fiscal 2003 decreased by $409,000 primarily because of certain manufacturing assets becoming fully depreciated in fiscal 2003. The annual amortization of goodwill which would have approximately $293,000 is no longer required in 2003 as a result of adopting FASB Statement No. 142, effective July 1, 2002.
EBITDA increased from approximately $9,229,000 in fiscal 2002 to approximately $9,444,000 in fiscal 2003. Performance improvements in the Company's plastic container segment raised EBITDA by approximately $838,000, but this increase was offset by a decrease of $623,000 in the performance of the Novatec Plastics division, mainly due to higher raw material costs.
Income from operations for the fiscal year ended June 30, 2003, increased to $3,340,000, or 3.7% of net sales, compared to $2,726,000, or 3.2% of net sales, in fiscal 2002.
Net interest expense decreased $244,000 during fiscal year ended June 30, 2003. This net decrease is mainly attributable to lower interest rates.
Net income for the fiscal year ended June 30, 2003, increased to $873,000, or $.12 per diluted share, compared to $261,000, or $.04 per diluted share, for fiscal 2002 due to factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Because management generally does not monitor liquidity and capital resources on a segment basis, this discussion is presented on a consolidated basis.
Cash flow from operations during fiscal 2004 totaled $5,829,000, representing an increase of $934,000 from the prior fiscal year. Cash flow from operations was favorably impacted by improved inventory management and timing of income tax payments.
Cash used for accounts receivable, net of allowances, during fiscal year ended June 30, 2004 was $2,502,000, an increase of $2,315,000 from the prior fiscal period. The increase was primarily due to the increase in sales during the fourth quarter of fiscal 2004.
The Company generated net cash from operating activities and additional long-term debt in the amount of $8,361,000. These funds were primarily used to acquire capital assets of $4,611,000, to reduce long-term debt by $3,763,000, and to reduce borrowings under our revolving credit line by $594,000.
Capital expenditures decreased by $1,151,000 to $4,611,000 during fiscal year ended June 30, 2004 as compared to $5,762,000 during fiscal year ended June 30, 2003. This decrease is mainly attributed to the initial entry into the PET product line, which required new equipment and start up expenses during fiscal year 2003.
The Company's liquidity position and working capital remained adequate for the fiscal period ended June 30, 2004. Net working capital decreased to $13,796,000 from $14,351,000 as at June 30, 2003. The current ratio of assets to liabilities decreased from 2.0 at June 30, 2003 to 1.8 at June 30, 2004. This decrease was primarily attributable to an increase in accounts payable.
The Company's Midwest facility, located in Ardmore, Oklahoma, reflected in the June 30, 2003 balance sheet in the amount of $262,000, plus $36,000 cost of land, was sold below fair value during the fourth quarter of 2004. The Company recorded a loss of $122,000, which is included in provision for restructuring and other exit activities.
The Company's short-term liquidity and short-term capital resources are projected to be adequate to allow the Company to continue to meet its financial obligations. The Company believes the financial resources available to it, including internally generated funds and borrowing under its revolving credit facility, will be sufficient to meet foreseeable working capital requirements. At June 30, 2004, the Company had unused sources of liquidity consisting of cash and cash equivalents of $366,000 and unused credit under a revolving credit facility of $10,238,000.
The Company's revolving credit facility includes financial and other covenants, including, without limitation, a minimum equity covenant and a fixed charge coverage covenant. As of June 30, 2004, the Company was in compliance with the covenants under its revolving credit facility.
The Company utilizes its revolving loan facilities for seasonal working capital needs and for other general corporate purposes. Amounts available under the Company's revolving loan facilities in excess of its seasonal working capital needs are available to pursue the Company's growth strategy and for other permitted purposes.
There were no material changes during the twelve months ended June 30, 2004 in the contractual obligations presented in the consolidated financial statements in the Company's annual report on Form 10-K for the fiscal year ended June 30, 2004.
The effective portion of the gain or loss on a derivative instrument that is designated and qualifies as a cash flow hedge is reported as a component of other comprehensive income and reclassified into earnings in the period or periods during which the hedged transaction affects earnings.
Off-Balance Sheet Arrangements
The Company does not have any material off balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition.
Contractual Obligations and Commercial Commitments
As of June 30, 2004, the Company is party to notes payable, working capital lines and various operating leases. These contractual obligations and other commercial commitments are summarized below. The Company has no other contractual obligations or commercial commitments as of June 30, 2004.
The operating leases relate to office and plant facilities, vehicles, and office equipment. We expect the majority of the leases upon expiration will be renewed or replaced by other leases.
Impact of Recently Issued Accounting Standards
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). FIN 46 is the interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, which addresses consolidation by business enterprises of variable interest entities. FIN 46 is effective immediately for all variable interest entities created after January 31, 2003 and became effective for the Company for periods ending after March 15, 2004 for variable interest entities in which it holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 did not have any impact on the Company's financial position, results of operations and cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (FAS 149). This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). The Statement is effective for contracts entered into or modified after June 30, 2003, and hedging relationships designated after June 30, 2003. Certain provisions of this statement relating to FAS 133 implementation issues that have been effective for prior fiscal quarters will continue to be applied in accordance with their respective effective dates. The Company does not expect that the adoption of FAS 149 will have an impact on its financial position, results of operations or cash flows.
In December of 2003, the FASB revised Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement, as revised, retains the disclosure requirements of the original statement, which it replaces, and requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of denied benefit pension plans and other defined benefit postretirement plans. The annual financial statement disclosures are effective for the Company for the fiscal year ended June 30, 2004.
