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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO THE SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _______________.
COMMISSION FILE NUMBER 0-08791
PVC CONTAINER CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 13-2616435
(STATE OF OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
2 Industrial Way West, Eatontown, New Jersey 07724-2202
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (732) 542-0060
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of exchange on which registered
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes x No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes x No
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of the last business day of the registrant's most recently
completed second quarter, at a closing price of $1.95 as reported by the OTC
Bulletin Board, was approximately $2,140,304.
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 September 19, 2003
Common Stock, $.01 par value 7,042,393
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference into Part III of
this Form 10-K: The information statement for the registrant's 2003 annual
meeting of stockholders.
EXHIBIT INDEX is located at Page 25
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 is the
manufacture and sale of plastic bottles and containers made primarily from
high-density polyethylene ("HDPE"), polypropylene ("PP"), polyethylene
terephthalate ("PET"), and polyvinyl chloride ("PVC") resins. Some of the HDPE
bottles are fluorinated to improve the chemical resistance and barrier
properties of the containers. The Company's plastic bottle business also
produces for small volume, high tolerance technical blow molded containers.
The Company sells and markets its plastic bottles utilizing three
wholly-owned subsidiaries, Novapak Corporation, Airopak Corporation, and Marpac
Industries, Inc. Novapak sells a general line of plastic bottles to the personal
care, food and household chemical markets. Airopak sells a line of fluorinated
containers primarily to the lawn and garden and industrial chemical markets.
Marpac provides technical blow molding for markets such as toner copier
containers and medical diagnostic equipment. The Company operates in two
reportable business segments: Plastic Containers and Compound. Of the Company's
fiscal 2003 net sales, approximately 84% were derived from the Plastic
Containers segment and approximately 16% were derived from the Compound segment.
For additional financial information relating to the Company's reportable
business segments, see Note 11 to the Company's Consolidated Financial
Statements, which are presented elsewhere in this Annual Report.
PVC compounds are consumed by the Company to manufacture some of the
Company's plastic bottles. These PVC compounds are produced and sold through the
Company's wholly owned subsidiary, Novatec Plastics Corporation, Inc. Novatec
also manufactures a diverse range of rigid PVC compounds for non-bottle
applications ("specialty compounds"), sold to manufacturers of plastic injection
molded and extruded products for use in products such as fencing, furniture
edgebanding, electrical wiring devices, and electronic housings.
Sales. The Company's plastic bottles are sold primarily to
manufacturers of personal care products, food, household chemicals, and lawn and
garden and industrial chemical products, private label manufacturers of similar
products, and to bottle distributors who sell to such manufacturers. PVC
compounds are consumed internally or sold to other plastic manufacturers. A
limited amount of the Company's total sales is made through commissioned sales
representatives. During the fiscal year ended June 30, 2003, no one customer
accounted for 10% or more of the Company's net sales.
Sales of the Company's plastic bottles and PVC bottle compounds have
accounted for most of the Company's net income; sales of specialty compounds to
non-bottle customers have accounted for the remainder of the Company's net
income. Plastic bottles are offered in food grade and non-food grade materials,
fluorinated or non-fluorinated, in clear and opaque colors and in a range of
sizes from one ounce to 225 ounces. The Company produces plastic bottles
utilizing its own molds in proprietary designs ("stock bottles") that are of its
own design and also produces on a contractual basis plastic bottles in molds
owned by the customer, utilizing the customer's designs and specifications.
The sale of plastic bottles is generally a "regional" business. The
majority of the Company's customers are within a 300-mile radius of the
Company's manufacturing plants. Freight costs restrict shipping bulky plastic
bottles long distances, although customers are willing to pay freight for
specialty bottles of a unique design or fluorinated containers that are not
available from local manufacturers. In contrast, the Company's PVC compounds,
which are sold in the form of plastic pellets
and are denser than plastic bottles, can be shipped throughout the continental
United States and Canada and tend to be more of a "national" business.
The Company's business is usually characterized by low customer
demand during the months of July and August and the last half of December
because buyers' plants often shut down during those periods. Some of the markets
in which the Company sells are seasonal, such as Airopak's primary markets of
lawn, garden, and agricultural chemicals. These markets are characterized by
high demand in the period of December through June and low demand from July
through November of each year.
Manufacturing Operations. The Company utilizes two basic processes
to manufacture its plastic bottles - extrusion blow molding ("EBM") and
injection stretch blow molding ("ISBM"). Plastic bottles made from HDPE, PP, or
PVC resins are manufactured using the EBM process. EBM involves melting the
plastic resins in an extruder and forming a plastic tube or parison that is
placed inside a two piece blow mold. The mold then closes and clamps around the
tube and the tube is blown (inflated) with compressed air against the walls of
the mold, forming the bottle to the shape of the mold. Some of the EBM
production also incorporates proprietary technology to manufacture fluorinated
HDPE plastic bottles.
The Company's PET bottles are manufactured using a two step ISBM
process. This process involves injection molding PET resins into a parison
called a preform. These PET preforms are then used in a separate blow molding
machine, where they are re-heated and blown into bottles, also utilizing a blow
mold.
The Company also provides a variety of value added services such as
bottle decoration. The Company's decorating capabilities include automatic silk
screening for multiple color applications, pressure sensitive paper and plastic
film labels, and therimage heat transfer labeling.
The Company operates plastic bottle manufacturing and warehousing
facilities in Hazleton, Pennsylvania; Paris, Illinois; Manchester, Pennsylvania;
Walterboro, South Carolina; Philmont, New York; and Kingston, New York. However,
the Company is transferring most of the personnel and equipment from our
Kingston, New York plant to its Philmont, New York facility and converting the
Kingston plant to a warehouse on or around October 1, 2003. A description of the
Company's plastic bottle facilities are 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 then melting the powder in a compounding
extrusion system for pelletizing the final plastic compound products into
pellets. Four compounding lines are located in a facility in Eatontown, New
Jersey, which began operations in 1982. The Company will purchase small amounts
of PVC bottle compounds produced by others for use in manufacturing plastic
bottles where customers specify a competing material, but otherwise the capacity
of the Company's PVC compounding facility is more than adequate to supply the
Company's current requirements. 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 manufacturers. A description
of the Company's compound facility is set forth below in Item 2 entitled
"Properties".
Raw Materials. Since 1982, the Company has manufactured most of the
PVC compounds the Company uses to manufacture plastic bottles. The major
ingredients of PVC compounds are PVC resins (approximately 85%) and MBS
(methacrylate-butadiene-styrene) impact modifiers
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(approximately 12%). The balance of the ingredients are heat stabilizers,
lubricants, processing aids, and toners (pigments). These materials are readily
available from various suppliers.
The other raw materials used to manufacture plastic bottles are
primarily HDPE, PP 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 it will
be able to purchase sufficient quantities in the foreseeable future.
A shortage of petroleum, should it develop, would have a negative
effect on the availability and the cost of the raw materials the Company uses.
The availability and price of resins has a direct effect on the Company's
business. Although sufficient PVC, HDPE, PP, and PET resins are currently
available for the Company's operations, no assurance can be given that an
adequate supply of plastic resins will be available to the Company in the
future. Moreover, the cost of resin can vary, and may have a material impact on
the business. The Company has in the past been able to recover the amount of
resin price increases by increasing the sales price of its plastic bottles;
however, any inability to raise prices in the future could have an adverse
impact on the Company's financial results. Prices for PVC as well as HDPE, PP
and PET resins are mostly dependent upon the supply and demand of specific
plastic resins as well as their monomers 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, the Company will pre-buy or increase
inventory of raw materials from a normal 2-3 week supply to up to a two 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 orders ranges
from approximately four to six weeks. The amount of unfilled orders was
approximately $9,000,000 at June 30, 2003 and June 30, 2002. There can be no
assurance that cancellations, rejections and returns will not reduce the amount
of sales realized from the backlog of orders.
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
of fencing, furniture, edgebanding, electrical wiring devices, and electronic
housings. 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 Corporation. 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. Many of these competitors also manufacture PVC resin.
The Company principally competes in the plastic bottle market on the
basis of quality, customer service, and competitive pricing. 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. Management believes that these constitute the primary areas in
which the Company can compete with others in the same industry.
3
The Company sometimes purchases its supply of PVC resin from its PVC
compound competitors. This has, at times, made it difficult to obtain adequate
supplies of PVC resin and has enabled competitors to increase PVC resin costs
charged to the Company, leading to reduced profit margins on PVC bottle
compound. However, profit margins on PVC specialty compounds remain strong
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 solid waste
issues. See "Environmental Regulation" below for a further discussion of solid
waste issues. Industry demand for PVC bottles and compounds are, however,
currently stable. The demand for PVC specialty compounds for use in the
Company's targeted markets is experiencing modest growth. The Company believes
that 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 engaged in an ongoing effort to develop specialty compounds for a
diverse range of manufacturers. 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 that are
characteristic of a specialty 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 and outdoor 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 markets. The Company
further believes its technical and marketing ability is equal to that of its
major competitors in the PVC compound markets in its region. The Company's
manufacturing capability for the PVC compound markets are limited by its lack of
a facility to produce PVC resin.
