1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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COMMISSION FILE NUMBER 0-30067
PVC CONTAINER CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 13-2616435
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(STATE OF OTHER JURISDICTION OF IRS IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER
2 Industrial Way West, Eatontown, New Jersey 07724-2202
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(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (732) 542-0060
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of exchange on which registered
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None None
2
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
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(TITLE OF CLASS)
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
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the last trade on August 27, 2001, was approximately
$6,335,265.
The number of shares outstanding of the registrant's only class of common stock,
as of the latest practicable date, is as follows:
Class Outstanding as of August 27, 2001
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Common Stock, $.01 par value 7,044,655
EXHIBIT INDEX is located at Page 19
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PART I
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
consists of the manufacture and sale of a line of plastic bottles made from
polyvinyl chloride ("PVC") compounds, high-density polyethylene ("HDPE")
polyethylene terephthalate ("PET") resins. The Company sells these bottles
through Novapak Corporation ("Novapak") which is a wholly-owned subsidiary of
the Company. Some of the HDPE bottles are fluorinated to improve the chemical
resistance and barrier properties of the containers manufactured by the
Company's wholly-owned subsidiary known as Airopak Corporation ("Airopak"). All
of these bottles ("plastic bottles") are used primarily for the packaging of
cosmetics, toiletries, foods, household chemicals, lawn and garden and
industrial chemical products.
PVC compounds are used by the Company or sold to other plastic
bottle manufacturers, some of which compete with those produced by the Company.
These PVC compounds are produced and sold through the Company's wholly-owned
subsidiary, Novatec Plastics Corporation, Inc. ("Novatec"). Novatec also
manufactures and sells a diversified portfolio of rigid PVC compounds for other
applications. During the last several years, the Company has developed and begun
to sell several categories of specialty PVC compounds for non-bottle
applications ("specialty compounds") including extruded profiles and
accessories, furniture, molding and other indoor fixtures, and a variety of
injection molded electrical and electronic housings (the "Company's targeted
markets'").
On March 30, 1998, the Company acquired the plastic bottle
blow molding business of McKechnie Investments, Inc., which operates out of a
100,000 square foot facility located in Philmont, New York and is operated by
Novapak. The annual revenues of this business are approximately $17,000,000. The
business serves primarily the toiletries and cosmetics, specialty and household
chemical markets.
On September 3, 1998 the Company acquired all of the issued
and outstanding stock of Marpac Industries,Inc. which was founded in 1967 and
has annual sales of approximately $7,000,000. Marpac Industries, Inc. produces
custom blow molded products including plastic bottles, containers, cartridges,
double-wall cases, flexible spouts and various dispensers. Marpac
Industries,Inc. is known in the market for its technical capabilities which
allow it to manufacture uniquely configurated products within specific
tolerances. Its business is presently operated out of a facility located in
Kingston, New York.
Sales. The Company's plastic bottles are sold primarily to
manufacturers of toiletries and cosmetics, food, household chemicals, lawn and
garden and industrial chemical products, private label manufacturers of similar
products, and bottle distributors who sell to such manufacturers. PVC compounds
are sold to the Company and to other manufacturers of plastic bottles, and
specialty compounds are sold to a diverse range of manufacturers of other
products. A limited amount of the Company's total sales is made through
commissioned sales representatives. During the fiscal year ended June 30, 2001,
no one customer accounted for 10% or more of the Company's net sales.
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 to three hundred and twenty ounces. The Company produces
plastic bottles utilizing its own molds, in proprietary designs ("stock
bottles") which are of its own design and also produces on a contractual basis
plastic bottles in molds owned by the customer, utilizing their designs and
specifications ("custom bottles").
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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 respective plastic bottle manufacturing plants. Freight costs
prohibit shipping plastic bottles long distances due to their bulky nature,
except 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 less regional and 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 due to shutdowns of buyers' plants during those periods. Some of the
markets the Company sells to are seasonal, such as lawn, garden and agricultural
chemicals which Airopak is dependent upon. These markets are characterized by
high demand in the periods of December through June and low demand from July
through November of each year.
Manufacturing Operations. The Company uses extrusion blow
molding equipment to manufacture its PVC plastic bottles. The same equipment is
also used to manufacture fluorinated and non-fluorinated plastic bottles from
HDPE and can also be used with some modifications, to process bottles from other
blow molding polymers, including polypropylene, glycol-modified polyethylene
terephthalate ("PETG") and some new extrusion grade polyethylene terephathalate
resins ("EPET"). The Company also manufactures and sells plastic bottles made
from injection stretch blow molding grades of PET as well as PET preforms which
can be converted into various sizes of plastic bottles and which can be
economically shipped in their preform state prior to such conversion.
The Company operates plastic bottle manufacturing facilities
in Hazleton, Pennsylvania; Paris, Illinois; Manchester, Pennsylvania;
Walterboro, South Carolina; Philmont, New York; Kingston, New York for the
manufacturing of plastic bottles. During September, 1998 the Company relocated
its existing plastic bottle business from a facility in Eatontown, New Jersey
owned by the Company to a constructed facility in Hazleton, Pennsylvania. See
Properties. This facility provides the Company with space needed to support
manufacturing on a more economical and efficient basis. The Eatontown facility
was sold during December 1999. In April 1993, the Company commenced operations
in a facility, located in Paris, Illinois which was added to support growth of
the Company's midwest bottle business. On August 4, 1994, the Company acquired
from Air Products and Chemicals, Inc., through its wholly-owned subsidiary known
as Airopak Corporation, the assets of a specialty container business. The
business is conducted from leased facilities located in Manchester,
Pennsylvania, and relates to the manufacture and sale of AIROPAK(R) fluorinated
HDPE containers. The assets of the business consist of equipment, machinery and
inventory used in connection with the manufacturing of such containers. A
description of the Company's plastic bottle facilities is set forth below in
item 2 entitled "Properties".
The Company manufactures plastic compounds utilizing a two
stage process consisting of mixing a powder blend of various resins and other
ingredients in an intensive mixer, and subsequently melting the powder in a
compounding extrusion system for pelletizing the final plastic compound
products. Four compounding lines are located in a separate facility in
Eatontown, New Jersey, which began operations during October 1982. The Company
will continue to purchase small amounts of PVC bottle compounds produced by
others for use in the manufacturing of plastic bottles where customers specify a
competing material. The capacity of the Company's PVC compounding facility is
more than adequate to supply the Company's current requirements for PVC
compound. The Company uses its excess PVC compounding capacity to produce PVC
bottle compounds and specialty compounds for sale to other plastic processors of
PVC bottles and other Company targeted markets. A description of the Company's
compound facility is set forth below in Item 2 entitled "Properties".
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Raw Materials. Since the Company completed and opened its PVC
compounding facility in 1982, the Company has manufactured for its own use most
of the PVC compounds used by it in the manufacture of plastic bottles. The major
ingredients used to manufacture such PVC compounds are PVC resins (approximately
85%) and MBS (methacrylate-butadiene-styrene) impact modifiers (approximately
12%). The balance of such ingredients includes heat stabilizers, lubricants,
processing aids, and toners (pigments), which materials are readily available
from various suppliers. The other raw materials used to manufacture plastic
bottles are primarily HDPE and PET. The Company believes it is not dependent
upon any single supplier for these major raw materials. The Company relies on
multi-year supply contracts for the purchase of these raw materials, and
believes that it will be able to purchase sufficient quantities in the
foreseeable future.
A shortage of petroleum, should it develop, would have an
effect on the availability and the cost of the raw materials used by the Company
in connection with its business. The availability and price of resins has a
direct effect on the business of the Company. Although sufficient PVC resin,
HDPE and PET resins are currently available for the Company's operations, no
assurance can be given that adequate supply of plastic resins will be available
to the Company in the future. However, the cost of resin can vary and may have a
material impact on the business of the Company. The Company's success in fully
recovering the cost of resin price increases, by increasing the selling prices
of its' products has been limited depending upon the degree of competition in
the various market segments in which it competes and any inability to do so in
the future could have an adverse impact on the Company's financial results.
Prices for PVC resins as well as HDPE and PET resins are mostly dependant upon
the supply/demand of specific plastic resins as well as their monomer and their
feedstocks. See "Competition & Marketing" below.
Inventory. Depending upon the level of demand and scheduling
requirements for the Company's products, the Company maintains on average 4-6
weeks of plastic bottles finished goods inventory and approximately 2-3 weeks of
plastic compound finished goods inventory. From time to time, depending upon the
prices and availability of raw materials (principally PVC resins), the Company
will pre-buy or increase inventory of raw materials from a normal 2-3 week
supply to up to a 2 month supply, in order to offset anticipated price
increases. During peak sales periods, it is sometimes necessary to store
inventory of the Company's products and raw materials in outside warehousing.
Backlog. Generally the Company's backlog of unfilled order
ranges from approximately four to six weeks.
Competition and Marketing. The Company believes it is one of
approximately thirty manufacturers of plastic bottles in the United States, one
of at least five manufacturers of PVC bottle compounds and one of at least five
manufacturers of specialty compounds for use in the Company's targeted markets.
The dominant manufacturers of plastic bottles are Owens-Brockway, Inc. and
Silgan Corp. The dominant manufacturers of PVC bottle compounds and PVC
specialty compounds are PolyOne Corporation, and Georgia Gulf. The Company's
sales volume, production capacity, and consumption of PVC resin are small
compared to its competitors. The Company's major PVC compound competitors are
large, integrated petrochemical companies with greater financial resources than
the Company, and many of which also manufacture PVC resin.
The Company principally competes in the plastic bottle market
on the basis of quality, customer service, price and product design. The Company
believes it produces a relatively high quality product in a timely manner in
accordance with customer specifications and requirements, with a high level of
customer service, and believes that this constitutes one of the primary areas in
which the Company can compete with others in the same industry.