Cautionary Note on Forward-Looking Statements
Certain statements in this report that are not reported financial results or other historical information are "forward-looking statements" and within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events and are not guarantees of future performance. They are based on management's expectations that involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions; prospective changes in raw material costs, product pricing or product demand; future performance or results of current and anticipated market conditions and market strategies; sales efforts; expenses; and financial results. There are risks and uncertainties that may cause results to differ materially from those set forth in these forward-looking statements. In particular,
unanticipated changes in the economic, competitive, governmental, technological, marketing or other factors identified in this report and in the Company's other filings with the Securities and Exchange Commission could cause such results to differ materially and could include, but are not limited to, changes in U.S., regional or world polymer growth rates affecting the Company's markets; changes in global industry capacity or in the rate at which anticipated changes in industry capacity come online in the polyvinyl chloride or other industries in which the Company participates; fluctuations in raw material prices, quality and supply and in energy prices and supply, in particular fluctuations outside the normal range of industry cycles; and an inability to raise prices or sustain price increases for products.
The Company cannot guarantee that any forward-looking statement will be realized, although it believes that management has been prudent in its plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear in mind as they consider forward-looking statements.
The Company undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures the Company makes on related subjects in its filings with the Securities and Exchange Commissions. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
Market risks relating to the Company's operations result primarily from changes in interest rates. Interest rate pricing transactions are used only to the extent considered necessary to meet our objectives. The Company does not utilize derivative financial instruments for trading or other speculative purposes.
Interest Rate Risk
The Company's interest rate risk management objective is to limit the impact of interest rate changes on its net income and cash flow and to lower its overall borrowing cost. The Company manages our exposure to interest rate fluctuations with variable rate swap agreements, which effectively convert interest rate exposure from variable rates to fixed rates of interest. The Company has entered into these agreements with banks under its senior secured credit facility. Refer to Notes 1 and 5 to the Company's Consolidated Financial Statements (included elsewhere in this Annual Report), which outline the principal amounts, interest rates, fair values, and other terms required to evaluate the expected cash flows from these agreements.
As of June 30, 2004, the Company had total outstanding indebtedness of $28,007,000. Of this amount, the total indebtedness subject to variable interest rates was approximately $20,272,000. Based on the Company's June 30, 2004 variable debt levels, a one quarter percent increase or decrease in interest rates would have had a $51,000 impact on the Company's annual interest expense.
Item 8.
Item 8. Financial Statements and Supplementary Data.
See annexed financial statements.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. As of the end of the period covered by this Annual Report, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective.
During the last quarter of fiscal 2004, there have been no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B.
Item 9B. Other Information
Not applicable
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth the directors and executive officers of the Company. Each director holds office until his successor is elected and qualified.
PHILLIP L. FRIEDMAN joined the Company in 1981 and served as President and Chief Executive Officer until 2004 when he resigned on September 2, 2004 and was appointed Chairman of the Board. Prior to joining the Company, he was employed by Occidental Chemical Corporation (formerly Hooker Chemical Corporation), a leading manufacturer and supplier of PVC resins and compounds, for 12 years. His responsibilities at Occidental culminated in a five-year tenure as Manager of Business Development and Director of Commercial Development for the Polyvinyl Chloride Plastics Division. As the Director of Commercial Development, he was responsible for coordinating and commercializing various research and development projects within the plastics industry. Mr. Friedman received a BS in chemical engineering from Pratt Institute and pursued graduate studies in business administration at Temple University. He is a member of the Executive Committee of the Company.
WILLIAM J. BERGEN joined the Company on September 2, 2004 when he was elected President and Chief Executive Officer and a Director. Mr. Bergen served as Vice President and General Manager--Plastics Americas Business Unit of Alcan, Inc., a provider of aluminum and packaging products, from 2003 to September 2004. Mr. Bergen also served in various capacities for International Paper Company, a forest products company, including as its General Manager of its Release Products Business, from 2001 to 2003, Regional Vice President-Sherwood Packaging Division from 2000 to 2001, and Business Unit Manager, Folding Cartons, from 1997 to 2000.
JOEL F. ROBERTS joined the Company in 1986 and has served as the Senior Vice President of Operations for the bottle division since 1999. Before assuming his current position, he was the Director of Operations for ten years and a plant manager for three years. Prior to joining the Company, Mr. Roberts was employed by Technical Plastics Extruders, an extruder of sheet material.
JEFFREY SHAPIRO has served as Chief Financial Officer since March 2000. Prior to joining the Company, he was employed as the Chief Operating Officer of Universal Process Equipment, a worldwide manufacturer of process equipment from 1996 to 2000. Mr. Shapiro has nearly twenty years of experience in the printing and packaging industry and has held various executive positions from Vice President to Controller to Chief Financial Officer. Prior companies include Webcraft Technologies and Klearfold Packaging. Mr. Shapiro is a graduate of Rutgers University and a CPA in New Jersey. He holds CITP certification and memberships in FEI, NJSCPA, and AICPA.
JOHN F. TURBEN is Chairman and Chief Executive Officer of Kirtland Capital Corporation, a privately funded investment company founded by Jack in 1977. Prior to joining Kirtland, he served as Chairman of the Executive Committee and Vice Chairman of the Board of Prescott, Ball & Turben, an investment banking firm headquartered in Cleveland, and Chairman of the Executive Committee and Director of the Geneve Corp. Jack serves as Chairman of Instron Corporation and Fairport Asset Management LLC and is Chairman of the Executive Committee of Fairmount Minerals, Ltd. He is a member of Kirtland Capital Partners' Advisory Board, a Director of PVC Container Corporation, Stonebridge Industries, Inc., Gries Financial LLC, PDM Bridge LLC and NACCO Industries, Inc. Jack is a member of the Board of Trustees and is past President of the Board of Trustees of University School, past Chairman of the Board of Trustees of Lake Erie College, a Trustee of Vocational Guidance Services and is the Mayor of Kirtland Hills, Ohio. He is a 1957 graduate of Yale University.