PVC competes with PET as a material used to manufacture clear or
transparent plastic bottles. Over the past several years, use of PET in the
clear plastic bottle market has increased, especially in high volume food,
personal care and household chemical markets. Because of this trend, the Company
has made substantial investments in ISBM technology. PET bottles now represent a
significant portion of the Company's plastic bottle business. PVC bottles still
represent a niche market for the Company because these bottles are still
preferred in many small and mid-range volume applications, including bottles
requiring an integral handle, which cannot be manufactured in PET.
Research and Development. The Company spent approximately $290,000,
$263,000 and $272,000 for the fiscal years ended June 30, 2003, 2002, and 2001,
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 that 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
4
have any material effect upon its capital expenditures, earnings, or competitive
position. However, the future of PVC as a material for packaging foods has been
threatened by the unwillingness of the Food and Drug Administration ("FDA") 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, estimate that it will take several years to complete an acceptable
environmental impact statement.
In addition, because it is now a supplier of a primary raw material,
the Company may have to comply with existing EPA regulations 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 major
environmental issues with respect to plastic packaging in general. There are
also concerns over the incineration of PVC compounds, which allegedly result in
hydrochloric acid and dioxin emissions. Further, several states have proposed
bans of certain plastics, including PVC packaging materials, but no bans have
been implemented yet. Industry lobbyists have supported state legislation
promoting 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 eight ounces in capacity or larger. The Company believes
that the threat of further regulatory actions inhibiting the future growth of
PVC as a viable packaging material will be minimal, 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, 2003, the Company employed 35 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. Monthly rental is
$15,500 until December 31, 2004, then $16,275 until December 31, 2006, and then
$17,050 until the end of the term.
As of June 30, 2003, the Company employed 48 people at the Novatec
facility in Eatontown, New Jersey; 116 people in the manufacturing facility in
Hazleton, Pennsylvania; 112 people at the Paris, Illinois facility; 7 people at
the Walterboro, S.C. facility; 84 people at Airopak Corporation in the
Manchester, Pennsylvania facility; 126 people at the Philmont, New York facility
and a total of 66 people at the 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, 2000 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. The term of the bargaining
agreement has been extended until October 31, 2003, by which date the Company
believes it will be renewed for a three-year term, expiring in 2006. However,
there can be no assurance that the Company will be able to renew the bargaining
agreement.
5
Financial Information about Foreign and
Domestic Operations and Export Sales
The Company had export sales of $5,348,000, $6,120,000, and
$4,267,000 during the fiscal years ended June 30, 2003, 2002 and 2001,
respectively. During the fiscal year ended June 30, 2003, net sales to the
northeast of the United States amounted to $35,200,000, net sales to the midwest
of the United States amounted to $35,123,000, net sales to the southeast of the
United States amounted to $8,953.000, and net sales to other domestic regions
amounted to $5,809,000.
Item 2. Properties.
The Company's activities with respect to its continuing businesses
are conducted at the seven facilities described in the following table:
Location Purpose of Facility Building Area
(square feet)
Hazleton, Pennsylvania Plastic bottle plant, 160,000(1)
warehouse, and office
Eatontown, New Jersey Plastic compounding 50,162(2)
plant, warehouse, and
executive offices
Manchester, Pennsylvania Airopak Corporation 145,221(3)
plant and warehouse
Paris, Illinois Plastic bottle plant, 125,000(4)
warehouse, and office
Walterboro, S.C. Plastic bottle plant, 61,430(5)
warehouse, and office
Philmont, New York Plastic bottle plant, 100,000(6)
warehouse and office
Kingston, New York Plastic bottling plant, 34,000(7)
warehouse and office
1. In September 1998, the Company relocated its Eatontown, New Jersey
manufacturing facilities to a new facility located in Hazleton, Pennsylvania on
10 acres of property owned by the Company. The Hazleton facility is a solid
concrete tilt-up facility, sprinklered throughout, with 160,000 square feet of
manufacturing and warehouse space. There are ten loading docks and a rail siding
at the facility.
2. The Company's PVC compounding manufacturing facility is located at 275
Industrial Way West, Eatontown, New Jersey on 5.5 acres of real property owned
by the Company. It contains manufacturing, research and development, warehouse,
and administrative offices and is constructed from steel and concrete panels.
3. The facilities in Manchester are leased and consist of a manufacturing
and warehouse facility having a total of approximately 145,221 square feet. The
aggregate annual rent payable with respect to the manufacturing and warehouse
space is $420,827 plus real estate taxes, utilities, and certain
6
other charges payable under a lease that expires on April 30, 2013 (with the
option of two additional five year terms). Management believes these facilities
are large enough to allow for future growth of the business there.
4. The Company commenced operations in 1993 in a new 62,500 square foot
concrete plastic bottle manufacturing facility located in Paris, Illinois. The
Company owns this facility and twenty acres of land on which it is located.
Financing for this facility was obtained from the Edgar County Bank, the City of
Paris, Illinois, and the Illinois Small Business Development Agency. In July
1997, the Company completed the construction of an additional 62,500 square feet
of warehouse and manufacturing space. The Company financed this expansion
through the issuance of Industrial Development Revenue Bonds by the City of
Paris, Illinois in the aggregate principal amount of $3,500,000.
5. In October 1996, the Company completed construction and began
operations in a new plastic bottle manufacturing plant in Walterboro, South
Carolina. This facility consists of 61,430 square feet of warehouse and
manufacturing space, located on 8.83 acres of property, owned by the Company.
Financing for this facility was obtained through the South Carolina Economic
Development Authority in the amount of $5,500,000.
6. On March 30, 1998, the Company acquired the plastic bottle
manufacturing facilities of McKechnie Investments, Inc. The facility consists of
100,000 square feet of warehouse and manufacturing space located on 37 acres of
property owned by the Company.
7. The Kingston facility consists of 34,000 square feet of manufacturing,
warehouse, and office space and is located on approximately 6 acres of property
(with 2.4 adjacent acres for expansion), that are owned by the Company. During
the fiscal year ended June 30, 2000, the Company exited its operations at the
Ardmore, Oklahoma facility, which consists of 10,000 square feet of
manufacturing, warehouse and office space. This facility is currently being
offered for sale.
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 OTC Bulletin Board under
the symbol OTC:PVCC. The last trade of the common stock on September 19, 2003
was at a price of $ 3.25 per share. The following is a summary of the high and
low close sales prices during the fiscal years of the Company ended June 30,
2003, and June 30, 2002:
Year Ended June 30, 2003
Low High
--- ----
1st Quarter $1.01 $2.04
2nd Quarter 1.10 2.05
3rd Quarter 1.25 2.00
4th Quarter 1.75 3.10
Year Ended June 30, 2002
Low High
--- ----
1st Quarter $2.15 $3.20
2nd Quarter 1.61 2.80
3rd Quarter 1.10 2.45
4th Quarter 1.45 2.90
As of September 19, 2003, the number of holders of record of the
issued and outstanding common stock of the Company was approximately 416. The
Company has not declared or paid any cash dividends on the shares of common
stock since fiscal 1997 and does not anticipate declaring or paying any such
dividends in the foreseeable future. The Company intends to retain earnings for
the operation of its business.
8
Item 6.
Selected Financial Data.
The selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements, related notes and other financial
information included in this report. The selected consolidated financial data
set forth below as of June 30, 2003, 2002 and 2001 and for the years ended June
30, 2003, 2002 and 2001 have been derived from our audited financial statements
included in this report. The selected consolidated financial data set forth
below as of June 30, 2000, and 1999 and for the years ended June 30, 2000 and
1999 have been derived from our audited financial statements that are not
included or incorporated by reference in this report. Our historical results are
not necessarily indicative of the results that may be expected for any future
period.
Years Ended June 30
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
SELECTED INCOME
STATEMENT DATA:
Net Sales $ 90,433,217 $ 84,076,390 $ 89,892,821 $ 94,870,507 $ 87,121,538
Income from operations 3,339,730 $ 2,726,128 $ 1,113,966 $ 1,050,599 $ 4,927,689
Net Income (Loss) 872,552 $ 261,445 $ (1,141,174) $ (1,196,678) $ 1,702,983
Earnings per share: 7,043,485 7,044,379 7,044,655 7,042,254 7,158,741
Weighted average
shares for diluted shares
Net Income (loss) per $ .12 $ .04 $ (.16) $ (.17) $ .24
share
SELECTED BALANCE
SHEET DATA
Current assets $ 28,511,306 $ 26,921,243 $ 29,266,731 $ 30,547,896 $ 33,771,892
Current liabilities $ 14,159,902 $ 15,086,732 $ 14,845,192 $ 16,186,694 $ 20,358,118
Working capital $ 14,351,404 $ 11,834,511 $ 14,421,539 $ 14,361,202 $ 13,413,774
Total assets $ 62,444,191 $ 61,255,060 $ 68,126,386 $ 70,855,593 $ 83,124,568
Long-term obligations $ 29,448,035 $ 28,158,275 $ 35,428,077 $ 35,500,046 $ 42,425,462
Stockholders' equity $ 18,836,254 $ 18,010,053 $ 17,853,117 $ 19,168,853 $ 20,340,988
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Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The following information should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in this report.
Certain statements in this report are forward-looking and are made pursuant to
the safe harbor provisions of the Securities Litigation Reform Act of 1995.
There are risks and uncertainties that may cause results to differ materially
from those set forth in these statements. In particular, unanticipated changes
in the economic, competitive, governmental, technological, marketing or other
factors identified in this report and in the Company's other filings with the
Securities and Exchange Commission could cause such results to differ from those
we have estimated.