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The Company sometimes purchases its supply of PVC resin from
its PVC compound competitors. This has, at times, caused the Company to have
difficulty obtaining adequate supplies of PVC resin and has permitted its
competitors to increase PVC resin costs charged to the Company, which has
resulted in reduced profit margins on PVC bottle compound; whereas profit
margins on PVC specialty compounds remain stronger because the Company faces
less price competition.
The market for PVC bottles and PVC bottle compounds has
declined somewhat during the past several years due to industry concern over the
ability to cope with solid waste issues. See item entitled "Environmental
Issues." Industry demand for PVC bottles and compounds is, however, currently
stable. The demand for PVC specialty compounds for use in the Company's targeted
markets is experiencing modest growth which is higher than that of PVC bottle
compounds. Competition in the area of PVC bottle compounds will remain intense
during the foreseeable future because of excess PVC bottle compound
manufacturing capacity and because PVC bottle compound buyers are increasingly
concerned about price and less concerned about quality and service. In this
respect, PVC bottle compound resembles a commodity business. This trend may
inhibit the Company from further expanding its share of the PVC bottle compound
market.
In response to these pressures in the PVC bottle compound
market, the Company is continuing in its effort to develop specialty compounds
for a diverse range of Company targeted markets. The Company believes that these
specialty compound markets will be less sensitive to wide swings in the cost of
PVC resin and may be more influenced by the performance, quality, and service
which is characteristic of a specialty type business. In particular, the Company
is marketing injection molding PVC compound for use in the communications,
electronics and appliance markets and extrusion compounds for use in indoor
molding and other specialty "profile" markets.
The Company believes its technical, marketing and
manufacturing capability in the plastic bottle market is equal to that of its
major competitors in small to midsize volume applications in its region,
particularly in the toiletry, cosmetic and household chemical product segments,
and believes its technical and marketing ability is equal to that of its major
competitors in the PVC compound markets in its region. Its manufacturing
capability for the PVC compound markets is limited by its lack of a facility to
produce PVC resin.
A shortage of labor and higher cost of living in New Jersey
and the resulting increased employee turnover and difficulty in retaining labor
on swing shifts, weekends and holidays influenced the Company's decision as
described above to relocate its New Jersey manufacturing facility from
Eatontown, New Jersey to Hazleton, Pennsylvania which has a large labor pool.
However, during the last twelve months, the Company has had difficulty in
retaining skilled and unskilled labor at all its locations.
As a result of the acquisition of the Philmont, New York
facility see "General", "Manufacturing Operations" and "Properties", the Company
has increased its container decorating capabilities to include automatic silk
screening multiple color applications, pressure sensitive paper and plastic film
labels and therimage heat transfer labeling. While the Company believes that
eventually it will be required to establish this capability in some of its other
manufacturing facilities, it does currently interfere with the Company's ability
to compete.
PVC competes with PET and PETG as a material for use in the
manufacture of transparent plastic bottles. Manufacturers of bottles made of PET
have captured a portion of the edible oil, household chemical and medicinal
segments of the plastic bottle market from PVC bottle manufacturers. Because the
price of PET bottles becomes competitive on high volume orders of custom bottles
(i.e., orders of more than approximately 5 million to 10 millions units), there
is a substantial risk
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that customers who have large custom bottle requirements may increasingly
consider using PET bottles instead of PVC bottles. Because most of the Company's
custom bottle business consists of low or mid-range volume orders, the Company's
custom bottle business has been less vulnerable to PET. However, recently
several stock PET containers of similar shape and size to some of the Company's
PVC stock bottles are becoming more prevalent in the Company's markets. Although
injection PET tooling is considerably more expensive than PVC extrusion tooling,
some components of PET molds and tooling can be shared over several custom or
stock designs thereby reducing the higher tooling/mold intensity associated with
the injection based PET stock and custom bottle business. The Company has the
ability to manufacture PETG bottles by modifying its equipment, and the Company
now manufactures and sells PETG bottles. The Company has commenced the
manufacture and sale of PET plastic bottles and preforms at its facility in
Paris, Illinois, and Hazleton, Pennsylvania as a defensive marketing strategy.
This capacity allows the Company to compete for PET bottle applications in the
plastic bottle market. See "Environmental Regulation" below.
Research and Development. The Company spent approximately
$272,000 and $238,000 for the fiscal years ended June 30, 2001 and June 30, 2000
respectively on research activities relating to the development of new designs
of containers and the production of compounds. The major thrust of the Company's
research and development efforts is currently in the area of new PVC compound
development.
Environmental Regulation. The Company does not believe that
compliance with federal, state and local laws and regulations which have been
enacted or adopted regulating the discharge of material into the environment, or
otherwise relating to the protection of the environment, has had or will have
any material effect upon the capital expenditures, earnings or competitive
position of the Company. However, the future of PVC as a material for packaging
foods has been dampened by the Food and Drug Administration's ("FDA's")
unwillingness to implement standards with regard to levels of residual vinyl
chloride monomer ("VCM") acceptable for food packaging. Although the FDA's
proposed levels of VCM are expected to be easily attainable by the Company's
industry, the FDA has been precluded from issuing the standards by the
Environmental Protection Agency ("EPA"). The EPA is insisting that a new
environmental impact statement be developed prior to promulgating new standards.
The EPA's concern is that the adoption of the FDA's new regulations will
stimulate additional demand for PVC bottles and, hence, add to the PVC in the
waste stream. The Society of Plastics Industry ("SPI"), and Vinyl Institute
("VI") which represent the PVC industry on this issue, estimates that it will
take several years to complete an acceptable environmental impact statement.
In addition, as it is now a supplier of a primary raw
material, the Company may have to comply with existing regulations promulgated
by the EPA with respect to the emission of VCM into the environment and
regulations promulgated by the Occupational Safety and Health Administration
regarding material safety.
Solid waste disposal and mandatory recycling have become a
major environmental issue with respect to plastic packaging in general. Concerns
over the incineration of PVC compounds, which allegedly result in hydrochloric
acid and dioxin emissions, have also recently been voiced. Further, the state
and national concern over disposal of solid waste has resulted in several states
proposing bans of certain plastics including PVC packaging materials. Thus far,
however, no bans have been implemented that would affect PVC as a packaging
material. The SPI and VI have effectively lobbied state legislatures which have
enacted legislation supporting the recycling of plastics. The Company is
currently implementing a program that is mandatory in certain states of placing
a recycling code on the bottom of most bottles 8 ounces in capacity or larger.
The Company believes, however, that the threat of further regulatory actions
inhibiting the future growth of PVC as a viable packaging material will be
minimal,
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although no assurances can be given that further regulatory actions, or the
threat of further regulatory action would not have a negative impact on the
Company's business.
Employees. As of June 30, 2001 the Company employed 41 people
at its executive office located at 2 Industrial Way West, Eatontown, New Jersey.
The Company occupies approximately 9,300 square feet of executive offices under
a lease for a term of ten years commencing on January 1, 1999 at an initial
monthly rental of $13,950 until December 31, 2000 when the monthly rental
increases to $15,500 until December 31, 2004 when the monthly rental increases
to $16,275 until December 31, 2006 when the monthly rental increases to $17,050
until the end of the term. As indicated above under "Manufacturing Operations",
the Company relocated its 401 Industrial Way West Eatontown, New Jersey
manufacturing facility to a new facility located in Hazleton, Pennsylvania and
its executive offices to the new location described above. On December 22, 1999
the Company sold its facilities located at 401 Industrial Way West. As of June
30, 2001 the Company employed a total of 49 people at the Novatec facility in
Eatontown, New Jersey; 89 people in the manufacturing facility in Hazleton,
Pennsylvania; 103 people at its Paris, Illinois facility; 30 people at its
Walterboro, S.C. facility; 78 people at Airopak Corporation in its Manchester,
Pennsylvania facility; 129 people at its Philmont, New York facility and a total
of 59 people at Kingston, New York facility. The Company renewed the collective
bargaining agreement with Local 108 of the Retail, Wholesale and Department
Store Union, AFL-CIO, effective September 1, 2001 until August 31, 2003 relating
only to employees of Novatec. The Company considers its relations with its work
force and the union to be good.
Financial Information about Foreign and
Domestic Operations and Export Sales
The Company had export sales of $4,177,000 during the fiscal
year ended June 30, 2001. Net sales to the northeast of the United States
amounted to $35,437,000 during such fiscal year; net sales to the Midwest
amounted to $30,138,000; net sales to the southeast amounted to $13,960,000; and
net sales to other domestic regions amounted to $4,283,000 during such fiscal
year.
Item 2. Properties.
The Company's manufacturing activities with respect to its
continuing businesses are conducted at the nine facilities described in the
following table:
Location Purpose of Facility Building Area
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(square feet)
Hazleton, Pennsylvania Plastic Bottle Plant and 160,000(1)
warehousing and Office
Eatontown, New Jersey Plastic Compounding Plant, 50,162(2)
warehouse and Executive offices
Manchester, Pennsylvania Airopak Corporation Plant and 145,221(3)
warehousing
Paris, Illinois Plastic Bottle Plant and 125,000(4)
warehousing and office
Walterboro, S.C. Plastic Bottle Plant warehousing 61,430(5)
and office
Philmont, New York Plastic Bottle Plant, warehouse and 100,000(6)
office
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Kingston, New York Plastic Bottle Plant, warehouse 34,000(7)
and office
Ardmore, Oklahoma Plastic Bottle Plant, warehouse 10,000(8)
and office
1. As indicated above, under "Manufacturing Operations" and
"Employees", the Company relocated during September 1998 its Eatontown, New
Jersey manufacturing facilities to a new facility located in Hazleton,
Pennsylvania on 10 acres of real property owned by the Company. The Hazleton
facility is a solid concrete tilt-up facility, sprinklered throughout and
consisting of 160,000 square feet of manufacturing and warehouse space. There
are also 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, R&D, warehouse, and
administrative offices and is constructed from steel and concrete panels.
3. As described in the section entitled "Manufacturing
Operations" the Company acquired a business located in Manchester, Pennsylvania.