MICHAEL SHERWIN has served as the Vice Chairman of Mid-West Forge Corporation, a manufacturer of shafts, since 1987 and as Chairman and Chief Executive Officer of Columbiana Boiler Company, a manufacturer of kettles, pressure vessels and transportation packages, since 1980. Prior to joining Mid-West Forge Corporation, Mr. Sherwin was the President of National City Venture Corporation and National City Capital Corporation, both subsidiaries of National City Corporation, a bank holding company. He is a member of the Executive Committee and Audit Committee.
JOHN G. NESTOR, President of Kirtland Capital Corporation, joined the company in March 1986. Prior to joining Kirtland, John spent 16 years at Continental Illinois Bank in a variety of lending positions. He is a member of Kirtland Capital Partners' Advisory Board, serves as Chairman of Essex Crane Rental Corp. and is a Director of Fairmount Minerals, Ltd., R Tape Corporation, PVC Container Corporation and PDM Bridge LLC. John is the Board Chair of the National Conference for Community and Justice (NCCJ) and Chairman of the Board of Trustees of The Cleveland Food Bank. A graduate of Georgetown University, John also holds an MBA from the University of Notre Dame and an MA in Urban Studies from Loyola University in Chicago.
MICHAEL LYNCH has served as the Senior Vice President of Oldcastle, Inc., a U.S. subsidiary of CRH pl, an international buildings materials company headquartered in Ireland, since 1982. Mr. Lynch has also served as the Chief Executive Officer of Allied Buildings Products Corp., which is a subsidiary of Oldcastle, Inc., since 2001. He is a member of the Audit Committee.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's executive officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, file reports of ownership and changes in ownership with the Securities and Exchange Commission. Executive officers, directors and greater than 10% equity holders are required by Securities and Exchange Commission rules to furnish the Company with copies of all forms they file. Based solely on its review of the copies of such forms received by us and written representations from certain reporting persons, the Company believes that, during fiscal 2004, all Section 16(a) filing requirements applicable to its executive officers, directors and 10% equity holders were satisfied.
The board of directors has determined that the audit committee has at least one "audit committee financial expert" (as such term is defined in item 401 of Regulation S-K) and such expert is Mr. Lynch, who is also "independent" (as such term is used in item 7 (D) (3) (iv) of Schedule 14A under the Exchange Act).
The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, comptrollers and principal accounting officer and all persons performing similar functions. The Company will provide to any person without charge, upon written or oral request, a copy of such code of ethics. Requests should be directed to: PVC Container Corporation, Attention: Gayle Jarema, Assistant Secretary, 2 Industrial Way West, Eatontown, New Jersey, 07724-2202, telephone number: (732) 542-0060.
Item 11.
Item 11. Executive Compensation.
The following table sets forth, for the fiscal years ended June 30, 2004, 2003 and 2002, compensation paid by the Company to its chief executive officer and to each of the executive officers of the Company whose total annual salary and bonus exceed $100,000:
SUMMARY COMPENSATION TABLE
(1) Mr. Friedman resigned as President and Chief Executive Officer on September 2, 2004. Mr. Friedman was named Chairman of the Board on September 2, 2004 and remains an employee of the Company.
STOCK OPTION GRANTS
During the fiscal year ended June 30, 2004, the Company did not grant any options to purchase share of Common Stock to any of the above-named executive officers of the Company.
AGGREGATED FISCAL YEAR-END OPTION VALUES
(1) Only those options held at the end of the fiscal year ended June 30, 2004 of the Company are listed.
(2) All exercisable options were out-of-the-money as at June 30, 2004.
LONG TERM INCENTIVE PLAN
Under the Company's Long Term Incentive Plan, there were no grants during the fiscal year ended June 30, 2004.
PROFIT SHARING SAVINGS PLAN
On September 29, 1983, the Board of Directors adopted the PVC Container Corporation Profit Sharing Savings Plan (the "Plan"), which Plan became effective July 1, 1984. The Plan supersedes the 1980 PVC Container Corporation Profit Sharing Pension Plan. All employees of the Company who have completed one year of service and are not covered by a collective bargaining agreement are eligible for participation in the Plan.
The Plan has been drafted to comply with Section 401(k) of the Internal Revenue Code. Each participating employee can defer from 1% to 6% of his salary into his Plan account, and the Company makes a matching contribution. Such contribution for the fiscal year ended June 30, 2004 was in an amount equal to 25% on the first 6% of the union and non-union employees pre-tax contributions. Contributions are made by the Company on a monthly basis. In addition to matching contributions, the Company, at its option, may make payments based on a percentage of quarterly profits. Such payments can be made directly to or for the Plan account of participating employees and are based on a percentage of the employee's compensation. The Company made discretionary payments during the fiscal year ended June 30, 2004 of $136,894, which amount includes the 25% and 10% contributions referred to above. All amounts deferred by and paid to executive officers of the Company pursuant to the Plan have been included in "Executive Compensation and Transactions with Management."
DEFERRED COMPENSATION PLAN
On June 4, 1986, the Board of Directors approved the establishment of a Deferred Compensation Plan, effective July 1, 1986, under which executives of the Company may defer and accrue for three years a certain amount of the compensation due them. No deferred compensation was accrued as at June 30, 2004.
EMPLOYMENT AGREEMENT
William J. Bergen and the Company entered into an employment agreement, effective as of September 2, 2004, pursuant to which Mr. Bergen agreed to serve as the Company's President and Chief Executive Officer. The employment agreement currently provides for, among other things, compensation consisting of a base salary of $240,000 per annum until Sept 1, 2005, when the term of agreement expires unless further extended. Additionally, the employment agreement provides for incentive compensation based upon the equity value of the Company. The employment agreement also provides for certain benefits payable to Mr. Bergen in the event the agreement is not renewed, or the death or disability of Mr. Bergen.