GENERAL
To prepare our financial statements, management must make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue, and
expenses, and related disclosure of contingent liabilities. On a continuous
basis, Management reviews its estimates, including those related to returns, bad
debts, inventories, intangible assets, and long lived assets. Management bases
its estimates on historical experience and on various other assumptions that are
believed to be reasonable. Actual results may differ from these estimates as
conditions may vary from those we anticipated.
Critical Accounting Policies
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
the Company's consolidated financial statements.
Bad Debt
The Company maintains allowances for doubtful accounts for estimated losses
resulting from customers' failure to make mandatory payments. If the financial
condition of the Company's customers were to erode, making them unable to make
payments, additional allowances may be required.
Inventory
Inventories are valued at the lower of cost or market, using the first-in,
first-out method. The Company provides reserves for estimated obsolescence of
its inventory equal to the difference between the cost of inventory and the
estimated net realizable value an amount determined by assessing future demand
and market conditions. If actual market conditions deteriorate, additional
inventory reserves may be required. Any change to the reserve is reflected in
cost of sales in the period the revision is made.
Revenue recognition
We recognize revenue when products are shipped to our customers. Sales are shown
net of returns, allowances and discounts.
Income Taxes
The Company records the estimated future tax effects of differences between the
tax basis of assets and liabilities and amount reported in the accompanying
consolidated balance sheets, as well as operating loss
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carry-forwards. We follow specific guidelines regarding the recoverability of
any tax assets recorded on the balance sheet and provide any necessary
allowances as required.
In the discussion of the Company's result of operations that follows, the
Company presents EBITDA, which it defines as earnings before interest, taxes,
depreciation and amortization. The Company believes that the presentation of
EBITDA provides useful information to investors because management uses EBITDA
to assess our operating performance and is a measure commonly used by investors
and financial analysts in evaluating operating performance. However, EBITDA is
not a measurement of operating performance computed in accordance with generally
accepted accounting principles and this measure should not be considered in
isolation or as a substitute for any measure of performance as determined in
accordance with generally accepted accounting principles. EBITDA may not be
comparable to similarly titled measures of other companies. The following table
provides a reconciliation from net income (loss) to EBITDA.
Fiscal Year Ended June 30th
2003 2002 2001
----------- ----------- -----------
Net income (loss) as reported $ 872,552 $ 261,445 $(1,141,174)
Add back:
Provision (benefit) for income taxes 606,349 349,298 (587,878)
Interest (net) 1,942,708 2,186,937 2,964,609
Depreciation and amortization 6,022,207 6,431,351 6,765,109
EBITDA $ 9,443,816 $ 9,229,031 $ 8,000,666
Results of Operations
FISCAL 2003 COMPARED TO FISCAL 2002
The Company's net sales for the fiscal year ended June 30, 2003, were
$90,433,000, an increase of approximately 8% from the fiscal 2002 total of
$84,076,000. The increase in revenue reflects a 11% increase in plastic bottle
sales, offset by a 6% decrease in merchant compounds.
Growth in plastic bottle sales benefited from strong demand for PET bottles by
27% resulting from the Company's recent innovations in PET blow molding
technology. In addition, the Company's fluorinated specialty bottle business
also had strong growth of 19%.
Although PVC compound revenue declined, sales actually increased by 7% on a unit
volume basis, primarily because the Company engaged in more "toll manufacturing"
in fiscal 2003 than in fiscal 2002. In toll manufacturing, the Company uses
customer-provided raw materials and collects only conversion costs and profit.
Our Novatec plastic compound business experienced an overall weaker demand for
rigid PVC compounds during this past fiscal year.
11
Cost of goods sold as a percentage of net sales increased to 79.0% in fiscal
2003 from 77.3% in fiscal 2002. The cost of virtually all plastic resins used in
both the bottle and compound businesses increased dramatically, exacerbated by
the turmoil in the energy markets as a result of the political events in the
Middle East. This has had an adverse effect on all areas of the Company's
business, but particularly our PVC compounding business. Start-up expenses
associated with the addition of new capacity in our PET bottle line also
contributed to the higher cost of goods sold.
Selling, general and administrative ("SG&A") expenses were $9,615,000, or 10.6%
of net sales, for the fiscal year ended June 30, 2003, as compared to
$9,934,000, or 11.8% of net sales, for fiscal 2002. SG&A expenses have decreased
primarily due to improved monitoring of accounts receivable. This monitoring has
reduced the Company's exposure to uncollectible accounts and, accordingly, our
provision for bad debts.
Depreciation and amortization expense for fiscal 2003 decreased by $409,000
primarily because of certain manufacturing assets become fully depreciated in
fiscal 2003.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased from approximately $9,229,000 in fiscal 2002 to approximately
$9,444,000 in fiscal 2003. Performance improvements in the Company's plastic
container segment raised EBITDA by approximately $838,000, but this increase was
offset by a decrease of $623,000 in the performance of the Novatec Plastics
division, mainly due to higher raw material costs.
Income from operations for the fiscal year ended June 30, 2003, increased to
$3,340,000, or 3.7% of net sales, compared to $2,726,000, or 3.2% of net sales,
in fiscal 2002.
Net interest expense decreased $244,000 during fiscal year ended June 30, 2003.
This net decrease is mainly attributable to lower interest rates.
Net income for the fiscal year ended June 30, 2003, increased to $873,000, or
$.12 per diluted share, compared to $261,000, or $.04 per diluted share, for
fiscal 2002 due to factors discussed above.
FISCAL 2002 COMPARED TO FISCAL 2001
The Company's net sales for the fiscal year ended June 30, 2002 were
$84,076,000, a decrease of approximately 6.5% from the fiscal 2001 total of
$89,893,000. This decrease in revenue was mainly attributable to weakness in
HDPE and PVC blow molded bottles, offset by positive growth in our PET and
technical molded bottles. The PET blow molded bottles achieved double-digit
growth, inspiring Management to plan new capacity expansions for this product
line.
Cost of goods sold as a percentage of net sales decreased to 77.3% in 2002 from
79.1% in 2001. Margins in both the bottle and compound businesses continued to
improve, primarily due to cost containment efforts, reductions in manufacturing
overhead, and decreases in raw material costs.
SG&A expenses were $9,934,000, or 11.8% of net sales for the fiscal year ended
June 30, 2002, compared to $10,934,000, or 12.2% of net sales, for the fiscal
year ended June 30, 2001. SG&A expenses decreased primarily due to improvements
in the Company's collection rates for customer accounts receivable, decreases in
professional fees and outside warehouse requirements, and a reorganization of
the Company's Marketing and Administrative Department.
12
Depreciation and amortization expense for fiscal 2002 decreased $334,000 from
fiscal 2001, primarily because certain manufacturing assets became fully
depreciated.
EBITDA increased from approximately $8,001,000 in fiscal 2001 to approximately
$9,229,000 in fiscal 2002. Of the $1,228,000 increase in EBITDA, approximately
$617,000 was the result of the performance improvements in the Company's plastic
containers businesses and the remaining $611,000 was the result of improved
performance in the Novatec Plastics division.
Income from operations for fiscal year ended June 30, 2002, increased to
$2,726,000, or 3.2% of net sales, compared to $1,114,000, or 1.2% of net sales,
in fiscal 2001.
Net interest expense decreased by $778,000 during the fiscal year ended June 30,
2002. This net decrease was primarily due to lower interest rates and reduced
borrowings for capital equipment and working capital needs.
Net income (loss) for the year ended June 30, 2002, increased to $261,000, or
$.04 per diluted share, compared to $(1,141,000), or $(.16) per diluted share,
for fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
Because management generally does not monitor liquidity and capital resources on
a segment basis, this discussion is presented on a consolidated basis.
Cash flow from operations during fiscal 2003 totaled $4,895,000, representing a
decrease of $4,737,000 from the prior fiscal year. Cash flow from operations was
unfavorably impacted by increased inventory levels and timing of income tax
payments.
Cash used for inventories during fiscal year ended June 30, 2003, was
$1,591,000, an increase of $2,987,000 from the prior fiscal year. The increased
inventories were required to support the higher level of sales in fiscal 2003
and anticipated continued sales growth in fiscal 2004.
The Company received $4,157,000 of proceeds from its revolving credit line and
additional long-term debt. These funds were primarily used to acquire capital
assets of $5,762,000 and to reduce long-term debt by $3,240,000. As a result of
increased inventory levels, working capital increased by approximately
$2,517,000 to $14,351,000 at June 30, 2003, from $11,834,000 at June 30, 2002.
The current ratio increased to 2.0 at June 30, 2003, from 1.8 at June 30, 2002.
Assets held for sale, consisting of the Company's Midwest facility, located in
Ardmore, Oklahoma, totaled approximately $262,000 at June 30, 2003. During
fiscal 2003, the Company reduced the carrying value of such assets to reflect
the estimated fair value, less disposition costs. Management expects to sell
these assets and receive proceeds that will approximate fair value during fiscal
2004.
The Company's short term liquidity and short term capital resources are
projected to be adequate to allow the Company to continue to meet its financial
obligations. The Company believes the financial resources available to it,
including internally generated funds and borrowing under its revolving credit
facility, will be sufficient to meet foreseeable working capital requirements.