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 rental payable with respect to the manufacturing and warehouse
space for the Airopak Corporation detailed above and in this Item 3 is $413,928
plus real estate taxes, utilities and certain other charges payable under a
lease which expires or April 30, 2013 with two additional five year terms. It is
believed that these facilities are large enough to allow for future growth of
the business conducted at these facilities.
4. The Company commenced operations during April, 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. This
expansion was financed by the Company through the issuance of Industrial
Development Revenue Bonds by the City of Paris, Illinois, in the amount of
$3,500,000.
5. In October 1996, the Company completed construction and
began operations in a new plastic bottle manufacturing plant located in
Walterboro, South Carolina. This facility consists of 61,430 square feet of
warehouse and manufacturing space, located on 8.83 acres of real property which
is 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. As indicated above under "Manufacturing Operations" the
Company acquired on March 30, 1998 the plastic bottle manufacturing facilities
of McKechnie Investments Ltd. The facility consists of 100,000 square feet of
warehouse and manufacturing space located on 37 acres of real property owned by
the Company.
7. and 8. As indicated above under "Manufacturing Operations"
the Company acquired on September 3, 1998 the plastic bottle manufacturing
business of Marpac Industries located in Kingston, New York and Ardmore,
Oklahoma. The Kingston facility consists of 34,000 square feet of manufacturing,
warehouse and office space. The Company discontinued during the fiscal year
ended June 30, 2000 its operations at the Ardmore, Oklahoma facility which
consists of 10,000 square feet of
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manufacturing, warehouse and office space. The facility is currently being
offered for sale. The Kingston facility is located on approximately 6 acres of
real property with 2.4 adjacent acres for expansion and all of which are owned
by the Company.
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. Submission of Matters to a Vote of Securityholders.
None
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PART II
Item 5. Market for Registrant's Common Stock and Related Securityholder Matters.
The Company's common stock trades on the Nasdaq National Stock Market
under the symbol PVCC. The last trade of the common stock on August 27, 2001 was
at a price of $3.01 per share. The following is a summary of the high and low
trade information on the Nasdaq National Stock Market during the fiscal years of
the Company ended June 30, 2001 and June 30, 2000:
Year Ended June 30, 2001 Low High
1st Quarter $3.88 $4.94
2nd Quarter 3.56 5.00
3rd Quarter 2.66 4.00
4th Quarter 2.00 3.80
Year Ended June 30, 2000 Low High
1st Quarter $6.25 $7.38
2nd Quarter 5.50 6.88
3rd Quarter 4.19 5.75
4th Quarter 3.75 5.00
As at August 27, 2001, the number of holders of record of the issued and
outstanding common stock of the Company was approximately 563.
The Company on December 20, 1991 paid to shareholders its first dividend
of $.05 per share of common stock, and a second, third and fourth dividend in
the same amount was paid on December 18, 1992, December 8, 1993 and January 18,
1995. The Company declared on January 29, 1996 a stock dividend in the amount of
3% per share and a total of 202,817 shares were paid on February 26, 1996 to
shareholders in connection with this dividend. The Company declared on August
29, 1996 a cash dividend of $.06 per share payable on September 20, 1996 to
shareholders of record as of the close of business on September 13, 1996. No
dividends have been declared or paid during subsequent fiscal years.
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Item 6. Selected Financial 2001 Data.
Years Ended June 30
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2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
SELECTED INCOME STATEMENT DATA:
Net Sales $ 87,995,433 $ 92,619,720 $ 85,155,047 $ 69,728,498 $ 58,392,310
Income from operations $ 1,113,966 $ 1,050,599 $ 4,770,689 $ 4,489,406 $ 4,206,218
Net Income (Loss) $ (1,141,174) $ (1,196,678) $ 1,702,983 $ 1,856,891 $ 2,249,328
Earnings per share:* 7,044,655 7,042,254 7,158,741 7,064,671 6,989,034
Weighted average shares
for diluted shares
Income from operations $ .16 $ .15 $ .69 $ .58 $ .60
Net (loss) Income per share $ (.16) $ (.17) $ .24 $ .26 $ .32
Cash dividends per share $ 0 $ 0 $ 0 $ 0 $ .06
Stock dividends per share $ 0 $ 0 $ 0 $ 0 $ 0
SELECTED BALANCE SHEET DATA
Current assets $ 29,266,731 $ 30,547,896 $ 33,771,892 $ 24,615,463 $ 20,384,764
Current liabilities $ 14,845,192 $ 16,186,694 $ 20,358,118 $ 16,654,395 $ 11,876,707
Working capital $ 14,421,539 $ 14,361,202 $ 13,413,774 $ 7,961,068 $ 8,508,057
Total assets $ 68,228,428 $ 70,855,593 $ 83,124,568 $ 69,986,118 $ 46,039,366
Noncurrent liabilities $ 35,540,119 $ 35,500,046 $ 42,425,462 $ 34,835,808 $ 17,525,635
Stockholders' equity $ 17,853,117 $ 19,168,853 $ 20,340,988 $ 18,495,915 $ 16,637,024
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* Earnings per share calculations are based on the weighted average number of
shares of common stock and common stock equivalents outstanding. Retroactively
restated for the 3% stock dividend paid on February 26, 1996 to shareholders of
records on February 9, 1996.
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
FISCAL 2001 AS COMPARED TO FISCAL 2000
The Company's net sales for the fiscal year ended June 30, 2001 reached
a level of $87,995,000, a decrease of approximately 5% from the 2000 level of
$92,620,000. This decrease in revenue as compared to the prior year is mainly
attributed to weaker demand in both of the Company's plastic container and
compound segments.
Cost of goods sold decreased to 78.6% in 2001 from 79.8% in fiscal 2000.
Margins in both the bottle and compound segments were favorably affected by
increased emphasis on cost containment and reductions in manufacturing overhead
and a decrease in raw material costs. Novatec Plastic's margins were
significantly affected by the steady reduction in plastic resin prices by
approximately 21.8% during the current fiscal year. Selling, general and
administrative expenses (SG&A) were $10,934,000 or 12.4% of net sales for the
fiscal year ended June 30, 2001 as compared to $10,459,000 or 11.3% of net sales
for the fiscal year ended June 30, 2000. SG&A expenses have increased primarily
due to the increase in bad debt reserve based upon the current economic climate.
Additionally, the Company has instituted various cost reduction programs to
anticipate any further degradation of revenue. Depreciation and amortization
expense of fiscal 2001 remained substantially the same as fiscal 2000.
Earnings before interest, taxes, depreciation and amortization
("EBITDA") increased from approximately $7,751,000 in fiscal 2000 to
approximately $8,001,000 in fiscal 2001. Of the $250,000 increase in EBITDA,
approximately $485,000 was due to the performance of the Novatec Plastics
Division with a decrease of approximately $235,000 as the result of the
performance in the Company's plastic container segment. Fiscal 2000 reflected a
non-recurring asset impairment $400,000 charge relating to the closing of the
Oklahoma manufacturing facility.
Income from operations for the fiscal year ended June 30, 2001 increased
to $1,114,000 or 1.3% of net sales compared to $1,051,000 or 1.1% of net sales
in fiscal 2000.
Net interest expense increased $199,731 during the fiscal year ended
June 30, 2001 as compared to fiscal 2000. The net increase was primarily due to
additional capital equipment financing.
Net income (loss) for the year ended June 30, 2001 decreased to
$(1,141,000) or $(.16) per share as compared to $(1,197,000) or $(.17) per share
for fiscal 2000.
FISCAL 2000 AS COMPARED TO FISCAL 1999
The Company's net sales for the fiscal year ended June 30, 2000 reached
a level of $92,620,000, an increase of approximately 8.8% over the 1999 level of
$85,155,000. The Company's Novatec Plastics and Novapak divisions experienced
increased demand; its specialty container division, which reflects twelve months
of operations from its acquisition of Marpac Industries verus four months in
1999, also registered growth.
Cost of goods sold increased to 79.8% in 2000 from 75.0% in fiscal 1999.
Margins in the bottle operations were adversely affected by the underabsorption
of manufacturing overhead expenses and raw material costs. Novatec Plastics
margins were significantly affected by rapidly rising plastic resin prices.
Resin prices increased in excess of 50% in the fiscal year. Selling, general and
administrative expenses ("SG&A") were $10,459,000 or 11.3% of net sales for the
-11-
14
fiscal year ended June 30, 2000 as compared to $9,187,000 or 10.8% of net sales
for the fiscal year ended June 30, 1999. SG&A expenses have increased to support
the Company's continued expansion. Additionally, the Company has incurred
additional rental costs resulting from its relocation of the executive and
administrative functions resulting from the sale of its manufacturing and office
facility in Eatontown, New Jersey. Depreciation and amortization expense for
fiscal 2000 decreased $342,000 as compared to fiscal 1999, primarily the effect
of certain manufacturing assets becoming fully depreciated in the current fiscal
year.
Earnings before interest, taxes, depreciation and amortization
("EBITDA") decreased from approximately $12,369,000 in fiscal 1999 to
approximately $7,751,000 in fiscal 2000. Of the $4,618,000 decrease in EBITDA,
approximately $2,237,000 was due to the performance of the Novatec Plastics
division, with the remaining $2,381,000 as the result of the performance in the
Company's plastic containers segment which included a non-recurring $400,000
asset impairment restructuring charge relating to the closing of the Ardmore,
Oklahoma manufacturing facility and the time lag in passing on resin price
increases to bottle customers was also a factor.
Income from operations for the fiscal year ended June 30, 2000 decreased
to $1,051,000 or 1.1% of net sales after a $400,000 pretax charge to income for
the impairment of the long-lived assets of its Ardmore, Oklahoma manufacturing
facility, which ceased operations in 2000 pending the sale of the facility.
Net interest expense increased $376,000 during the fiscal year ended
June 30, 2000 as compared to fiscal 1999. The net increase was primarily due to
higher interest rates and additional borrowings for working capital needs.