Mr. Phillip L. Friedman has resigned from his position as President and Chief Executive Officer effective September 2, 2004. As severance compensation, the Company shall pay Mr. Friedman an amount equal to $710,000. The agreement provides for other benefits to be provided subsequent to December 31, 2004. He will continue as an employee of the Company and will serve as the Chairman of the Board of Directors.
COMPENSATION OF THE BOARD OF DIRECTORS
Directors are reimbursed for reasonable expenses actually incurred in connection with attending each formal meeting of the Board of Directors or any committee thereof. In addition, each director of the Company is paid $1,250 per quarter.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has not established a compensation committee. Decisions with respect to the compensation of the Company's executive officers are made by the entire Board of Directors. During the fiscal year ended June 30, 2004. Mr. Friedman, the President and Chief Executive Officer of the Company who is also a member of the Board of Directors, participated in deliberations of the Board of Directors concerning executive officer compensation. No interlocking relationship presently exists between any member of the Board of Directors and any member of the board of directors or compensation committee of any other company.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The common stock, par value $.01 per share, of the Company (the "Common Stock") is the only authorized voting security of the Company. There are 7,042,393 shares of Common Stock were outstanding, each of which is entitled to one vote. The Common Stock does not have cumulative voting rights.
The following table sets forth, as of August 31, 2004, the beneficial ownership of Common Stock of (i) any person who is known by the Company to own more than 5% of the voting securities of the Company, (ii) each of the Company's executive officers named in the Summary Compensation Table (collectively, the "Named Executive Officers"), (iii) each director, and (iv) all directors and executive officers of the Company as a group. Except as otherwise indicated, the Company believes, based on information furnished by such owners, that the beneficial owners of the Company's common stock listed below have sole voting and investment power with respect to such shares, subject to any applicable community property laws. Beneficial ownership of the Common Stock has been determined for this purpose in accordance with the applicable rules and regulations promulgated under the Securities Exchange Act of 1934 (the "Exchange Act").
*Less than 1%
(1) KCP II acquired on December 12, 1996 an aggregate of 4,110,679 shares of Common Stock and KCC II acquired on December 12, 1996 and January 3, 1997 an aggregate of 356,736 shares of Common Stock, which shares are owned directly and beneficially by KCP II and KCC II, respectively. Collectively, KCP II and KCC II beneficially own 4,467,415 shares of Common Stock, which constitutes 63.4% of the outstanding shares of Common Stock. The address for each of KCP II and KCC II is 3201 Enterprises Parkway-3200 Beachwood, Ohio 44122.
(2) Information reported is based on a Form 4 as filed with the Securities and Exchange Commission on June 7, 2004 by Lionheart Group Inc. and C. Duncan Soukup. The Form 4 provided that 978,869 shares of Common Stock were owned by Lionheart Group Inc. and 34,000 shares of Common Stock were owned individually by Mr. Soukup, President of Lionheart Group Inc. Mr. Soukup disclaims beneficial ownership of the shares owned by Lionheart Group Inc., except to the extent of his pecuniary interest therein. The address for each of Lionheart Group Inc. and Mr. Soukup is 118 E. 25th Street, 8th Floor, New York, New York 10010.
(3) Includes 167,500 shares of Common Stock that may be acquired upon exercise of options granted under the 1996 Incentive Stock Option Plan of the Company ("Option Plan") that are exercisable within 60 days of August 31, 2004.
(4) Includes 24,000 shares of Common Stock that may be acquired upon exercise of options granted under the Option Plan that are exercisable within 60 days of August 31, 2004.
(5) Includes 33,500 shares of Common Stock that may be acquired upon exercise of options granted under the Option Plan that are exercisable within 60 days of August 31, 2004.
(6) Includes 10,000 shares of Common Stock that may be acquired upon exercise of options granted under the Option Plan that are exercisable within 60 days of August 31, 2004. Mr. Sherwin has a 10% interest in Midwest Forge Corporation, which has a .0143% direct interest as a limited partner in KCP II. Mr. Sherwin disclaims beneficial ownership of the interest of Midwest Forge Corporation in KCP II.
(7) Includes 10,000 shares of Common Stock that may be acquired upon exercise of options granted under the Option Plan that are exercisable within 60 days of October 24, 2004 and 25,000 shares of Common Stock owned individually by Mr. Turben. Also includes 4,110,679 shares of Common Stock owned by KCP II and 356,736 shares of Common Stock owned by KCC II. Mr. Turben is the Chairman of the Board of Directors of Kirtland Capital Corp., an Ohio corporation, which is the general partner that controls KCP II and has sole voting and investment power over all of the Common Stock owned by KCP II. Kirtland Capital Corp. is also the general partner of Evergreen Partners II L.P., an Ohio limited partnership, which is the managing member of KCC II. Kirtland Capital Corp. has sole voting and investment power over all of the common stock owned by KCC II. Mr. Turben disclaims beneficial ownership of the shares of Common Stock owned by of KCP II and KCC II. Mr. Turben's address is c/o Kirtland Capital Corp., 3201 Enterprise Parkway - 3200 Beachwood, Ohio 44122.
(8) Includes 10,000 shares of Common Stock that may be acquired upon exercise of options granted under the Option Plan that are exercisable within 60 days of August 31, 2004.