At June 30, 2003, the Company had
13
unused sources of liquidity consisting of cash and cash equivalents of $673,000
and unused credit under a revolving credit facility of $8,248,000.
The Company's revolving credit facility includes financial and other covenants,
including, without limitation, a minimum equity covenant and a fixed charge
coverage covenant. As of June 30, 2003, the Company was in compliance with the
covenants under its revolving credit facility.
The Company utilizes its revolving loan facilities for seasonal working capital
needs and for other general corporate purposes. Amounts available under the
Company's revolving loan facilities in excess of its seasonal working capital
needs are available to pursue the Company's growth strategy and for other
permitted purposes.
Off-Balance Sheet Arrangements
The Company does not have any material off balance sheet arrangements that have
or are reasonably likely to have a current or future effect on the Company's
financial condition.
14
Contractual Obligations and Commercial Commitments
As of June 30, 2003, the Company is party to notes payable and various operating
leases. These contractual obligations and other commercial commitments are
summarized below. The Company has no other contractual obligations or commercial
commitments as of June 30, 2003.
Contractual Obligations Payments Due by Period
Total 2004 2005 2006 2007 2008 Thereafter
----- ---- ---- ---- ---- ---- ----------
Long term notes payable .......... $29,832,154 $ 3,351,266 $ 3,364,331 $14,264,725 $ 1,893,787 $ 1,346,071 $ 5,611,974
Non-cancelable operating leases .. 6,136,249 1,239,272 818,038 982,444 647,656 621,872 1,826,967
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total contractual cash obligations $35,968,403 $ 4,590,538 $ 4,182,369 $15,247,169 $ 2,541,443 $ 1,967,943 $ 7,438,941
=========== =========== =========== =========== =========== =========== ===========
The operating leases relate to office and plant facilities, vehicles, and office
equipment. We expect the majority of the leases will be renewed or replaced by
other leases.
Other Commercial Commitments Payments Due by Period
Total 2004 2005 2006 2007 2008 Thereafter
----- ---- ---- ---- ---- ---- ----------
Standby letters of credit......... $5,093,573 $3,845,973 $1,247,600 -
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total commercial commitments...... $5,093,573 $3,845,973 $1,247,600 -
========== ========== ========== ========== ========== ========== ==========
Impact of Recently Issued Accounting Standards
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). Fin 45 requires the recognition of certain
guarantees as liabilities at fair market value and is effective for guarantees
issued or modified after December 31, 2002. The Company's financial statements
were not impacted by the adoption of the provisions of FIN 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure"(SFAS 148). SFAS 148 amends Statement
No. 123, Stock-Based Compensation (SFAS 123) to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The disclosure provisions of SFAS 148 are effective for periods ending
after December 15, 2002 and have been incorporated into the footnotes
accompanying the Company's Consolidated Financial Statements, which are included
elsewhere in this Annual Report.
15
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 is the interpretation of Accounting
Research Bulletin No. 51 Consolidated Financial Statements, which addresses
consolidation by business enterprises of variable interest entities. FIN 46 is
effective immediately for all variable interest entities created after January
31, 2003 and becomes effective for the Company on July 1, 2003 for variable
interest entities in which it holds a variable interest that it acquired before
February 1, 2003. The Company does not expect the adoption of FIN 46 to have an
impact on its financial position, results of operations and cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (FAS 149). This statement amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133). The Statement is effective for contracts entered into or modified after
June 30, 2003, and hedging relationships designated after June 30, 2003. Certain
provisions of this statement relating to FAS 133 implementation issues that have
been effective for prior fiscal quarters will continue to be applied in
accordance with their respective effective dates. The Company does not expect
that the adoption of FAS 149 will have an impact on its financial position,
results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" (FAS 150). FAS
150 establishes standards for classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. FAS
150 is effective for all financial instruments created or modified after May 31,
2003, and otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect that the adoption of
FAS 150 will have an impact on the Company's financial position, results of
operations or cash flows.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
Market risks relating to the Company's operations result primarily from changes
in interest rates. Interest rate pricing transactions are used only to the
extent considered necessary to meet our objectives. The Company does not utilize
derivative financial instruments for trading or other speculative purposes.
Interest Rate Risk
The Company's interest rate risk management objective is to limit the impact of
interest rate changes on its net income and cash flow and to lower its overall
borrowing cost. The Company manages our exposure to interest rate fluctuations
with variable rate swap agreements, which effectively convert interest rate
exposure from variable rates to fixed rates of interest. The Company has entered
into these agreements with banks under its senior secured credit facility. You
should also read Notes 1 and 5 to the Company's Consolidated Financial
Statements (included elsewhere in this Annual Report), which outline the
principal amounts, interest rates, fair values, and other terms required to
evaluate the expected cash flows from these agreements.
16
As of June 30, 2003, the Company had total outstanding indebtedness of
$29,832,000. Of this amount, the total indebtedness subject to variable interest
rates was approximately $22,184,000. Based on the Company's June 30, 2003
variable debt levels, a one quarter percent increase or decrease in interest
rates would have had a $55,000 impact on the Company's annual interest expense.
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-
Item 9A. Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. As of the end of the period
covered by this Annual Report, an evaluation was carried out under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the Company's disclosure controls and procedures. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are effective.
Subsequent to the date of their evaluation, there have been no significant
changes in the Company's internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 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
qualified.
Name Age Held Office Since Offices with the Company
- ---- --- ----------------- ------------------------
Phillip L. Friedman 56 1981 President, Chief Executive,and Director
Joel F. Roberts 61 1999 Senior Vice President Operations
Jeffrey Shapiro 54 2000 Senior Vice President & Chief Financial Officer
John F. Turben 68 1996 Director
17
Michael Sherwin 62 1996 Director
John G. Nestor 58 2001 Director
Michael Lynch 55 2002 Director
PHILLIP L. FRIEDMAN has served as the President and Chief Executive
Officer since 1981. Prior to joining the Company, he was employed by Occidental
Chemical Corporation (formerly Hooker Chemical Corporation), a leading
manufacturer and supplier of PVC resins and compounds, for 12 years. His
responsibilities at Occidental culminated in a five-year tenure as Manager of
Business Development and Director of Commercial Development for the Polyvinyl
Chloride Plastics Division. As the Director of Commercial Development, he was
responsible for coordinating and commercializing various research and
development projects within the plastics industry. Mr. Friedman received a BS in
chemical engineering from Pratt Institute and pursued graduate studies in
business administration at Temple University. He is a member of the Executive
Committee of the Company.
JOEL F. ROBERTS joined the Company in 1986 and has served as the
Senior Vice President of Operations for the bottle division since 1999. Before
assuming his current position, he was the Director of Operations for ten years
and a plant manager for three years. Prior to joining the Company, Mr. Roberts
was employed by Technical Plastics Extruders, an extruder of sheet material.
JEFFREY SHAPIRO has served as Chief Financial Officer since March
2000. Prior to joining the Company, he was employed as the Chief Operating
Officer of Universal Process Equipment, a worldwide manufacturer of process
equipment from 1996 to 2000. Mr. Shapiro has nearly twenty years of experience
in the printing and packaging industry and has held various executive positions
from Vice President to Controller to Chief Financial Officer. Prior companies
include Webcraft Technologies and Klearfold Packaging. Mr. Shapiro is a graduate
of Rutgers University and a CPA in New Jersey. He holds CITP certification and
memberships in FEI, NJSCPA, and AICPA.
JOHN F. TURBEN is Chairman of Kirtland Capital Partners and is a KCP
I and KCP II Advisory Board member. He serves as Chairman of The Hickory Group,
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.
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 a member of the Executive
Committee and Audit Committee.
JOHN G. NESTOR has been a Managing Partner of Kirtland Capital
Partners since March 1986. Prior to joining Kirtland, he spent 17 years at
Continental Illinois Bank in a variety of lending positions. He serves as
Chairman of Unifrax Corp., TruSeal Technologies, Inc., Profile Metal Forming and
Essex Crane Rental Corp. He is President of the Board of Trustees of The
Cleveland Foodbank, a member of The Greater Cleveland Committee on Hunger, and
the Investment Committee of Rainbow Babies and Childrens Hospital. A 1967
graduate of Georgetown University, John also holds an MBA from the University of
Notre Dame and an MA in Urban Studies from Loyola University in Chicago. He is a
member of the Audit Committee.
18
MICHAEL LYNCH is the Senior Vice President of Oldcastle, Inc., the
U.S. subsidiary of CRH pl. CRH is an international buildings materials company
headquartered in Ireland. Mr. Lynch is also the Chief Executive Officer of
Allied Buildings Products Corp., which is a subsidiary of Oldcastle, Inc. Mr.
Lynch was elected as a Director on August 28, 2002 in order to fill the vacancy
created by the resignation of Jeffery C. Garvey. He is a member of the Audit
Committee.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's executive officers and directors, and persons who own more than 10% of
a registered class of the Company's equity securities, file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Executive
officers, directors and greater than 10% equity holders are required by
Securities and Exchange Commission rules to furnish the Company with copies of
all forms they file. Based solely on its review of the copies of such forms
received by us and written representations from certain reporting persons, the
Company believes that, during fiscal 2003, all Section 16(a) filing requirements
applicable to its executive officers, directors and 10% equity holders were
satisfied.
Item 11. Executive Compensation.