Net income (loss) for the year ended June 30, 2000 decreased to
$(1,197,000) or $(.17) per share as compared to $1,703,000 or $.24 per share for
fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity position at June 30, 2001 increased from the
prior year. Working capital increased approximately $61,000 to $14,422,000 at
June 30, 2001 from $14,361,000 at June 30, 2000. The current ratio increased to
2.0 at June 30, 2001 from 1.9 at June 30, 2000.
Cash flows from operations during fiscal 2001 totaled $4,002,000
representing an increase of $1,073,000 from the prior year. The increase in net
operating working capital is primarily related to improved accounts receivable
collections and a reduction in cash used for income taxes.
The Company received $27,577,806 in proceeds from long term debt and
$79,700 from the sale of various capital assets. These funds, combined with the
cash flow from operations, were used to acquire $4,251,517 in capital assets,
reduce long term debt by $27,463,000 and pay deferred financing costs of
$532,000 associated with our debt refinancing.
Assets held for sale at June 30,2001 totaled approximately $685,000.
Management expects to sell the facility and receive proceeds which approximate
the net book value in fiscal 2002.
On September 1, 2000, the Company entered into a new $43,375,000 senior
secured credit facility with PNC Business Credit. The credit facilities are
structured as a five year $25,000,000 senior revolving credit facility, a five
year $12,183,000 senior term loan, a five year $4,192,000 standby letter of
credit and a $2,000,000 capital expenditure line.
-12-
15
The Company's short term liquidity and short term capital resources are
projected to be adequate to allow the Company to continue to make timely
payments to trade and other creditors. The Company believes that the financial
resources available to it, including internally generated funds and amounts
available under its revolving credit facility would be sufficient to meet its
foreseeable working capital requirements. As of June 30, 2001, the Company had
unused sources of liquidity consisting of cash and cash equivalents of $502,000
and available unused credit under a revolving credit facility of $4,684,000.
Item 8. Financial Statements and Supplementary Data.
See annexed financial statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
-None-
-13-
16
PART III
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
qualifies.
Held
Office
Name Age Since Offices with the Company
Phillip L. Friedman 54 1982 President, Chief Executive, and Director
Joel Francis Roberts 59 1989 Senior Vice President Operations
Jeffrey Shapiro 52 2000 Chief Financial Officer
John F. Turben 66 1996 Director
Michael Sherwin 60 1996 Director
George R. Begley 58 1996 Director
Jeffery C. Garvey 52 2000 Director
John G. Nestor 56 2001 Director
PHILLIP L. FRIEDMAN was employed by Occidental Chemical Corporation
(formerly Hooker Chemical Corporation), a leading manufacturer and supplier of
PVC resins and compounds from 1969 until December 1981, when he joined the
Company. During his last 5 years with Occidental, Mr. Friedman was 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 reducing to commercial practice various
research and development projects within the plastics industry. He is a member
of the Executive Committee of the Company.
JOEL FRANCIS ROBERTS, from 1984 to July 1986, was a plant manager for
Technical Plastics Extruders, an extruder of sheet material. During July 1986 he
joined the Company as a plant manager and became a Director of Operations during
1989. He became a Senior Vice President for Operations during November 1989.
JEFFREY SHAPIRO, was employed as the Chief Operating Officer of
Universal Process Equipment, a world wide manufacturer of process equipment,
before joining PVCC in March 2000 as Chief Financial Officer. Mr. Shapiro has
nearly twenty years of experience in the printing and packaging industry and has
held various executive positions from Controller to Vice President 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 joined the Company as Chief Financial Officer during its fiscal year
ended June 30, 2000.
GEORGE R. BEGLEY, Mr. Begley is an independent investment advisor, a
director of North Coast Energy and a member of the audit committee of the
Company.
JOHN G. NESTOR has been a Managing Partner of Kirtland Capital Partners
since March 1986. He is also Chairman of the Board of Unifrax Corporation,
TruSeal Technologies, Inc., Profile Metal Forming, Inc., and a director of
Fairmount Minerals, Ltd.
-14-
17
MICHAEL SHERWIN is the Vice Chairman of Mid-West Forge Corporation and
Chairman and Chief Executive Officer of Columbiana Boiler Company. 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. He is chairman of the Audit Committee
of the Company.
JOHN F. TURBEN is Chairman of Kirtland Capital Partners and is a KCP I
and KCP II Advisory Board member and serves as Chairman of The Hickory Group,
PVC Container Corporation and Harrington and Richardson 1871, Inc. He is also
Chairman of the Executive Committee of Fairmount Minerals, Ltd. and Execution
Services Inc. He is a director of NACCO Industries, Unifrax Corporation and
TruSeal Technologies Inc. He is Chairman of the Board of the Company and a
member of its Executive Committee.
JEFFERY C. GARVEY is the co-founder of Austin Ventures for the past 21
years and is Chairman of the Board of the Lance Armstrong Foundation. He is a
member of Kirtland Capital Partners Advisory Board.
Item 11. Executive Compensation.
Incorporated by reference from the Company's definitive information
statement to be filed with the Commission not later than 120 days following the
end of the Company's fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference from the Company's definitive or information
statement to be filed with the Commission not later than 120 days following the
end of the Company's fiscal year.
Item 13. Certain Relationships and Related Transactions.
None.
-15-
18
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements.
Report of Independent Auditors
Consolidated Balance Sheets at June 30, 2001 and 2000
Consolidated Statements of Income for the three years ended
June 30, 2001
Consolidated Statements of Stockholders' Equity
for the three years ended June 30, 2001
Consolidated Statements of Cash Flows for the three years
ended June 30, 2001
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, 2001
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits.
3.1 Certificate of Incorporation of the Company filed
with the Secretary of State of the State of Delaware
(filed as Exhibit 3.1 to the Company's Form 10-K for
the fiscal year ended June 30, 1988 (the "1988
10-K"), and incorporated herein by reference).
3.2 The Company's By-Laws (filed as Exhibit 3.2 to the
1988 10-K, and incorporated herein by reference).
10.1 Deferred Compensation Plan established June 4, 1986
and effective July 1, 1986 (filed as Exhibit 10.1 to
the Company's Form 10-K for the fiscal year ended
June 30, 1987 (the "1987 10-K"), and incorporated
herein by reference).
10.2 Profit Sharing Savings Plan (Flexinvest 401(k) Plan)
effective July 1, 1984 (filed as Exhibit 10.2 to the
1987 10-K, and incorporated herein by reference).
-16-
19
10.3 1981 Incentive Stock Option Plan filed as an Exhibit
to the Company's Form 10-K for fiscal 1982 and
incorporated herein by reference (filed as Exhibit
10.3 to the 1987 10-K, and incorporated herein by
reference).
10.4 Employment Agreement between the Company and Phillip
L. Friedman dated July 1, 1982 as amended on June 4,
1986 (filed as Exhibit 10.4 to the 1987 10-K, and
incorporated herein by reference).
10.5 Lease for the Company's container manufacturing plant
dated October 5, 1973 and amended July 2, 1974
between John Donato, Jr. and the Company (filed as
Exhibit 10.5 to the 1987 10-K, and incorporated
herein by reference).
10.7 Loan and Security Agreement among the Company, First
Jersey National Bank and Novatec dated June 1, 1984
and modified March 31, 1986 (filed as Exhibit 10.7 to
the 1987 10-K, and incorporated herein by reference).
10.8 Credit Agreement among the Company, New Jersey
Economic Development Authority, United Jersey Bank
and The First Jersey National Bank dated as of
November 1, 1981 (filed as Exhibit 10.8 to the 1987
10-K, and incorporated herein by reference).
10.9 Bond Financing Agreement among the Company, New
Jersey Economic Development Authority, United Jersey
Bank and The First Jersey National Bank dated
November 27, 1984 (filed as Exhibit 10.9 to the 1987
10-K, and incorporated herein by reference).
10.10 Collective Bargaining Agreement dated September 1,
1988 between the Company and Local 108, Retail,
Wholesale and Department Store Union, AFL-CIO (filed
as Exhibit 10.10 to the 1988 10-K, and incorporated
herein by reference).
10.11 Third Amendment to Employment Agreement between
Phillip L. Friedman and the Company dated November
29, 1989 (filed as Exhibit 10.11 to 1990 10-K and
incorporated herein by reference).
10.12 Asset Purchase Agreement between Airopak Corporation
and Air Products and Chemicals, Inc. dated 8/4/94
(filed as Exhibit 10 to the report on Form 8-K filed
on August 8, 1994 and incorporated herein by
reference).
10.13 Employment Agreement between the Company and Phillip
L. Friedman dated July 1, 1996 (filed as Exhibit 10.2
to the December 12, 1996 8-K, and incorporated herein
by reference).
10.14 Stock Purchase Agreement among the Company, Kirtland
Capital Partners, and Rimer Anstalt, dated December
3, 1996 (filed as Exhibit 10.1 to the December 12,
1996 8-K and incorporated herein by reference).
-17-
20
10.15 1996 Incentive Stock Option Plan (filed as Exhibit
10.3 to the December 12, 1996 8-K, and incorporated
herein by reference).
10.16 Asset Purchase Agreement dated March 30, 1998 among
the Company, Charter Supply Co.,Inc. and McKechnie
Investments, Inc. (filed as an Exhibit to the April
14, 1998 Report on Form 8-K and incorporated herein
by; reference).
10.17 Loan and Security Agreement among the Company and its
subsidiaries and Fleet Bank, N.A. dated March 30,
1998 relating to the financing of the purchase
described in 10.16 above (filed as an Exhibit to the
April 14, 1998 Report on Form 8-K and incorporated
herein by reference).
10.18 Stock Purchase Agreement dated September 3, 1998
among the Company and the sellers of all the
securities of Marpac Industries, Inc. (filed as an
Exhibit to the September 18, 1998 Report on Form 8-K
and incorporated herein by reference).
10.19 Revolving Credit, Term Loan and Security Agreement
among PNC Bank, NA (As Lender and As Agent) and PVC
Container Corporation and it's Subsidiaries dated
August 31, 2000.