(9) Includes 10,000 shares of Common Stock that may be acquired upon exercise of options granted under the Option Plan that are exercisable within 60 days of August 31, 2004. Also includes 4,110,679 shares of Common Stock owned by KCP II and 356,736 shares of Common Stock owned by KCC II. Mr. Nestor is the President and a director of Kirtland Capital Corp., an Ohio corporation, which is the general partner that controls KCP II and has sole voting and investment power over all of the Common Stock owned by KCP II. Kirtland Capital Corp. is also the general partner of Evergreen Partners II L.P., an Ohio limited partnership, which is the managing member of KCC II. Kirtland Capital Corp. has sole voting and investment power over all of the common stock owned by KCC II. Mr. Nestor disclaims beneficial ownership of the shares of Common Stock owned by of KCP II and KCC II. Mr. Nestor's address is c/o Kirtland Capital Corp., 3201 Enterprise Parkway - 3200 Beachwood, Ohio 44122.
(10) Includes 265,000 shares of Common Stock that may be acquired upon exercise of options granted under the Option Plan that are exercisable within 60 days of August 31, 2004.
Shown below is information concerning all equity compensation plans and individual compensation arrangements in effect as of the end of the last fiscal year.
EQUITY COMPENSATION PLAN INFORMATION
Item 13.
Item 13. Certain Relationships and Related Transactions.
The Company has entered into a management agreement with Kirtland Capital Corp., pursuant to which Kirtland Capital Corp. receives $25,000 per month for providing management services to the Company. Mr. Turben is Chairman of Kirtland Capital Corp., and Mr. Nestor is President of Kirtland Capital Corp. Kirtland Capital Corp. is the General Partner of Kirtland Capital Partners II L.P. and Kirtland Capital Company II, which collectively own 63.9% of the issued and outstanding common stock of the Company.
The Board of Directors of the Company has established an Audit Committee and adopted an Audit Committee Charter. The current members of the Audit Committee are Messrs. Sherwin (Chairman), Lynch and Nestor. Notwithstanding the management agreement and the ownership of the Company's common stock by Kirtland Capital Partners II L.P. and Kirtland Capital Company II and Mr. Nestor's position with Kirtland Capital Corp. described above, the Company's Board of Directors does not believe that such relationships interfere with the exercise by Mr. Nestor of independent judgment in carrying out his responsibilities as a director and as a member of the Audit Committee in accordance with Rule 4200(a)(15) of NASD listing standards and that, based upon his considerable business and financial background, his membership on the Audit Committee is in the best interests of the Company and its stockholders.
PART III
Item 14.
Item 14. Principal Accountant Fees and Services
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements.
Report of Independent Auditors
Consolidated Balance Sheets at June 30, 2004 and 2003
Consolidated Statements of Operations for the years ended June 30, 2004, 2003 and 2002
Consolidated Statements of Stockholders' Equity for the years ended June 30, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended June 30, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules.
Report of Independent Auditors on Consolidated Financial Statement Schedules
For the three years ended June 30, 2004
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits.
INDEX TO EXHIBITS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
PVC CONTAINER CORPORATION (Registrant)
By: /s/Phillip L. Friedman --------------------------- Phillip L. Friedman Chairman
Date: October 1, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
PVC CONTAINER CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-K
JUNE 30, 2004
CONSOLIDATED FINANCIAL STATEMENTS
PVC Container Corporation
June 30, 2004, 2003 and 2002
PVC Container Corporation
Consolidated Financial Statements
June 30, 2004, 2003 and 2002
CONTENTS
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders PVC Container Corporation
We have audited the accompanying consolidated balance sheets of PVC Container Corporation as of June 30, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 2004. Our audit also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PVC Container Corporation at June 30, 2004 and 2003 and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2004 in conformity with U.S. generally accepted accounting principles . Also, in our opinion, the related 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.
As discussed in Note 1, the Company changed its method of accounting for goodwill and other intangible assets effective July 1, 2002.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey September 23, 2004
PVC Container Corporation
Consolidated Balance Sheets
See accompanying notes.
PVC Container Corporation
Consolidated Statements of Operations
See accompanying notes.
PVC Container Corporation
Consolidated Statements of Stockholders' Equity
See accompanying notes.
PVC Container Corporation
Consolidated Statements of Cash Flows
See accompanying notes.
PVC Container Corporation
Notes to Consolidated Financial Statements
June 30, 2003, 2002 and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
PVC Container Corporation (the "Company") was incorporated in Delaware on June 14, 1968. The Company's major business is the manufacture and sale of a line of plastic bottles made from polyvinyl chloride (PVC) compounds, high density polyethylene resins and polyethylene terephthalate (PET). These bottles are used primarily for packaging cosmetics, toiletries, foods, household chemicals, lawn and garden supplies, and industrial chemical products. The Company produces and sells polyvinyl chloride which is used by the Company or sold to other plastic bottle manufacturers whose products compete with those produced by the Company. Our businesses are based in the United States.
CONSOLIDATION
The accompanying financial statements include the accounts of PVC Container Corporation and its wholly-owned subsidiaries, Novatec Plastics Corporation, Novapak Corporation, Airopak Corporation, Marpac Industries Inc., Marpac Southwest, Inc., and PVC Container International Sales Corporation, a foreign sales company incorporated in the U.S. Virgin Islands. All inter-company accounts have been eliminated.
CASH EQUIVALENTS
The Company considers investments with maturities of three months or less when acquired to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is determined under the first-in, first-out ("FIFO") method.
DEPRECIATION
Depreciation is provided on a straight-line method over the estimated useful lives of the related assets. Maintenance and repairs are charged to operations as incurred. Major renewals and betterments are capitalized.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INTANGIBLES
Effective July 1, 2002, the Company adopted the provisions of FASB Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142). Under these rules, goodwill is no longer subject to amortization but is reviewed for potential impairment upon adoption and thereafter annually or upon the occurrence of an impairment indicator. SFAS 142 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment, while the second phase measures the impairment. The carrying amount of the Company's goodwill is reviewed on a regular basis for any signs of an impairment. The Company determines if the carrying amount is impaired based on anticipated cash flows. In the event of impairment, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the asset. Fair value is determined primarily using the anticipated cash flows, discounted at a rate commensurate with the associated risk. The Company completed the annual impairment test in fiscal 2004 and passed the first phase of the impairment test; therefore, no further testing was required.