Incorporated by reference from the Company's definitive information
statement for the Company's 2003 annual meeting of stockholders to be filed with
the Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Information with respect to security ownership of certain beneficial
owners and management is incorporated by reference from the Company's definitive
information statement for the Company's 2003 annual meeting of stockholders to
be filed with the Commission.
Shown below is information concerning all equity compensation plans
and individual compensation arrangements in effect as of the end of the last
fiscal year.
EQUITY COMPENSATION PLAN INFORMATION
Plan Category Number of Securities To Be Issued Weighted Average Exercise Number of Securities Remaining
Upon Exercise of Outstanding Options Price of Outstanding Options Available for Future Issuance
Under Equity Compensation Plans
Equity compensation plans
Approved by security
holders 494,800 $4.07 105,200
Equity compensation plans
not Approved by security
holders -- -- --
Total 494,800 $4.07 105,200\
Item 13. Certain Relationships and Related Transactions.
The Company has entered into a management agreement with Kirtland
Capital Partners, which owns approximately 63% of the Company's outstanding
common stock, pursuant to which Kirtland Capital Partners receives $25,000 per
month for the provision of management services. Mr.
19
Turben is Chairman of Kirtland Capital Partners, and Mr. Nestor is a Managing
Partner of Kirtland Capital Partners.
20
PART III
Item 14. Principal Accountant Fees and Services
Not applicable
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements.
Report of Independent Auditors
Consolidated Balance Sheets at June 30, 2003 and 2002
Consolidated Statements of Operations for the years ended June 30,
2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended June 30,
2003, 2002 and 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, 2003
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).
21
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).
10.11 Third Amendment to Employment Agreement between Phillip L.
Friedman and the Company dated November 29, 1989 (filed as
Exhibit 10.11 to the Company's Form 10-K for the fiscal year
ended June 30, 1990 (the "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).
22
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, Report on Form 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, Report on Form 8-K, and
incorporated herein by reference).
10.15 1996 Incentive Stock Option Plan (filed as Exhibit 10.3 to the
December 12, 1996, Report on Form 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, NA 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 its Subsidiaries dated August 31, 2000 (filed
as an Exhibit 10.19 to the Company's Form 10-K for the fiscal
year ended June 30, 2000, and incorporated herein by
reference).
21 Subsidiaries of the Company (filed as Exhibit 22 to the 1987
10-K, and incorporated herein by reference).
23 Consent of Ernst & Young LLP
31.1 Principal Executive Officer Certification pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Principal Financial Officer Certification pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification requirement under Section 906 of the
Sarbanes-Oxley Act of 2002.
23
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.)
Reports on Form 8-K filed during last quarter of the year ended June 30, 2003:
None.
24
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------ ----------------------
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).
25
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 the Company's Form 10-K for the fiscal year ended June
30, 1990 (the "1990 10-K"), 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, Report on Form 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, Report on Form 8-K and
incorporated herein by reference).
10.15 1996 Incentive Stock Option Plan (filed as Exhibit 10.3 to the
December 12, 1996, Report on Form 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, NA 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 (filed as Exhibit 10.19 to the
Company's Form 10-K for the fiscal year ended June 30, 2000, and
incorporated herein by reference).
21 Subsidiaries of the Company (filed as Exhibit 22 to the 1987 10-K,
and incorporated herein by reference).
23 Consent of Ernst & Young LLP.
31.1 Principal Executive Officer Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
26
31.2 Principal Financial Officer Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 Certification requirement under Section 906 of the Sarbanes-Oxley
Act of 2002.
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.)
27
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: October 1, 2003
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: October 1, 2003
2
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 Director October 1, 2003
- ------------------------------------
Phillip L. Friedman
/s/ Jeffrey Shapiro Chief Financial and Accounting Officer October 1, 2003
- ------------------------------------
Jeffrey Shapiro
/s/ John F. Turben Director October 1, 2003
- ------------------------------------
John F. Turben
/s/ John G. Nestor Director October 1, 2003
- ------------------------------------
John G. Nestor
/s/ Michael Sherwin Director October 1, 2003
- ------------------------------------
Michael Sherwin
/S/ Michael Lynch Director October 1, 2003
- ------------------------------------
Michael Lynch
CONSOLIDATED FINANCIAL STATEMENTS
PVC Container Corporation
June 30, 2003, 2002 and 2001
PVC Container Corporation
Consolidated Financial Statements
June 30, 2003, 2002 and 2001
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
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, 2003 and 2002, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 2003. Our audit also included the
financial statement schedule listed in the index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with 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, 2003 and 2002 and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended June 30, 2003 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.
ERNST & YOUNG LLP
MetroPark, New Jersey
September 17, 2003
1
PVC Container Corporation
Consolidated Balance Sheets
JUNE 30
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 673,055 $ 657,123
Accounts receivable, net of allowance of $999,000 and
$970,000 at June 30, 2003 and 2002, respectively 12,398,916 12,211,388
Inventories, net 12,525,741 10,935,003
Prepaid expenses and other current assets 1,255,440 1,389,661
Deferred income taxes 1,658,154 1,728,068
------------ ------------
Total current assets 28,511,306 26,921,243
Properties, plant and equipment, net 30,297,375 30,557,983
Goodwill 3,296,298 3,296,298
Other assets 339,212 479,536
------------ ------------
$ 62,444,191 $ 61,255,060
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,132,728 $ 7,736,570
Accrued expenses 2,675,908 3,443,970
Income taxes payable 913,548
Current portion of long-term debt 3,351,266 2,992,644
------------ ------------
Total current liabilities 14,159,902 15,086,732
Long-term debt 26,480,888 25,922,049
Interest rate swap 543,436 457,127
Deferred income taxes 2,423,711 1,779,099
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 as of June 30, 2003
and 2002 70,446 70,446
Capital in excess of par value 3,810,981 3,810,981
Retained earnings 15,280,249 14,407,697
Accumulated other comprehensive loss (320,627) (274,276)
Treasury stock, at cost (2,262 shares at June 30, 2003 and 2002) (4,795) (4,795)
------------ ------------
Total stockholders' equity 18,836,254 18,010,053
------------ ------------
$ 62,444,191 $ 61,255,060
============ ============
See accompanying notes.
2
PVC Container Corporation
Consolidated Statements of Operations
FISCAL YEAR ENDED JUNE 30
2003 2002 2001
------------ ------------ ------------
Net sales $ 90,433,217 $ 84,076,390 $ 89,892,821
Cost and expenses:
Cost of goods sold (exclusive of depreciation
and amortization expense shown separately below) 71,456,597 64,985,299 71,079,638
Selling, general and administrative expense 9,614,683 9,933,612 10,934,108
Depreciation and amortization expense 6,022,207 6,431,351 6,765,109
------------ ------------ ------------
87,093,487 81,350,262 88,778,855
------------ ------------ ------------
Income from operations 3,339,730 2,726,128 1,113,966
Other expenses:
Interest expense (1,944,091) (2,214,658) (2,994,589)
Interest income 1,383 27,721 29,980
Other income 81,879 71,552 121,591
------------ ------------ ------------
(1,860,829) (2,115,385) (2,843,018)
------------ ------------ ------------
Income (loss) before provision (benefit) for
income taxes 1,478,901 610,743 (1,729,052)
Provision (benefit) for income taxes 606,349 349,298 (587,878)
------------ ------------ ------------
Net income (loss) $ 872,552 $ 261,445 $ (1,141,174)
============ ============ ============
Earnings (loss) per share:
Basic $ .12 $ .04 $ (.16)
Diluted $ .12 $ .04 $ (.16)
See accompanying notes.
3
PVC Container Corporation
Consolidated Statements of Stockholders' Equity
ACCUMULATED
COMMON STOCK CAPITAL IN OTHER
------------------------------- EXCESS OF RETAINED COMPREHENSIVE
SHARES AMOUNT PAR VALUE EARNINGS LOSS
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2000 7,044,655 $ 70,446 $ 3,810,981 $ 15,287,426 --
Comprehensive loss:
Net loss (1,141,174)
Unrealized loss on interest
Rate swap, net of taxes of
$116,375 $ (174,562)
------------ ------------ ------------ ------------ ------------
Total Comprehensive Loss (1,141,174) $ (174,562)
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2001 7,044,655 $ 70,446 $ 3,810,981 $ 14,146,252 $ (174,562)
Comprehensive income:
Net income 261,445
Unrealized loss on interest rate
swap, net of taxes of $66,476 (99,714)
------------ ------------ ------------ ------------ ------------
Total comprehensive income -- -- -- 261,445 (99,714)
Repurchase of common stock (2,262)
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2002 7,042,393 70,446 3,810,981 14,407,697 (274,276)
Comprehensive income:
Net income 872,552
Unrealized loss on interest rate
swap, net of taxes of $39,958 (46,351)
------------ ------------ ------------ ------------ ------------
Total comprehensive income 872,552 (46,351)
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2003 7,042,393 $ 70,446 $ 3,810,981 $ 15,280,249 ($ 320,627)
============ ============ ============ ============ ============
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
------------ ------------
Balance, June 30, 2000 -- $ 19,168,853
Comprehensive loss:
Net loss (1,141,174)
Unrealized loss on interest
Rate swap, net of taxes of
$116,375 (174,562)
------------ ------------
Total Comprehensive Loss (174,562)
------------ ------------
Balance, June 30, 2001 $ -- $ 17,853,117
Comprehensive income:
Net income 261,445
Unrealized loss on interest rate
swap, net of taxes of $66,476 (99,714)
------------ ------------
Total comprehensive income -- 161,731
Repurchase of common stock (4,795) (4,795)
------------ ------------
Balance, June 30, 2002 (4,795) 18,010,053
Comprehensive income:
Net income 872,552
Unrealized loss on interest rate
swap, net of taxes of $39,958 (46,351)
------------ ------------
Total comprehensive income 826,201
------------ ------------
Balance, June 30, 2003 ($ 4,795) $ 18,836,254
============ ============
See accompanying notes.