16 Letter dated March 1, 1989 from Gassman, Rebhun &
Co., P.C. regarding resignation as certifying
accountant for the Company (filed as Exhibit 16 to
the February 28, 1989 8-K, and incorporated herein by
reference).
18 Preference Letter re: Change in Accounting Principles
re: LIFO to FIFO.
22 Subsidiaries of the Company (filed as Exhibit 22 to
the 1987 10-K, and incorporated herein by reference).
23 Consent of Ernst & Young LLP
99.1 Second Amendment to the PVC Container Corporation
1981 Incentive Stock Option Plan, dated July 6, 1989,
with the unanimous written consent of Directors of
the Company (filed as Exhibit 28.1 to 1990 10-K and
incorporated herein by reference.
99.2 Letter dated September 22, 1989 from Phillip L.
Friedman to Bidyuk AG regarding the termination of
their Option Agreement dated December 14, 1987 (filed
as Exhibit 28.2 to 1990 10-K and incorporated herein
by reference).
-18-
21
Exhibits filed herewith:
None.
(b) Reports on Form 8-K filed during last quarter of the year ended June
30, 2001:
None.
(c) Exhibits
None.
(d) Financial statement schedules
The financial statement schedules required by Regulation S-X are
submitted as a separate section of this filing.
-19-
22
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
President and Chief Executive Officer
Date: September 28, 2001
23
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.
Signature Title Date
--------- ----- ----
/s/ Phillip L. Friedman Chief Executive Officer and September 28, 2001
------------------------ Director
Phillip L. Friedman
/s/ Jeffrey Shapiro Chief Financial and Accounting September 28, 2001
------------------------ Officer
Jeffrey Shapiro
/s/ John F. Turben Director September 28, 2001
------------------------
John F. Turben
/s/ Jeffery C. Garvey Director September 28, 2001
------------------------
Jeffery C. Garvey
/s/ George R. Begley Director September 28, 2001
------------------------
George R. Begley
/s/ John G. Nestor Director September 28, 2001
------------------------
John G. Nestor
/s/ Michael Sherwin Director September 28, 2001
------------------------
Michael Sherwin
24
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit Page
--------- --------------------------------------------------------------- ----
3.1 Certificate of Incorporation of the Company filed with the
Secretary of State of the State of Delaware (filed as Exhibit
3.1 to the Company's Form 10-K for the fiscal year ended June
30, 1988 (the "1988 10-K"), and incorporated herein by
reference).
3.2 The Company's By-Laws (filed as Exhibit 3.2 to the 1988 10-K,
and incorporated herein by reference).
10.1 Deferred Compensation Plan established June 4, 1986 and
effective July 1, 1986 (filed as Exhibit 10.1 to the Company's
Form 10-K for the fiscal year ended June 30, 1987 (the "1987
10-K"), and incorporated herein by reference).
10.2 Profit Sharing Savings Plan Flexinvest 401(k) Plan) effective
July 1, 1984 (filed as Exhibit 10.2 to the 1987 10-K, and
incorporated herein by reference).
10.3 1981 Incentive Stock Option Plan filed as an Exhibit to the
Company's Form 10-K for fiscal 1982 and incorporated herein by
reference (filed as Exhibit 10.3 to the 1987 10-K, and
incorporated herein by reference).
10.4 Employment Agreement between the Company and Phillip L.
Friedman dated July 1, 1982 as amended on June 4, 1986 (filed
as Exhibit 10.4 to the 1987 10-K, and incorporated herein by
reference).
10.5 Lease for the Company's container manufacturing plant dated
October 5, 1973 and amended July 2, 1974 between John Donato,
Jr. and the Company (filed as Exhibit 10.5 to the 1987 10-K,
and incorporated herein by reference).
10.7 Loan and Security Agreement among the Company, First Jersey
National Bank and Novatec dated June 1, 1984 and modified
March 31, 1986 (filed as Exhibit 10.7 to the 1987 10-K, and
incorporated herein by reference).
10.8 Credit Agreement among the Company, New Jersey Economic
Development Authority, United Jersey Bank and The First Jersey
National Bank dated as of November 1, 1981 (filed as Exhibit
10.8 to the 1987 10-K, and incorporated herein by reference).
10.9 Bond Financing Agreement among the Company, New Jersey
Economic Development Authority, United Jersey Bank and The
First Jersey National Bank dated November 27, 1984 (filed as
Exhibit 10.9 to the 1987 10-K, and incorporated herein by
reference).
10.10 Collective Bargaining Agreement dated September 1, 1988
between the Company and Local 108, Retail, Wholesale and
Department Store Union, AFL-CIO (filed as Exhibit 10.10 to the
1988 10-K, and incorporated herein by reference).
25
10.11 Third Amendment to Employment Agreement between Phillip L.
Friedman and the Company dated November 29, 1989 and
incorporated herein by reference.
10.12 Asset Purchase Agreement between Airopak Corporation and Air
Products and Chemicals, Inc. dated August 4, 1994 (filed as
Exhibit 10 to the report on Form 8-K filed on August 8, 1994
and incorporated herein by reference).
10.13 Employment Agreement between the Company and Phillip L.
Friedman dated July 1, 1996 (filed as Exhibit 10.2 to the
December 12, 1996 8-K, and incorporated herein by reference)
10.14 Stock Purchase Agreement among the Company, Kirtland Capital
Partners, and Rimer Anstalt, dated December 3, 1996 (filed as
Exhibit 10.1 to the December 12, 1996 8-K and incorporated
herein by reference).
10.15 1996 Incentive Stock Option Plan (filed as Exhibit 10.3 to the
December 12, 1996 8-K, and incorporated herein by reference).
10.16 Asset Purchase Agreement dated March 30, 1998 among the
Company, Charter Supply Co.,Inc. and McKechnie Investments,
Inc. (filed as an Exhibit to the April 14, 1998 Report on Form
8-K and incorporated herein by; reference).
10.17 Loan and Security Agreement among the Company and its
subsidiaries and Fleet Bank, N.A. dated March 30, 1998
relating to the financing of the purchase described in 10.16
above (filed as an Exhibit to the April 14, 1998 Report on
Form 8-K and incorporated herein by reference).
10.18 Stock Purchase Agreement dated September 3, 1998 among the
Company and the sellers of all the securities of Marpac
Industries, Inc. (filed as an Exhibit to the September 18,
1998 Report on Form 8-K and incorporated herein by reference).
10.19 Revolving Credit, Term Loan and Security Agreement among PNC
Bank, NA (As Lender and As Agent) and PVC Container
Corporation and it's Subsidiaries dated August 31, 2000.
16 Letter dated March 1, 1989 from Gassman, Rebhun & Co., P.C.
regarding resignation as certifying accountant for the Company
(filed as Exhibit 16 to the February 28, 1989 8-K, and
incorporated herein by reference).
18 Preference Letter re: Change in Accounting Principles re: LIFO
to FIFO.
22 Subsidiaries of the Company (filed as Exhibit 22 to the 1987
10-K, and incorporated herein by reference).
23 Consent of Ernst & Young LLP.
99.1 Second Amendment to the PVC Container Corporation 1981
Incentive Stock Option Plan, dated July 6, 1989, with the
unanimous written consent of Directors of the Company and
incorporated herein by reference.
26
99.2 Letter dated September 22, 1989 from Phillip L. Friedman to
Bidyuk AG regarding the termination of their Option Agreement
dated December 14, 1987 and incorporated herein by reference.
27
PVC CONTAINER CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-K
JUNE 30, 2001
28
CONSOLIDATED FINANCIAL STATEMENTS
PVC Container Corporation
June 30, 2001, 2000 and 1999
29
PVC Container Corporation
Consolidated Financial Statements
June 30, 2001, 2000 and 1999
CONTENTS
Report of Independent Auditors............................................. 1
Consolidated Balance Sheets................................................ 2
Consolidated Statements of Operations...................................... 3
Consolidated Statements of Stockholders' Equity............................ 4
Consolidated Statements of Cash Flows...................................... 5
Notes to Consolidated Financial Statements................................. 6
30
Report of Independent Auditors
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, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 2001. Our audit also included the
financial statement schedule listed in the index at Item 14(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 auditing standards generally accepted
in the 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 as of June 30, 2001 and 2000 and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended June 30, 2001 in conformity with accounting principles generally
accepted in the United States. 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.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey
September 14, 2001
1
31
PVC Container Corporation
Consolidated Balance Sheets
JUNE 30
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 501,708 $ 1,088,540
Accounts receivable, net of allowance of $2 million and
$1 million at June 30, 2001 and 2000, respectively 12,339,146 13,972,869
Inventories 12,332,083 11,672,233
Prepaid expenses and other current assets 1,498,995 1,010,494
Deferred income taxes 1,910,070 2,119,031
Net assets held for disposition 684,729 684,729
------------ ------------
Total current assets 29,266,731 30,547,896
Other assets 1,231,877 78,835
Goodwill, net of accumulated amortization of $805,215
and $576,000 at June 30, 2001 and 2000, respectively 3,589,266 3,818,792
Unexpended proceeds from construction loan 102,042 97,368
Properties, plant and equipment at cost, net 34,038,512 36,312,702
------------ ------------
$ 68,228,428 $ 70,855,593
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,174,657 $ 8,327,066
Accrued expenses 4,146,300 3,904,221
Income taxes payable 184,380
Current portion of long-term debt 3,524,235 3,771,027
------------ ------------
Total current liabilities 14,845,192 16,186,694
Long-term debt 32,317,612 31,956,264
Interest rate swap 290,937
Deferred income taxes 2,921,570 3,543,782
Stockholders' equity:
Preferred stock, par value $1.00, authorized 1,000,000 shares, none
issued
Common stock, par value $.01, authorized 10,000,000 shares, 7,044,655
shares issued and outstanding as of June 30, 2001 and 2000 70,446 70,446
Capital in excess of par value 3,810,981 3,810,981
Retained earnings 14,146,252 15,287,426
Accumulated other comprehensive loss (174,562)
------------ ------------
Total stockholders' equity 17,853,117 19,168,853
------------ ------------
$ 68,228,428 $ 70,855,593
============ ============
See accompanying notes.