The annual amortization of goodwill, which would have approximated $293,000 is no longer required in 2004 or 2003. The following table reflects unaudited adjusted results of operations of the Company giving effect to SFAS 142 as if it were adopted on July 1, 2001.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
CONCENTRATION OF CREDIT RISK
The Company grants trade credit to its customers, who are primarily manufacturers of personal care products, food, household chemicals, and lawn and garden and industrial chemical products, and to bottle distributors who sell to such manufacturers. The Company performs periodic credit evaluations of its customers and generally does not require collateral. Sales and accounts receivable from customers are denominated in U.S. dollars. The Company has not experienced significant losses related to receivables from individual customers. The Company maintains allowances for doubtful accounts for estimated losses resulting from customers' failure to make mandatory payments.
REVENUE RECOGNITION
Revenue is recognized upon shipment of the product. Sales are shown net of returns, allowances and discounts. In accordance with Emerging Issues Task Force EITF 00-10, Accounting for Shipping and Handling Fees and Costs, the Company reports amount billed to customers for shipping and handling fees as sales in the Company's Consolidated Statements of Operations. Costs incurred by the Company for shipping and handling fees are reported as cost of sales.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to expense as incurred and amounted to $323,000, $290,000 and $263,000, in 2004, 2003 and 2002, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in operations or expected to be disposed of when events and circumstances indicate that the assets might be impaired and when those assets are expected to generate undiscounted cash flows that would be less than their carrying amounts.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK-BASED COMPENSATION
As permitted by Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123), the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its employee stock option plans. Under APB 25, compensation expense is calculated at the time of option grant based upon the difference between the exercise price of the option and the fair market value of the Company's common stock at the date of grant, and is recognized over the vesting period.
SFAS 123 requires pro forma information regarding net income and earnings per share as if the Company had accounted for its employee stock options and warrants ("equity awards") under the fair value method of SFAS 123. The fair value of the Company's equity awards was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2003 and 2002, respectively: risk-free interest rates of approximately 2.4% and 4.1%, expected volatility of 0.6 and 0.4; expected option life equal to the vesting period, and an expected dividend yield of 0.0%. No options were granted in 2004.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options.
The following table illustrates the effect on net income (loss) and net income (loss) per common shares for the three fiscal years ended June 30, 2003, as if the Company had applied the fair value method to measure stock-based compensation, required under the disclosure provision of SFAS 123:
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PER SHARE INFORMATION
Per share information is presented in accordance with SFAS No. 128, Earnings Per Share. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share includes the dilutive effect of all such securities.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company recognizes all of its derivative instruments on the balance sheets as either assets or liabilities at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, (based upon the exposure being hedged), as either a fair value hedge, a cash flow hedge, or a hedge of a net investment in a foreign operation.
For a derivative instrument that is designated and qualifies as cash flow hedge (i.e., hedges the exposure to variability on expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on a derivative instrument that is designated and qualifies as a cash flow hedge is reported as a component of other comprehensive income and reclassified into earnings in the period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument, if any, is recognized in current earnings to the extent it exceeds the cumulative change in the present value of future cash flows of the hedged item. There have been no such gains or losses recorded by the Company.
At June 30, 2004, the Company had interest-rate swap agreements, designated as cash flow hedges, that effectively convert approximately $6,008,213 of its floating-rate debt to a fixed-rate through August 2005. The interest rate swap agreements hedge the floating interest rate by reducing the impact of interest rate changes on future interest expense. The fair value of the interest-rate swap at June 30, 2004, was approximately $198,000, based upon bank valuation, and is included in the accompanying consolidated balance sheet. Losses reported in accumulated, other comprehensive loss, that are expected to be reclassified into earnings in the next twelve months total approximately $170,000 before taxes.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). FIN 46 is the interpretation of Accounting Research Bulletin No. 51 Consolidated Financial Statements, which addresses consolidation by business enterprises of variable interest entities. FIN 46 is effective immediately for all variable interest entities created after January 31, 2003 and became effective for the Company for periods ending after March 15, 2004, for variable interest entities in which it holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 did not have any impact on the Company's financial position, results of operations and cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The Statement is effective for contracts entered into or modified after June 30, 2003, and hedging relationships designated after June 30, 2003. Certain provisions of this statement relating to SFAS 133 implementation issues that have been effective for prior fiscal quarters will continue to be applied in accordance with their respective effective dates. The Company does not expect that the adoption of SFAS 149 will have an impact on its financial position, results of operations or cash flows.
In December of 2003, the FASB revised Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement, as revised, retains the disclosure requirements of the original statement, which it replaces, and requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The annual financial statement disclosures are effective for the Company for the fiscal year ended June 30, 2004 and have been incorporated in Note 7.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates that affect the financial statements include, but are not limited to, recoverability of inventories, collectibility of accounts receivable, returns, useful lives of property, plant and equipment and related amortization periods, recoverability of long-lived assets and fair value of net assets held for sale.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
2. INVENTORIES
Inventories consist of the following:
3. PROPERTIES, PLANT AND EQUIPMENT
Depreciation expense and amortization expense for 2004, 2003 and 2002 were $6,262,000, $6,021,000 and $6,430,000 and $1,000, $1,000 and $294,000 respectively.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
4. ACCRUED EXPENSES
Accrued expenses at June 30 consists of:
5. LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt at June 30 consists of the following:
Maturities of long-term debt are as follows: 2005-$3,929,649; 2006-$14,073,041; 2007-$2,299,565; 2008-$1,704,683; 2009-$743,998; and 2010 to 2016-$5,255,943. Interest paid amounted to $1,871,346, $1,946,630, and $2,358,089 in 2004, 2003, and 2002, respectively.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT AND PLEDGED ASSETS (continued)
PNC AGREEMENT
The Company entered into a $43,750,000 senior secured credit facility with PNC Bank in August 2000. The credit facility is structured as a five-year $25,000,000 senior revolving credit facility, a five-year $12,183,000 senior term loan, a five-year $3,846,000 standby letter of credit, and a $2,000,000 capital expenditure line. At June 30, 2004, the Company was in compliance with all of the credit facility's covenants. The credit facility is secured by accounts receivable, inventories, property, plant and equipment.