4
PVC Container Corporation
Consolidated Statements of Cash Flows
FISCAL YEAR ENDED JUNE 30
2003 2002 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 872,552 $ 261,445 $ (1,141,174)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 6,022,207 6,431,351 6,765,109
Amortization of deferred financing costs 160,388 126,385
Deferred income taxes 754,484 (893,993) (296,876)
Gain on sale of equipment (2,700) (34,250)
Gain on sale of building (40,952)
Changes in assets and liabilities:
Accounts receivable (187,528) 127,758 1,633,723
Inventories (1,590,738) 1,397,080 (659,850)
Prepaid expenses and other current assets 134,221 794,063 (488,501)
Other assets 17,696 655,956 (681,398)
Accounts payable and accrued expenses (371,904) (140,417) (910,330)
Income taxes payable (913,548) 913,548 (184,380)
------------ ------------ ------------
Net cash provided by operating activities 4,895,130 9,632,224 4,002,073
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (5,761,598) (2,729,520) (4,251,517)
Proceeds from sale of equipment 2,700 79,700
Proceeds from sale of building 112,618
------------ ------------ ------------
Net cash (used in) investing activities (5,758,898) (2,616,902) (4,171,817)
CASH FLOWS FROM FINANCING ACTIVITIES
Treasury shares purchased (4,795)
Net proceeds (payments) from revolving credit line 1,384,515
Proceeds from long-term debt 2,772,866 576,893 27,577,806
Payments on indebtedness (3,239,920) (7,402,005) (27,463,250)
Deferred financing costs (37,761) (30,000) (531,644)
------------ ------------ ------------
Net cash provided by (used in) financing activities 879,700 (6,895,907) (417,088)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 15,932 155,415 (586,832)
Cash and cash equivalents, beginning of year 657,123 501,708 1,088,540
------------ ------------ ------------
Cash and cash equivalents, end of year $ 673,055 $ 657,123 $ 501,708
============ ============ ============
See accompanying notes.
5
PVC Container Corporation
Notes to Consolidated Financial Statements
June 30, 2003, 2002 and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
PVC Container Corporation (the "Company") was incorporated in Delaware on June
14, 1968. The Company's major business is the manufacture and sale of a line of
plastic bottles made from polyvinyl chloride compounds, high density
polyethylene resins and polyethylene terephthalate (PET). These bottles are used
primarily for packaging cosmetics, toiletries, foods, household chemicals, lawn
and garden supplies, and industrial chemical products.
CONSOLIDATION
The accompanying financial statements include the accounts of PVC Container
Corporation and its wholly-owned subsidiaries, Novatec Plastics Corporation,
Novapak Corporation, Airopak Corporation, Marpac Industries Inc., Marpac
Southwest, Inc., and PVC Container International Sales Corporation, a foreign
sales company incorporated in the U.S. Virgin Islands. All inter-company
accounts have been eliminated.
CASH EQUIVALENTS
The Company considers investments with maturities of three months or less when
acquired to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is determined
under the first-in, first-out ("FIFO") method.
DEPRECIATION
Depreciation is provided on a straight-line method over the estimated useful
lives of the related assets. Maintenance and repairs are charged to operations
as incurred. Major renewals and betterments are capitalized.
6
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET ASSETS HELD FOR DISPOSITION
Certain facilities held for disposition are included in prepaid expenses and
other current assets, reflecting management's intention to sell such assets.
During 2003, the Company reduced the carrying value of such assets from $500,000
to $262,000 to reflect the estimated fair value less disposal costs. The net
assets held for disposition at June 30, 2003 are included in the Plastic
Containers segment and are expected to be sold in fiscal 2004. The Company had
recorded a $400,000 restructuring charge and related reserve in 2000 related to
this facility, $185,000 of the reserve was used in 2002 and the remaining
reserve was used in 2003 to reduce the carrying value of the net assets.
INTANGIBLES
Effective July 1, 2002, the Company adopted the provisions of FASB Statement No.
142, Goodwill and Other Intangible Assets (SFAS 142). Under the new rules,
goodwill is no longer subject to amortization but is reviewed for potential
impairment upon adoption and thereafter annually or upon the occurrence of an
impairment indicator. SFAS 142 prescribes a two-phase process for impairment
testing of goodwill. The first phase screens for impairment; while the second
phase measures the impairment. In addition, within six months of adopting the
new accounting standard, a transitional impairment test must be completed and
any impairment identified must be reported as a cumulative effect of a change in
accounting principle. The carrying amount of the Company's goodwill is reviewed
on a regular basis for any signs of an impairment. The Company completed the
transitional and annual impairment test in fiscal 2003 and passed the first
phase of the impairment test; therefore, no further testing was required. The
Company did not recognize an impairment loss as a result of impairment testing
completed in fiscal 2003.
7
The annual amortization of goodwill, which would have approximated $293,000 was
no longer required in 2003. The following table reflects unaudited adjusted
results of operations of the Company giving effect to SFAS 142 as if it were
adopted on July 1, 2000.
Year Ended June 30,
------------------------------------------
2003 2002 2001
----------- -------- -----------
Net income (loss), as reported $ 872,552 $261,445 $(1,141,174)
Add back: amortization expense,
net of tax -- 125,427 151,800
----------- -------- -----------
Net income (loss), as adjusted $ 872,552 $386,872 $ (989,374)
=========== ======== ===========
Basic and diluted net income (loss)
per share, as adjusted
Basic $ .12 $ .05 ($ .14)
Diluted $ .12 $ .05 ($ .14)
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.
8
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
REVENUE RECOGNITION
Revenue is recognized upon shipment of the product. Sales are shown net of
returns, allowances and discounts. In accordance with Emerging Issues Task Force
EITF 00-10, "Accounting for Shipping and Handling Fees and Costs," the Company
reports amount billed to customers for shipping and handling fees as sales in
the Company's "Consolidated Statements of Operations." Costs incurred by the
Company for shipping and handling fees are reported as cost of sales. As a
result of adopting the provisions of EITF00-10, the Company reclassified
shipping and handling costs previously reported in Net Sales to Cost of Sales
for all periods presented.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to expense as incurred and
amounted to $290,000, $263,000, and $272,000 in 2003, 2002 and 2001,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in operations or
expected to be disposed of when events and circumstances indicate that the
assets might be impaired and when those assets are expected to generate
undiscounted cash flows that would be less than their carrying amounts.
STOCK-BASED COMPENSATION
As permitted by Financial Accounting Standards Board (FASB) Statement No. 123,
Accounting for Stock-Based Compensation (SFAS 123), the Company has elected to
follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25) and related interpretations in accounting for its employee
stock option plans. Under APB 25, compensation expense is calculated at the time
of option grant based upon the difference between the exercise price of the
option and the fair market value of the Company's common stock at the date of
grant, and is recognized over the vesting period.
9
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table illustrates the effect on net income (loss) and net income
(loss) per common shares for the three fiscal years ended June 30, 2003, as if
the Company had applied the fair value method to measure stock-based
compensation, required under the disclosure provision of SFAS 123:
2003 2002 2001
------------- ------------- -------------
Net income (loss) as reported $ 872,552 $ 261,445 $ (1,141,174)
Add: Stock based compensation
Included in reported net income,
(loss), net of taxes ---- ---- ----
Deduct: Stock-based compensation expense
Under fair value report, net of taxes (9,225) (45,917) (50,583)
-----------------------------------------------------
Pro forma net income (loss) $ 863,327 $ 215,528 $ (1,191,757)
Income (loss) per share:
Net income (loss) as reported:
Basic $ .12 $ .04 $ (.16)
Diluted $ .12 $ .04 $ (.16)
Pro forma net income (loss)
Basic $ .12 $ .04 $ (.17)
Diluted $ .12 $ .04 $ (.17)
PER SHARE INFORMATION
Per share information is presented in accordance with SFAS No. 128, Earnings Per
Share. Basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share includes the
dilutive effect of all such securities.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company recognizes all of its derivative instruments on the balance sheets
as either assets or liabilities at fair value. The accounting for changes in the
fair value (i.e., gains or losses) of a derivative instrument depends on whether
it has been designated and qualifies as part of a hedging relationship and
further, on the type of hedging relationship. For those derivative instruments
that are designated and qualify as hedging instruments, a company must designate
the hedging instrument, (based upon the exposure being hedged), as either a fair
value hedge, a cash flow hedge, or a hedge of a net investment in a foreign
operation.
10
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For a derivative instrument that is designated and qualifies as cash flow hedge
(i.e., hedges the exposure to variability on expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on
a derivative instrument that is designated and qualifies as a cash flow hedge is
reported as a component of other comprehensive income and reclassified into
earnings in the period or periods during which the hedged transaction affects
earnings. The remaining gain or loss on the derivative instrument, if any, is
recognized in current earnings to the extent it exceeds the cumulative change in
the present value of future cash flows of the hedged item.