2
32
PVC Container Corporation
Consolidated Statements of Operations
FISCAL YEAR ENDED JUNE 30
2001 2000 1999
---- ---- ----
Net sales $ 87,995,433 $ 92,619,720 $ 85,155,047
Cost and expenses:
Cost of goods sold (exclusive of depreciation and
amortization expense shown separately below) 69,182,250 73,911,809 63,899,366
Selling, general and administrative expense 10,934,108 10,458,510 9,186,743
Depreciation and amortization expense 6,765,109 6,798,802 7,141,249
Asset impairment 400,000
------------ ------------ ------------
86,881,467 91,569,121 80,227,358
------------ ------------ ------------
Income from operations 1,113,966 1,050,599 4,927,689
Other income (expenses):
Interest expense (2,994,589) (2,811,973) (2,457,940)
Interest income 29,980 47,095 68,590
Other income (expense) 121,591 (98,870) 299,966
------------ ------------ ------------
(2,843,018) (2,863,748) (2,089,384)
------------ ------------ ------------
(Loss) income before (benefit) provision for income
taxes (1,729,052) (1,813,149) 2,838,305
(Benefit) provision for income taxes (587,878) (616,471) 1,135,322
------------ ------------ ------------
Net (loss) income $ (1,141,174) $ (1,196,678) $ 1,702,983
============ ============ ============
(Loss) earnings per share:
Basic $ (.16) $ (.17) $ .24
Diluted $ (.16) $ (.17) $ .24
See accompanying notes.
3
33
PVC Container Corporation
Consolidated Statements of Stockholders' Equity
COMMON STOCK ACCUMULATED
ISSUED AND OUTSTANDING CAPITAL IN OTHER TOTAL
---------------------- EXCESS OF RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT PAR VALUE EARNINGS LOSS EQUITY
------ ------ --------- -------- ---- ------
Balance, June 30, 1998 7,004,705 $ 70,047 $ 3,646,747 $ 14,781,121 $ -- $ 18,497,915
Net income 1,702,983 1,702,983
Exercise of stock options 34,000 340 139,750 140,090
---------- ------------ ------------ ------------ ---------- ------------
Balance, June 30, 1999 7,038,705 70,387 3,786,497 16,484,104 -- 20,340,988
Net loss (1,196,678) (1,196,678)
Exercise of stock options 5,950 59 24,484 24,543
---------- ------------ ------------ ------------ ---------- ------------
Balance, June 30, 2000 7,044,655 70,446 3,810,981 15,287,426 -- 19,168,853
Comprehensive loss:
Net loss (1,141,174) (1,141,174)
Unrealized loss on interest
rate swap, net (174,562) (174,562)
---------- ------------ ------------ ------------ ---------- ------------
Total comprehensive loss -- -- -- (1,141,174) (174,562) (1,315,736)
---------- ------------ ------------ ------------ ---------- ------------
Balance, June 30, 2001 7,044,655 $ 70,446 $ 3,810,981 $ 14,146,252 $ (174,562) $ 17,853,117
========== ============ ============ ============ ============ ============
See accompanying notes.
4
34
PVC Container Corporation
Consolidated Statements of Cash Flows
FISCAL YEAR ENDED JUNE 30
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (1,141,174) $ (1,196,678) $ 1,702,983
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 6,765,109 6,798,802 7,141,249
Deferred income taxes (296,876) (70,322) (95,565)
Gain on sale of equipment (34,250) (17,541) (201,662)
Loss on sale of building 173,818
Changes in assets and liabilities:
Accounts receivable 1,633,723 (1,064,017) (401,268)
Inventories (659,850) 1,485,827 (2,134,860)
Prepaid expenses and other current assets (488,501) 135,576 (366,744)
Other assets (681,398) 156,949 488,216
Accounts payable and accrued expenses (910,330) (2,229,674) (718,378)
Income taxes payable (184,380) (1,244,111) 1,098,966
------------ ------------ ------------
Net cash provided by operating activities 4,002,073 2,928,629 6,512,937
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (4,251,517) (2,382,677) (3,021,554)
Proceeds from sale of equipment 79,700 23,000 234,000
Proceeds from sale of building 4,262,286
Purchase of business (12,000,000)
------------ ------------ ------------
Net cash (used in) provided by investing activities (4,171,817) 1,902,609 (14,787,554)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 24,543 140,090
Proceeds from long-term debt 27,577,806 3,924,841 14,400,000
Payments on indebtedness (27,463,250) (8,476,169) (6,349,884)
Deferred financing costs (531,644)
------------ ------------ ------------
Net cash (used in) provided by financing activities (417,088) (4,526,785) 8,190,206
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (586,832) 304,453 (84,411)
Cash and cash equivalents, beginning of year 1,088,540 784,087 868,498
------------ ------------ ------------
Cash and cash equivalents, end of year $ 501,708 $ 1,088,540 $ 784,087
============ ============ ============
See accompanying notes.
5
35
PVC Container Corporation
Notes to Consolidated Financial Statements
June 30, 2001, 2000 and 1999
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 activity primarily consists of the
manufacture and sale of a line of plastic bottles made from polyvinyl chloride
compounds and high density polyethylene resins. These bottles are used primarily
for the packaging of cosmetics, toiletries, foods, household chemicals, lawn and
garden, and industrial chemical products.
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 on March 1, 1993. All
intercompany 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 FIFO method.
DEPRECIATION
Depreciation is provided for financial reporting purposes 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.
NET ASSETS HELD FOR DISPOSITION
In connection with the Company's strategic planning, certain facilities have
been classified as "Net Assets Held for Disposition" reflecting management's
intention to sell such assets. The net assets held for disposition at June 30,
2001 are included in the Plastic Containers segment and are expected to be sold
in fiscal 2002.
6
36
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLES
The excess of purchase price over net assets of the businesses acquired is
amortized on a straight-line basis over fifteen years. Amortization expense
totaled approximately $230,000 and $287,000 for the years ended June 30, 2001
and 2000, respectively.
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.
REVENUE RECOGNITION
Revenue is recognized upon shipment of the product.
SHIPPING COSTS
The Company's shipping and handling costs are included as on offset to sales for
all periods presented.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to expense as incurred and
amounted to $272,000, $238,000 and $222,000 in 2001, 2000 and 1999,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in operations or
expected to be disposed when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amounts of those assets.
7
37
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 (FASB 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, recognized over the vesting period.
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
As of July 1, 2000, the Company adopted FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, which requires the Company to
recognize all of its derivative instruments as either assets or liabilities in
the balance sheets 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, a company must designate the
hedging instrument, based upon the exposure being hedged, as either a fair value
hedge, cash flow hedge or a hedge of a net investment in a foreign operation.
For derivatives instruments that are designated and qualify as a cash flow hedge
(i.e., hedging 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
the derivative instrument is reported as a component of other comprehensive
income and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings. The remaining gain or loss on the
derivative instrument in excess of the cumulative change in the present value of
future cash flows of the hedged item, if any, is recognized in current earnings
during the period of change.
8
38
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has entered into interest-rate swap agreements that effectively
convert a portion of its floating-rate debt to a fixed-rate basis through 2005,
thus reducing the impact of interest-rate changes on future interest expense.
Approximately $7,250,000 of the Company's outstanding debt was designated as the
hedged items to interest-rate swap agreements. The fair value of the
interest-rate swap at June 30, 2001 totaled approximately $291,000 and is
included in the accompanying consolidated balance sheet. The reclassification of
losses that are reported in accumulated other comprehensive loss, that are
expected to be reclassified into earnings in the next twelve months, totals
approximately $200,000 before taxes.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill [and intangible assets deemed
to have indefinite lives] will no longer be amortized but will be subject to
annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.
The Company is currently evaluating early adoption of the New Statements.
Application of the nonamortization provisions of the Statement is expected to
result in an increase in net income of approximately $151,000 ($.02 per share)
per year. The Company has not yet determined what the effect of these Statements
will be on the earnings and financial position of the Company.
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.
9
39
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
2. INVENTORIES
Inventories consist of the following:
2001 2000
----------- -----------
Raw materials $ 4,421,108 $ 3,384,525
Finished goods 6,614,982 7,378,544
----------- -----------
Total inventories 11,036,090 10,763,069
Molds for resale, in production 909,168 527,120
Supplies 386,825 382,044
----------- -----------
Total $12,332,083 $11,672,233
=========== ===========
3. PROPERTIES, PLANT AND EQUIPMENT
ESTIMATED
USEFUL LIFE IN
2001 2000 YEARS
----------- ----------- --------------
Land $ 686,343 $ 686,343
Building and improvements 16,302,400 16,300,282 20-25
Machinery and equipment 49,167,697 45,543,523 7-10
Molds 4,480,826 4,057,823 3-5
Office furniture and equipment 3,548,944 3,453,438 5-10
Motor vehicles 141,335 165,749 3-5
Leasehold improvements 24,845 13,521
----------- -----------
74,352,390 70,220,679
Less accumulated depreciation 40,313,878 33,907,977
----------- -----------
$34,038,512 $36,312,702
=========== ===========
4. ACCRUED EXPENSES
Accrued expenses at June 30 consists of:
2001 2000
---------- ----------
Accrued payroll $ 525,499 $ 792,574
Accrued vacation 760,257 691,667
Accrued employee benefits 1,061,984 1,229,228
Other accrued expenses 1,798,560 1,190,752
---------- ----------
$4,146,300 $3,904,221
========== ==========
10
40
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT
Long-term debt at June 30 consists of the following:
2001 2000
---- ----
Notes payable:
South Carolina Economic Development Authority:
Loan $ 3,700,000 $ 3,700,000
Pennsylvania Industrial Development Authority:
Loan 845,043 915,527
GE Capital Public Finance:
Equipment loans 4,260,270 2,995,508
Building loan 3,916,920 4,211,717
PNC/Fleet Bank:
Term notes 10,877,676 19,424,333
Revolving line of credit 11,281,916 3,400,000
Edgar County Bank Construction Loan 401,500 434,500
City of Paris:
Community Development Assistance Loan 252,901 286,205
Revolving Loan Fund 76,159 86,112
Illinois Small Business Development Loan 197,770 220,476
Obligations under capital leases 31,692 52,913
------------ ------------
35,841,847 35,727,291
Less current portion (3,524,235) (3,771,027)
------------ ------------
$ 32,317,612 $ 31,956,264
============ ============
Maturities of long-term debt are as follows: 2002 - $3,524,235; 2003 -
$2,903,014; 2004 - $3,130,547; 2005 - $2,817,489; 2006 - $16,097,775 and 2007 to
2016 - $7,368,787. Interest paid amounted to $3,027,737, $2,756,980 and
$2,413,246 in 2001, 2000 and 1999, respectively.