The Term Notes bear interest at LIBOR plus 250 basis points and the revolving line bears interest at LIBOR plus 200 basis points. The effective interest rates of the term loan and revolver were 3.98% and 3.49%, respectively, in fiscal 2004. The Company entered into interest-rate swap agreements (Note 1) to effectively convert a portion of the floating Term Note debt interest to a fixed rate.
The $2 million capital expenditure line of credit bears interest at the prime rate. Borrowings against this line totaled approximately $.9 million at June 30, 2004.
NOTE PAYABLE - SOUTH CAROLINA ECONOMIC DEVELOPMENT AUTHORITY ("S.C. EDA")
This note was obtained to finance the construction of the Company's South Carolina manufacturing facility and is due April 1, 2016. Prepayments may be made without penalty. This note is subject to prior mortgages in favor of the PNC Bank. The effective interest rate on this obligation was 1.1% in fiscal 2004 and 1.4% in fiscal 2003. The note is secured by property, plant and equipment.
S.C. EDA has issued tax exempt bonds to fund the debt. Should the tax exempt status of this bond issue be negated, the interest rate on this note would be retroactively adjusted. The Company has an unused letter of credit amounting to approximately $3.6 million in conjunction with this note.
NOTE PAYABLE - PENNSYLVANIA INDUSTRIAL DEVELOPMENT AUTHORITY
During fiscal year 1999, the Company obtained a $1.0 million loan from the Pennsylvania Industrial Development Authority ("PIDA") to assist in financing the construction of its Hazleton, Pennsylvania manufacturing facility. The loan is payable in 145 equal monthly installments of $8,634, with an interest rate of 3.75% and a maturity date of March 1, 2011. The loan may be prepaid in whole or in part subject to certain requirements stated in the loan agreement. The loan is secured by the property of the manufacturing facility.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT AND PLEDGED ASSETS (continued)
GE CAPITAL PUBLIC FINANCE BUILDING AND EQUIPMENT LOANS
During fiscal year 1998, the Hazleton Area Industrial Development Authority approved $7,250,000 tax-exempt Industrial Development Bonds. The Bonds were purchased and are held by GE Capital Public Finance, Inc. to finance a loan to the Company in conjunction with the Company's Hazleton, Pennsylvania manufacturing facility. The loan is payable in 144 decreasing monthly installments at an interest rate of 5.15%, with a final lump sum payment of $1,860,530 due June 15, 2010. The loan may be prepaid in whole or in part subject to certain requirements stated in the loan agreement. The loan is secured by the property of the manufacturing facility.
During fiscal 1997, the City of Paris, Illinois approved $1,200,000 Series 1997A and $2,300,000 Series 1997B Industrial Development Revenue Bonds. The bonds were purchased and are held by GE Capital Public Finance, Inc. to finance a loan to the Company in conjunction with the Company's expansion of its Paris, Illinois manufacturing facility. The loan is payable in 120 decreasing monthly installments at an interest rate of 5.90%, with a final lump sum payment of $602,952 due April 1, 2007. The loan may be prepaid in whole or in part subject to certain requirements stated in the loan agreement. The loan is secured by the property and the equipment. The Company has unused letters of credit amounting to approximately $1.2 million in conjunction with this loan.
The bonds issued by the City of Paris to fund the debt are tax exempt. Should the tax-exempt status of these bonds be negated, the interest rate of on the related note would be retroactively adjusted.
OTHER
Other loans consist of notes payable to various banks for equipment, real estate improvements and development and expansion of the Company's manufacturing plants. The notes bear interest at rates ranging from 3% to 9.5% and are payable in monthly installments through 2011. The loans are secured by the Company's equipment, land and buildings.
The carrying amounts of the aforementioned debt agreements approximate fair value.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
6. OPERATING LEASES
Minimum rental commitments under non-cancelable operating leases are payable as follows:
Rental expense for operating leases amounted to $1,316,506 and $1,139,611, and $1,124,857 in fiscal 2004, 2003, and 2002, respectively. The executive office lease is for a term of ten years that commenced January 1, 1999 and has a rent escalation clause as follows: monthly rental is $15,500 until December 31, 2004, then $16,275 until December 31, 2006 and then $17,050 until the end of the term.
7. PENSION PLAN
On September 1, 1990, the Company instituted a non-contributory defined benefit pension plan for all eligible full-time union employees. Benefits are based on years of service. The Company contributes to the plan amounts, actuarially determined by the Unit Credit Actuarial Cost Method, that provides the plan with sufficient assets to meet future benefit payment requirements. The plan's assets are invested principally in short-term investments.
The pension plan assets are invested with the objective of being able to meet current and future benefit payment needs, while controlling pension expense volatility and future contributions. Plan assets are diversified between fixed income investments, cash and U.S. equities. The strategic target allocation is 100% fixed income investments. The weighted-average asset allocation for our pension plans at June 30, 2004, 2003 and 2002 was 100% for fixed income securities.