At June 30, 2003, the Company had interest-rate swap agreements, designated as
cash flow hedges, that effectively convert approximately $7,648,000 of its
floating-rate debt to a fixed-rate through 2005. The interest rate swap
agreements hedge the floating interest rate by reducing the impact of interest
rate charges on future interest expense. The fair value of the interest-rate
swap at June 30, 2003, was approximately $543,000 and is included in the
accompanying consolidated balance sheet. Losses reported in accumulated, other
comprehensive loss, that are expected to be reclassified into earnings in the
next twelve months total approximately $241,000 before taxes.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 requires the recognition of certain
guarantees as liabilities at fair market value and is effective for guarantees
issued or modified after December 31, 2002. The Company's financial statements
were not impacted by the adoption of the provisions of FIN 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure"(SFAS 148). SFAS 148 amends Statement
No. 123, Stock-Based Compensation (SFAS 123) to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The disclosure provisions of SFAS 148 are effective for periods ending
after December 15, 2002 and have been incorporated into the accompanying
financial statement footnotes.
11
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 is the interpretation of Accounting
Research Bulletin No. 51 Consolidated Financial Statements, which addresses
consolidation by business enterprises of variable interest entities. FIN 46 is
effective immediately for all variable interest entities created after January
31, 2003 and becomes effective for the Company on July 1, 2003 for variable
interest entities in which it holds a variable interest that it acquired before
February 1, 2003. The Company does not expect the adoption of FIN 46 to have an
impact on its financial position, results of operations and cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). This statement amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133). The Statement is effective for contracts entered into or modified after
June 30, 2003, and hedging relationships designated after June 30, 2003. Certain
provisions of this statement relating to SFAS 133 implementation issues that
have been effective for prior fiscal quarters will continue to be applied in
accordance with their respective effective dates. The Company does not expect
that the adoption of SFAS 149 will have an impact on its financial position,
results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" (SFAS 150).
SFAS 150 establishes standards for classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for all financial instruments created or modified after May 31,
2003, and otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect that the adoption of
SFAS 150 will have an impact on the Company's financial position, results of
operations or cash flows.
12
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates that affect the financial statements include, but are not
limited to, recoverability of inventories, collectibility of accounts
receivable, returns, useful lives of property, plant and equipment and related
amortization periods, recoverability of long-lived assets and fair value of net
assets held for sale.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. INVENTORIES
Inventories consist of the following:
2003 2002
------------ ------------
Raw materials $ 6,023,810 $ 5,452,207
Finished goods 6,264,247 5,341,191
Reserves (1,036,762) (1,154,962)
------------ ------------
11,251,295 9,638,436
Molds for resale, in production 840,605 834,621
Supplies 433,841 461,946
------------ ------------
Total inventories $ 12,525,741 $ 10,935,003
============ ============
13
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
3. PROPERTIES, PLANT AND EQUIPMENT
ESTIMATED
USEFUL LIFE
2003 2002 IN YEARS
----------- ----------- -----------
Land $ 686,343 $ 686,343
Building and improvements 16,773,267 16,215,800 20-25
Machinery and equipment 53,722,845 51,326,146 7-10
Molds 6,003,311 4,980,605 3-5
Office furniture and equipment 3,845,375 3,649,772 5-10
Motor vehicles 125,718 141,335 3-5
Leasehold improvements 24,845 24,845 12
Construction in Progress 1,589,124
----------- -----------
82,770,828 77,024,846
Less accumulated depreciation 52,473,453 46,466,863
----------- -----------
$30,297,375 $30,557,983
=========== ===========
4. ACCRUED EXPENSES
Accrued expenses at June 30 consists of:
2003 2002
---------- ----------
Accrued payroll $ 433,316 $ 534,403
Accrued vacation 713,247 733,653
Accrued employee benefits 737,654 1,101,115
Other accrued expenses 791,691 1,074,799
---------- ----------
$2,675,908 $3,443,970
========== ==========
14
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt at June 30 consists of the following:
2003 2002
------------ ------------
Notes payable:
South Carolina Economic Development Authority:
Loan $ 3,595,955 $ 3,596,384
Pennsylvania Industrial Development Authority:
Loan 695,905 771,870
GE Capital Public Finance:
Equipment loans 1,575,350 1,946,665
Building loan 3,300,488 3,589,661
PNC Bank:
Term notes 8,528,844 10,535,636
Revolving line of credit 8,899,404 7,514,889
Other 3,236,208 959,588
------------ ------------
29,832,154 28,914,693
Less current portion (3,351,266) (2,992,644)
------------ ------------
$ 26,480,888 $ 25,922,049
============ ============
Maturities of long-term debt are as follows: 2004 - $3,351,266; 2005 -
$3,364,331; 2006 - $14,264,725; 2007 - $1,893,787; 2008 - $1,346,071; and 2009
to 2016 - $5,611,974. Interest paid amounted to $1,946,630, $2,358,089, and
$3,027,737 in 2003, 2002, and 2001, respectively.
PNC AGREEMENT
The Company entered into a $43,750,000 senior secured credit facility with PNC
Bank in August 2000. The credit facility is structured as a five year
$25,000,000 senior revolving credit facility, a five year $12,183,000 senior
term loan, a five year $4,192,000 standby letter of credit, and a $2,000,000
capital expenditure line. At June 30, 2003, the Company was in compliance with
all of the credit facility's covenants. The credit facility is secured by
accounts receivable, inventories, property, plant and equipment.
15
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT AND PLEDGED ASSETS (CONTINUED)
The Term Notes bear interest at LIBOR plus 300 basis points and the revolving
line bears interest at LIBOR plus 250 basis points. The effective interest rates
of the term loan and revolver were 4.54% and 4.04%, respectively, in fiscal
2003. The Company entered into interest-rate swap agreements (Note 1) to
effectively convert a portion of the floating Term Note debt interest to a fixed
rate.
The $2 million capital expenditure line of credit bears interest at LIBOR plus
300 basis points. Borrowings against this line totaled approximately $1.4
million at June 30, 2003.
NOTE PAYABLE - SOUTH CAROLINA ECONOMIC DEVELOPMENT AUTHORITY "S.C. EDA"
This note was obtained to finance the construction of the Company's South
Carolina manufacturing facility and is due April 1, 2016. Prepayments may be
made without penalty. This note is subject to prior mortgages in favor of the
PNC Bank. The effective interest rate on this obligation was 1.4% in 2003 and
1.9% in 2002. The note is secured by property, plant and equipment.
The agreement requires the funds to be held in trust by a third-party financial
institution until 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 subject to 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 interest rate on this note would be
retroactively adjusted. There is an unused letter of credit amounting to
approximately $3.6 million in conjunction with this note.
NOTE PAYABLE - PENNSYLVANIA INDUSTRIAL DEVELOPMENT AUTHORITY
During fiscal year 1999, the Company obtained a $1.0 million loan from the
Pennsylvania Industrial Development Authority ("PIDA") to assist in financing
the construction of its Hazleton, Pennsylvania manufacturing facility. The loan
is payable in 145 equal monthly installments of $8,634, with an interest rate of
3.75% and a maturity date of March 1, 2011. The loan may be prepaid in whole or
in part subject to certain requirements stated in the loan agreement. The loan
is secured by the property.
16
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT AND PLEDGED ASSETS(CONTINUED)
GE CAPITAL PUBLIC FINANCE BUILDING AND EQUIPMENT LOANS
During fiscal year 1998, the Hazleton Area Industrial Development Authority
approved $7,250,000 tax-exempt Industrial Development Bonds. The Bonds were
purchased and are held by GE Capital Public Finance, Inc., to finance a loan to
the Company in conjunction with the Company's Hazleton, Pennsylvania
manufacturing facility. The loan is payable in 144 decreasing monthly
installments at an interest rate of 5.15%, with a final lump sum payment of
$1,860,530 due June 15, 2010. The loan may be prepaid in whole or in part
subject to certain requirements stated in the loan agreement. The loan is
secured by the property.
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., to finance
a loan to the Company in conjunction with the Company's expansion of its Paris,
Illinois manufacturing facility. The loan is payable in 120 decreasing monthly
installments at an interest rate of 5.90%, with a final lump sum payment of
$602,952 due April 1, 2007. The loan may be prepaid in whole or in part subject
to certain requirements stated in the loan agreement. The loan is secured by the
property and the equipment. The Company has unused letters of credit amounting
to approximately $1.2 million in conjunction with this loan.
The agreements for all these bonds require the funds to be held in trust by a
third-party financial institution until building, construction, or equipment
purchases are made. The funds are invested at rates of return comparable to the
interest rates paid by the Company on the obligations. Purchases subject to
these agreements are paid directly from the trust.
17
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT AND PLEDGED ASSETS (CONTINUED)
The bonds issued by the City of Paris to fund the debt are tax exempt. Should
the tax-exempt status of these bonds be negated, the interest rate of on the
related note would be retroactively adjusted.
OTHER
Other loans consist of notes payable to various banks for equipment, real estate
improvements and development and expansion of the Company's manufacturing
plants. The notes bear interest at rates ranging from 3% to 7.75% and are
payable in monthly installments through 2009. The loans are secured by the
Company's equipment, land and buildings.