Long-term debt at June 30, 2000 includes $22.8 million of debt which was
refinanced with a senior secured credit facility ("PNC Bank Agreement") entered
into with PNC Bank in August 2000.
11
41
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
PNC AGREEMENT
The Company entered into a new $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 $4,192,000 standby letter of credit and a $2,000,000
capital expenditure line. The credit facility contains annual minimum equity and
fixed charge coverage covenants which the Company was in compliance with at June
30, 2001.
The Term Notes bear interest at LIBOR plus 275 basis points and the revolving
line bears interest at LIBOR plus 225 basis points. The effective interest rate
of the New Agreement was 8.5% in fiscal 2001. 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 PNC Bank Agreement also includes a $2 million capital expenditure line of
credit which bears interest at LIBOR plus 275 basis points. Borrowings against
this line totaled approximately $1.2 million at June 30, 2001.
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 3.9% in 2001 and
2000.
The agreement contains certain provisions which require the funds to be held in
trust (the "Trust") by a third-party financial institution until such time that
equipment purchases are made. The funds are invested at rates of return
comparable to the interest rate paid by the Company on the obligation. Equipment
purchases in connection with this agreement are paid directly from the Trust.
S.C. EDA has issued tax exempt bonds to fund the debt. Should the tax exempt
status of this bond issue be negated, the rate of interest of this note would be
retroactively adjusted.
The Company has unused letters of credit amounting to approximately $3.7 million
in conjunction with this note.
12
42
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
NOTE PAYABLE - PENNSYLVANIA INDUSTRIAL DEVELOPMENT AUTHORITY-"PIDA"
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 at an interest rate of
3.75% with 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 collateralized by the property.
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., who is financing 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 on 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 collateralized
by the property. The Company has unused letters of credit amounting to
approximately $230,000 in conjunction with this note.
During fiscal year 1998, the City of Paris, Illinois approved $2,500,000 Series
1997C Industrial Development Revenue bonds. The Bonds were purchased and are
held by GE Capital Public Finance, Inc., who is financing 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 5.45% through March 16, 2008. The loan may be prepaid in whole
or in part subject to certain requirements stated in the loan agreement. The
loan is collateralized by the property and the equipment.
During fiscal year 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., who is
financing 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 on 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
collateralized by the property and the equipment. The Company has unused letters
of credit amounting to approximately $1.2 million in conjunction with this loan.
13
43
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
The agreements contain provisions which require the funds to be held in trust
(the "Trust") by a third-party financial institution until such time that
building, construction or equipment purchases are made. The funds are invested
at rates of return comparable to the interest rate paid by the Company on the
obligation. Purchases in connection with this agreement are paid directly from
the Trust.
The bonds issued by the City of Paris to fund the debt are tax-exempt bonds.
Should the tax-exempt status of these bonds be negated, the rate of interest of
this note would be retroactively adjusted.
TERM NOTES
During fiscal year 1999, the Company obtained a $12.0 million loan from Fleet
Bank to finance the September 3, 1998 acquisition of Marpac Industries, Inc.
This loan was repaid in August 2000 with the proceeds from the PNC Bank
Agreement.
During fiscal year 1998, the Company obtained a $10.0 million loan from Fleet
Bank ("Fleet") to finance the March 30, 1998 acquisition of Charter Supply Co.,
Inc. This loan was repaid in August 2000 with proceeds from the PNC Bank
Agreement.
During fiscal year 1997, the Company consolidated various equipment and term
notes through a $2,530,000 term loan with Fleet Bank. This loan was repaid in
August 2000 with proceeds from the PNC Bank Agreement.
During fiscal year 1997, the Company obtained a $1.2 million loan from Fleet
Bank to finance the expansion of its New Jersey manufacturing facility. This
loan was repaid in August 2000 with proceeds from the PNC Bank Agreement.
During fiscal year 1994, the Company purchased $1,200,000 of property and
equipment which was financed through a term note with Fleet Bank. This loan was
repaid in August 2000 with proceeds from the PNC Bank Agreement.
REVOLVING LINE OF CREDIT
On April 1, 1997, the Company entered into a $5,000,000 line of credit agreement
with Fleet Bank. This credit agreement was repaid in full in August 2000 with
the proceeds from the PNC Bank Agreement.
14
44
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
EDGAR COUNTY BANK CONSTRUCTION LOAN
During fiscal year 1998, the Company refinanced $495,000 of their loan obtained
for real estate improvements for a manufacturing plant in Paris, Illinois. The
loan is payable in fifty-nine monthly principal payments of $2,750 and a final
lump sum payment of $332,750 on August 30, 2003 plus interest at 7.75%. The loan
is collateralized by a shared first lien interest for the land and building in
Paris, Illinois in conjunction with an inter creditor agreement between the bank
and the City of Paris.
COMMUNITY DEVELOPMENT ASSISTANCE LOAN
In fiscal year 1993, the Illinois Department of Commerce and Community Affairs
approved a loan with the City of Paris for development of a manufacturing plant
in Illinois for $500,000 which will be payable in 180 monthly installments of
$3,453 including interest at 3% through April 1, 2008. The loan is
collateralized by a shared first lien interest for the land and building in
Paris, Illinois in conjunction with an inter creditor agreement between the City
of Paris and Edgar County Bank.
REVOLVING LOAN FUND
The Illinois Department of Commerce and Community Affairs also approved a
revolving loan fund from the City of Paris to assist in the development of the
manufacturing plant in Illinois for $150,000 in fiscal year 1993. The loan is
payable in 180 monthly installments of $1,033 including interest at 3% through
April 1, 2008. The loan is collateralized by a subordinate lien interest for the
land and building in Paris, Illinois in conjunction with an inter creditor
agreement between the City of Paris and Edgar County Bank.
ILLINOIS SMALL BUSINESS DEVELOPMENT LOAN
In fiscal year 1994, the Illinois Department of Commerce and Community Affairs
approved a loan with the City of Paris for the expansion of the Company's
manufacturing plant in Illinois for $350,000 which is payable in 180 monthly
installments of $2,767 including interest at 5% and a final payment to satisfy
the conditions of the loan in August 2008. The loan can be prepaid in whole or
in part without penalty. The loan is collateralized by the property and
improvements thereafter as well as the rent issues and profits of the premises.
The carrying amounts of the aforementioned debt agreements approximate fair
value.
15
45
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
6. OPERATING LEASES
Minimum rental commitments under non-cancellable operating leases are payable as
follows:
YEAR AMOUNT
---- ------
2002 $1,123,021
2003 1,102,663
2004 886,617
2005 764,377
2006 733,656
Thereafter 3,059,356
Rental expense for operating leases amounted to $1,124,857, $1,179,929 and
$1,148,549 in 2001, 2000 and 1999, respectively.
7. PENSION PLAN
On September 1, 1990, the Company instituted a non-contributory defined benefit
pension plan (the 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, which provides
the Plan with sufficient assets to meet future benefit payment requirements. The
assets of the Plan are invested principally in short-term investments. The
following table sets forth the Plan's funded status and the amount recognized in
the Company's consolidated balance sheet:
2001 2000
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 895,967 $ 1,005,365
Service cost 8,063 6,811
Interest cost 64,421 62,983
Actuarial gain (23,445) (151,992)
Benefits paid (27,138) (27,200)
----------- -----------
Benefit obligation at end of year $ 917,868 $ 895,967
=========== ===========
Change in plan assets:
Fair value of plan assets at beginning of year $ 870,366 $ 782,144
Actual return on plan assets 59,877 52,752
Employer contribution 100,000 83,475
Benefits paid, including expenses (40,076) (48,005)
----------- -----------
Fair value of plan assets at end of year $ 990,167 $ 870,366
=========== ===========
16
46
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
7. PENSION PLAN (CONTINUED)
2001 2000
---- ----
Funded status $ 72,299 $ (25,601)
Unrecognized net actuarial loss 231,178 233,238
Unrecognized prior service cost 15,080 16,754
Unrecognized transition obligation 18,105 21,123
Adjustment to recognize minimum liability (271,115)
--------- ---------
Pension asset (liability) $ 336,662 $ (25,601)
========= =========
Weighted-average assumptions at year-end:
Discount rate 7.5% 7.5%
Expected return on plan assets 8.5 8.5
Components of net periodic benefit cost:
Service cost $ 8,063 $ 6,811
Interest cost 64,421 62,983
Expected return on plan assets (77,078) (68,874)
Amortization of transition obligation 3,018 3,018
Amortization of prior service cost 1,675 1,675
Recognized net actuarial loss 8,753 7,927
--------- ---------
Net periodic benefit cost $ 8,852 $ 13,540
========= =========
The Company maintains a voluntary salary reduction 40l(k) plan covering all
non-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 an amount equal to 25% on the first 6% of
the employee's pre-tax contribution and, at its discretion, may make additional
contributions to the plan based on earnings. The Company contributed $148,255,
$158,926 and $127,956 in 2001, 2000 and 1999, respectively.