The following table sets forth the plan's funded status and the amount recognized in the Company's consolidated balance sheet:
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
7. PENSION PLAN (continued)
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
7. PENSION PLAN (continued)
Projection of benefits paid by the plan for next ten fiscal years
Contributions for the fiscal year beginning July 1, 2004 are not available until the next valuation date is completed. In the meantime, a reasonable projection of the minimum contribution for the fiscal year beginning July 1, 2004 would be $8,662.
To develop the expected long-term rate of return on assets assumption, the Company considered the current level of expected returns on risk free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the target asset allocation to develop the expected long-term rate of return on assets assumption for the portfolio. The measurement date for our pension plan is June 30 of each year.
The Company maintains a voluntary salary reduction 40l(k) plan covering all non-union and union employees with more than one year of service. Eligible employees may elect to contribute up to 15% of their salaries on a pre-tax basis and an additional 10% of their salaries on an after-tax basis up to ERISA's maximum annual level. The Company contributes 25% on the first 6% of the union and non-union employees' pre-tax contribution. The Company may make additional discretionary contributions to the plan based on earnings. The Company contributed $136,894, $143,716 and $136,340 in 2004, 2003, and 2002, respectively.
8. COMMON STOCK AND STOCK OPTIONS
In 1997, the Company's Board of Directors approved and ratified an incentive stock option plan to enable the Company to grant options to purchase up to 600,000 shares of the Company's common stock through the plan's expiration on January 16, 2007. This plan conforms to the requirements of Rule 16b-3 of the Securities Exchange Act of 1934. The options granted vest at the rate of 25% per year. All options have been granted at fair market value.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
8. COMMON STOCK AND STOCK OPTIONS (continued)
A summary of stock option activity follows:
Exercise prices for options outstanding as of June 30, 2004, ranged from $1.55 to $6.38 per share. The weighted average remaining contractual life of these options is 7 years.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES
The provision (benefit) for income taxes consists of:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of June 30 are as follows:
A reconciliation of the income tax provision and the amount computed by applying the statutory federal income tax rate to earnings before income taxes is as follows:
The change in the effective tax rate from 2003 to 2004 is primarily attributable to the decrease in pre tax income, while the amount of meals and entertainment and other permanent differences remain consistent from year to year.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (continued)
Income taxes paid amounted to $334,779, $1,246,078, and $244,000, in fiscal 2004, 2003, and 2002, respectively.
10. EARNINGS PER SHARE
The following table sets forth the computation of weighted-average shares outstanding for calculating basic and diluted earnings per share for the years ended June 30, 2004, 2003, and 2002. Income available to common stockholders for both basic and diluted earnings per share is the same as net income presented in the statements of income for the years ended June 30, 2004, 2003, and 2002.
11. SEGMENTS
The Company identifies its segments based upon differences in the types of products each sells. The Company currently has two reportable segments: Plastic Containers and Compound. The Plastic Containers segment manufactures custom designed PET, HDPE, and PVC containers mainly for cosmetics, toiletries, foods, household chemicals, lawn and garden supplies, and industrial chemical products. The Compound segment manufactures PVC compound for internal use and for sale. Our customers use PVC compound for extruded profiles and accessories, furniture, molding and other indoor fixtures, and molded electrical and electronic housings. Both of the Company's segments sell to customers located primarily in the United States.
The reportable segments are managed separately because they use different manufacturing processes and serve different markets. The Company evaluates each segment's performance based on profit or loss from operations after income taxes. The accounting policies for the reportable segments are the same as those for the Company (described in Note 1). Intersegment sales and transfers are recorded at market prices. Information on segments and a reconciliation to a consolidated total are as follows:
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
11. SEGMENTS (continued)
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
12. QUARTERLY FINANCIAL DATA
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present selected financial data by quarter for the years ended June 30, 2004, and 2003:
13. PROVISION FOR RESTRUCTURING AND OTHER EXIT ACTIVITIES
In 2004, the Company recorded charges for restructuring and other exit activities of $475,000, which is reflected in the plastic container segment. During the quarter ended September 30, 2003, the Company decided to transfer a majority of the personnel and most of the equipment at its Marpac Industries subsidiary located in Kingston, NY to its Philmont, NY plant. The Kingston facility was converted to a warehouse. The workforce reduction included 48 employees of which 19 were direct labor, 27 indirect labor and 2 administrative. During 2004, the Company recorded restructuring
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
13. PROVISION FOR RESTRUCTURING AND OTHER EXIT ACTIVITIES (continued)
charges of $229,000 related to severance and other personnel related costs and $124,000 for equipment relocation and other transfer costs. As of June 30, 2004, $353,000 has been incurred and paid. The plastic container segment experienced manufacturing inefficiencies related to the move. These additional costs are reflected in cost of good sold.
Certain facilities, previously classified as net assets held for disposition, were sold in April 2004 for an amount less than carrying value. The Company recorded a loss of $122,322 on the sale of the assets in provision for restructuring and other exit activities.
14. SUBSEQUENT EVENT
On September 2, 2004, Phillip L. Friedman announced his resignation as President and Chief Executive Officer of the Company and will be assuming the role of Chairman of the Company's Board of Directors. As severance compensation, the Company shall pay Mr. Friedman an amount equal to $710,000. This agreement provides for other benefits to be provided subsequent to December 31, 2004. William J. Bergen will be assuming the titles of President and Chief Executive Officer and will serve as a Director. Mr. Bergen served as Vice President and General Manager for the Plastics Americas Business Unit of Alcan Inc., a provider of aluminum and packaging products, from 2003 to August 2004.
PVC Container Corporation
Schedule II - Valuation and Qualifying Accounts
* Charges to revenues to accrue for customer returns and allowances.