8. COMMON STOCK
The Company's Board of Directors approved and ratified on January 16, 1997, an
incentive stock option plan pursuant to which options to purchase an aggregate
of 600,000 shares of the common stock of the Company may be granted. Such plan
conforms to the requirements of Rule 16B-3 of the Securities Exchange Act of
1934. The options granted are exercisable to the extent of 20-25% per year on a
cumulative basis through their expiration on January 16, 2007.
17
47
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
8. COMMON STOCK (CONTINUED)
FASB 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 FASB 123. The fair
value of these equity awards was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 2001 and 2000, respectively: risk-free interest rates of
approximately 5.5%; expected volatility of 0.3%; expected option life equal to
the vesting period, and an expected dividend yield of 0.0%.
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.
For purposes of pro forma disclosures, the estimated fair value of the equity
awards is amortized to expense over the options vesting period. The Company's
pro forma information is as follows:
2001 2000
---- ----
Pro forma net loss $(1,191,757) $ (1,297,041)
Pro forma net loss per share of common stock $ (.17) $ (.18)
18
48
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
8. COMMON STOCK (CONTINUED)
A summary of stock option activity follows:
WEIGHTED-
AVERAGE
EXERCISE
OPTIONS PRICE
------- -----
Outstanding at June 30, 1998 374,000 $ 4.29
Granted 118,000 6.38
Forfeited (51,000) 4.13
Exercised (34,000) 4.13
------- --------
Outstanding at June 30, 1999 407,000 4.92
Granted -- --
Forfeited (32,250) 5.73
Exercised (5,950) 4.13
------- --------
Outstanding at June 30, 2000 368,800 4.87
Granted 30,000 4.25
Forfeited (30,000) 5.03
Exercised -- --
------- --------
Outstanding at June 30, 2001 368,800 $ 4.46
======= ========
Exercisable at June 30, 1999 216,250 $ 4.60
======= ========
Exercisable at June 30, 2000 281,300 $ 4.68
======= ========
Exercisable at June 30, 2001 325,550 $ 4.74
======= ========
Exercise prices for options outstanding as of June 30, 2001 ranged from $4.13 to
$6.38 per share. The weighted-average remaining contractual life of these
options is 5.6 years.
19
49
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES
The (benefit) provision for income taxes consists of:
2001 2000 1999
---- ---- ----
Current:
Federal $ (109,189) $ (604,149) $ 1,035,565
State 51,000 58,000 243,322
----------- ----------- -----------
(58,189) (546,149) 1,278,887
Deferred:
Federal (411,157) 82,423 (111,506)
State (118,532) (152,745) (32,059)
----------- ----------- -----------
(529,689) (70,322) (143,565)
----------- ----------- -----------
Total (benefit) provision $ (587,878) $ (616,471) $ 1,135,322
=========== =========== ===========
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:
2001 2000
---- ----
Deferred tax liabilities:
Long-lived assets and other $2,921,570 $3,543,782
---------- ----------
Total deferred tax liabilities 2,921,570 3,543,782
Deferred tax assets:
Bad debt reserves 704,800 447,077
Inventory reserves 533,600 498,584
Accrued liabilities and other 671,670 1,173,370
---------- ----------
Total deferred tax assets 1,910,070 2,119,031
---------- ----------
Net deferred tax liabilities $1,011,500 $1,424,751
========== ==========
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:
2001 2000 1999
---- ---- ----
Federal tax at statutory rate 34% 34% 34%
Effect of:
State income taxes, net of federal income tax benefit 2 4 4
Goodwill amortization (5) (5) 3
Foreign operations 2 2 (1)
Other 1 (1)
---- ---- ----
Effective income tax rate 34% 34% 40%
==== ==== ====
20
50
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
Income taxes paid amounted to $163,000, $153,000 and $322,000 in 2001, 2000 and
1999, 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, 2001, 2000 and 1999. 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, 2001, 2000 and 1999.
2001 2000 1999
---- ---- ----
Weighted-average shares for basic earnings
per share 7,044,655 7,042,254 7,008,955
Effect of dilutive securities:
Employee stock options 149,786
--------- --------- ---------
Adjusted weighted-average shares for diluted
earnings per share 7,044,655 7,042,254 7,158,741
========= ========= =========
11. PROVISION FOR ASSET IMPAIRMENT
During the third quarter of 2000, the Company recorded a $400,000 pre-tax charge
to operations for asset impairment related to the expected loss on the sale of
its Ardmore, Oklahoma manufacturing facility.
12. SEGMENTS
The Company identifies its segments based upon differences in the types of
products it 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 and industrial chemical products. The
Compound segment manufactures PVC compound for use by the Company as well as
external customers. The external use of the PVC compound is for extruded
profiles and accessories, furniture, molding and other indoor fixtures, and
molded electrical and electronic housings.
21
51
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
12. SEGMENTS (CONTINUED)
The reportable segments are each managed separately due to the different
manufacturing processes used and the different markets in which each segment
operates. The Company evaluates each segment's performance based on profit or
loss from operations before 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 consolidated total are as follows:
2001 2000 1999
---- ---- ----
Net revenues:
Compound total $ 23,002,044 $ 26,411,741 $ 25,366,232
Intersegment revenue - Compound (7,051,553) (7,492,056) (8,157,436)
------------ ------------ ------------
Revenues from external customers - Compound 15,950,491 18,919,685 17,208,796
Plastic Containers 72,044,942 73,700,035 67,946,251
------------ ------------ ------------
Total consolidated net revenues $ 87,995,433 $ 92,619,720 $ 85,155,047
============ ============ ============
Depreciation and amortization expense:
Compound $ 365,659 $ 374,963 $ 376,011
Plastic Containers 6,399,450 6,423,839 6,765,238
------------ ------------ ------------
Total consolidated depreciation and
amortization expense $ 6,765,109 $ 6,798,802 $ 7,141,249
============ ============ ============
Interest income:
Compound $ 21,485 $ 20,900 $ --
Plastic Containers 8,495 26,195 68,590
------------ ------------ ------------
Total consolidated interest income $ 29,980 $ 47,095 $ 68,590
============ ============ ============
Interest expense:
Compound $ 145,720 $ 138,417 $ 98,369
Plastic Containers 2,848,869 2,673,556 2,359,571
------------ ------------ ------------
Total consolidated interest expense $ 2,994,589 $ 2,811,973 $ 2,457,940
============ ============ ============
Asset impairment charge:
Compound $ -- $ -- $ --
Plastic Containers -- 400,000 --
------------ ------------ ------------
Total consolidated restructuring charge $ -- $ 400,000 $ --
============ ============ ============
22
52
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
12. SEGMENTS (CONTINUED)
2001 2000 1999
---- ---- ----
Income tax expense (benefit):
Compound $ 332,174 $ 125,498 $ 1,349,373
Plastic Containers (920,052) (741,969) (214,051)
------------ ------------ ------------
Total consolidated income tax
(benefit) expense $ (587,878) $ (616,471) $ 1,135,322
============ ============ ============
Net income (loss):
Compound $ 565,607 $ 243,613 $ 2,084,074
Plastic Containers (1,706,781) (1,440,291) (381,091)
------------ ------------ ------------
Total consolidated net income $ (1,141,174) $ (1,196,678) $ 1,702,983
============ ============ ============
Total assets:
Compound $ 8,041,676 $ 8,114,167 $ 8,713,933
Plastic Containers 60,186,752 62,741,426 74,410,635
------------ ------------ ------------
Total consolidated assets $ 68,228,428 $ 70,855,593 $ 83,124,568
============ ============ ============
Capital expenditures:
Compound $ 483,093 $ 337,954 $ 278,943
Plastic Containers 3,768,424 2,044,723 2,742,611
------------ ------------ ------------
Total consolidated capital expenditures $ 4,251,517 $ 2,382,677 $ 3,021,554
============ ============ ============
23
53
PVC Container Corporation
Schedule II - Valuation and Qualifying Accounts
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS
--------- AMOUNT
CHARGED TO WRITTEN
BALANCE CHARGED TO OTHER OFF BALANCE
BEGINNING OF COSTS AND ACCOUNTS AGAINST END OF
DESCRIPTION YEAR EXPENSES (DESCRIBED) RESERVE YEAR
----------- ---- -------- ----------- ------- ----
Valuation accounts
deducted from assets to
which they apply:
June 30, 2001:
Accounts receivable $1,010,192 $1,135,000 $ 133,192 $2,012,000
Inventory 587,000 909,000 786,000 710,000
June 30, 2000:
Accounts receivable 956,174 860,093 806,075 1,010,192
Inventory 442,000 585,000 440,000 587,000
June 30, 1999:
Accounts receivable 411,725 584,449 40,000 956,174
Inventory 552,000 74,000 184,000 442,000
54
UNAUDITED QUARTERLY FINANCIAL DATA
Quarter Fiscal
(in thousands except per share data) First Second Third Fourth Year
------------------------------------ ----- ------ ----- ------ ----
FISCAL 2001
Net Sales 20,735 20,641 23,289 23,330 87,995
Gross Profit 16,998 16,061 18,060 18,063 69,182
Net (loss) income (716) (313) 101 (213) (1,141)
------ ------ ------ ------ ------
PER SHARE DATA:
Net (loss) income (0.10) (0.04) 0.01 (0.03) (0.16)
------ ------ ------ ------ ------
Weighted average number of
common shares outstanding 7,045 7,045 7,045 7,045 7,045
------ ------ ------ ------ ------
FISCAL 2000
Net Sales 20,926 21,070 25,781 24,843 92,620
Gross Profit 16,547 17,041 20,318 20,006 73,912
Net (loss) income (169) (563) (3) (462) (1,197)
------ ------ ------ ------ ------
PER SHARE DATA:
Net (loss) income (0.02) (0.08) 0.00 (0.07) (0.17)
------ ------ ------ ------ ------
Weighted average number of
common shares outstanding 7,039 7,042 7,067 7,067 7,054
------ ------ ------ ------ ------