The carrying amounts of the aforementioned debt agreements approximate fair
value.
6. OPERATING LEASES
Minimum rental commitments under non-cancellable operating leases are payable as
follows:
YEAR AMOUNT
----------------------------
2004 $1,239,272
2005 818,038
2006 982,444
2007 647,656
2008 621,872
Thereafter 1,826,967
Rental expense for operating leases amounted to $1,139,611, $1,134,309, and
$1,124,857 in 2003, 2002, and 2001, respectively.
7. PENSION PLAN
On September 1, 1990, the Company instituted a non-contributory defined benefit
pension plan for all eligible full-time union employees. Benefits are based on
years of service. The Company contributes to the plan amounts, actuarially
determined by the Unit Credit Actuarial Cost Method, that provides the plan with
sufficient assets to meet future benefit payment requirements. The plan's assets
are invested principally in short-term investments.
The following table sets forth the plan's funded status and the amount
recognized in the Company's consolidated balance sheet:
18
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
7. PENSION PLAN (CONTINUED)
2003 2002
----------- -----------
Change in benefit obligation:
Benefit obligation at beginning of year $ 933,277 $ 917,868
Service cost 8,298 8,132
Interest cost 70,492 65,465
Actuarial loss (gain) 22,018 (29,701)
Benefits paid (31,221) (28,488)
----------- -----------
Benefit obligation at end of year $ 1,002,864 $ 933,276
=========== ===========
Change in plan assets:
Fair value of plan assets at beginning of year $ 1,017,742 $ 990,167
Actual return on plan assets 39,030 38,947
Employer contribution -- 17,116
Benefits paid, including expenses (31,221) (28,488)
----------- -----------
Fair value of plan assets at end of year $ 1,025,551 $ 1,017,742
=========== ===========
Funded status $ 22,687 $ 84,466
Unrecognized net actuarial loss 292,328 238,030
Unrecognized prior service cost 11,730 13,405
Unrecognized transition obligation 15,087 15,087
----------- -----------
Pension asset $ 341,832 $ 350,988
=========== ===========
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 $ 8,299 $ 8,132
Interest cost 70,492 65,465
Expected return on plan assets (85,199) (83,382)
Amortization of transition obligation 3,018 3,018
Amortization of prior service cost 1,675 1,675
Recognized net actuarial loss 10,872 7,882
----------- -----------
Net periodic benefit cost $ 9,157 $ 2,790
=========== ===========
19
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
7. PENSION PLAN (CONTINUED)
The Company maintains a voluntary salary reduction 40l(k) plan covering all
non-union and union employees with more than one year of service. Eligible
employees may elect to contribute up to 15% of their salaries on a pre-tax basis
and an additional 10% of their salaries on an after-tax basis up to ERISA's
maximum annual level. The Company contributes 25% on the first 6% of the
non-union employees' pre-tax contribution, and 10% on the first 6% of the union
employees' pre-tax contribution. The Company may make additional discretionary
contributions to the plan based on earnings. The Company contributed $143,716,
$136,340, and $148,255 in 2003, 2002, and 2001, respectively.
8. COMMON STOCK AND STOCK OPTIONS
In 1997, the Company's Board of Directors approved and ratified, an incentive
stock option plan to enable the Company to grant options to purchase up to
600,000 shares of the Company's common stock through the plan's expiration on
January 16, 2007. This plan conforms to the requirements of Rule 16-3 of the
Securities Exchange Act of 1934. The options granted vest at the rate of 20-25%
per year. All options have been granted at fair market value.
SFAS 123 requires pro forma information regarding net income and earnings per
share as if the Company had accounted for its employee stock options and
warrants ("equity awards") under the fair value method of SFAS 123. The fair
value of the Company's equity awards was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 2003, 2002 and 2001, respectively: risk-free interest rates of
approximately 2.4%, 4.1% and 5.5%; expected volatility of 0.6, 0.4 and 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.
20
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
8. COMMON STOCK AND STOCK OPTIONS (CONTINUED)
A summary of stock option activity follows:
WEIGHTED-
AVERAGE
EXERCISE
OPTIONS PRICE
------- ----------
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
Granted 191,000 2.82
Forfeited (15,000) 4.96
Exercised -- --
------- -----
Outstanding at June 30, 2002 544,800 4.10
Granted 10,000 1.55
Forfeited (60,000) 3.69
Exercised
------- -----
Outstanding at June 30, 2003 494,800 $4.07
======= =====
Exercisable at June 30, 2001 325,550 $4.74
======= =====
Exercisable at June 30, 2002 415,300 $4.50
======= =====
Exercisable at June 30, 2003 423,050 $4.37
======= =====
Exercise prices for options outstanding as of June 30, 2003, ranged from $1.55
to $6.38 per share. The weighted average remaining contractual life of these
options is 7.65 years.
21
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES
The provision (benefit) for income taxes consists of:
2003 2002 2001
----------- ----------- ---------
Current:
Federal $ 746,934 $ 897,168 $(109,189)
State 220,186 274,947 51,000
----------- ----------- ---------
967,120 1,172,115 (58,189)
Deferred:
Federal (277,794) (637,683) (411,157)
State (82,977) (185,134) (118,532)
----------- ----------- ---------
(360,771) (822,817) (529,689)
----------- ----------- ---------
Total provision (benefit) $ 606,349 $ 349,298 $(587,878)
=========== =========== =========
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:
2003 2002
---------- ----------
Deferred tax liabilities:
Long-lived assets and other $2,423,711 $1,779,099
---------- ----------
Total deferred tax liabilities $2,423,711 1,779,099
Deferred tax assets:
Bad debt reserves 359,793 488,502
Inventory reserves 414,704 321,985
Accrued liabilities and other 883,657 917,581
---------- ----------
Total deferred tax assets 1,658,154 1,728,068
---------- ----------
Net deferred tax liabilities $ 765,557 $ 51,031
========== ==========
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:
2003 2002 2001
---- ---- ----
Federal tax at statutory rate 34% 34% 34%
Effect of:
State income taxes, net of federal income tax benefit 6 9 2
Goodwill amortization 0 16 (5)
Foreign operations (2) (7) 2
Other 3 5 1
---- ---- ----
Effective income tax rate 41% 57% 34%
==== ==== ====
22
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
Income taxes paid amounted to $1,246,078, $244,000, and $163,000 in 2003, 2002,
and 2001, 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, 2003, 2002, and 2001. 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, 2003, 2002, and 2001.
2003 2002 2001
--------- --------- ---------
Weighted-average shares for basic earnings
per share 7,042,393 7,044,379 7,044,655
Effect of dilutive securities:
Employee stock options 1,092 -- --
--------- --------- ---------
Adjusted weighted-average shares for diluted
earnings per share 7,043,485 7,044,379 7,044,655
========= ========= =========
11. SEGMENTS
The Company identifies its segments based upon differences in the types of
products each sells. The Company currently has two reportable segments: Plastic
Containers and Compound. The Plastic Containers segment manufactures custom
designed PET, HDPE, and PVC containers mainly for cosmetics, toiletries, foods,
household chemicals, lawn and garden supplies, and industrial chemical products.
The Compound segment manufactures PVC compound for internal use and for sale.
Our customers use PVC compound for extruded profiles and accessories, furniture,
molding and other indoor fixtures, and molded electrical and electronic
housings. Both of the Company's segments sell to customers located primarily in
the United States.
The reportable segments are managed separately because they use different
manufacturing processes and serve different markets. The Company evaluates each
segment's performance based on profit or loss from operations 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 a
consolidated total are as follows:
23
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
11. SEGMENTS (CONTINUED)
2003 2002 2001
------------ ------------ ------------
Net revenues:
Compound total $ 20,851,641 $ 21,261,456 $ 23,432,157
Intersegment revenue - Compound (6,466,334) (5,971,921) (7,051,553)
------------ ------------ ------------
Revenues from external customers - Compound
14,385,307 15,289,535 16,380,604
Plastic Containers 76,047,910 68,786,855 73,512,217
------------ ------------ ------------
Total consolidated net revenues $ 90,433,217 $ 84,076,390 $ 89,892,821
============ ============ ============
Depreciation and amortization expense:
Compound $ 383,044 $ 367,316 $ 365,659
Plastic Containers 5,639,163 6,064,035 6,399,450
------------ ------------ ------------
Total consolidated depreciation and
amortization expense $ 6,022,207 $ 6,431,351 $ 6,765,109
============ ============ ============
Interest expense:
Compound $ 85,618 $ 107,055 $ 145,720
Plastic Containers 1,858,473 2,107,603 2,848,869
------------ ------------ ------------
Total consolidated interest expense $ 1,944,091 $ 2,214,658 $ 2,994,589
============ ============ ============
Net income (loss):
Compound $ 510,949 $ 905,606 $ 565,607
Plastic Containers 361,603 (644,161) (1,706,781)
------------ ------------ ------------
Total consolidated net income (loss) $ 872,552 $ 261,445 $ (1,141,174)
============ ============ ============
Total assets:
Compound $ 5,933,014 $ 6,612,289 $ 8,041,676
Plastic Containers 56,511,177 54,642,771 60,084,710
------------ ------------ ------------
Total consolidated assets $ 62,444,191 $ 61,255,060 $ 68,126,386
============ ============ ============
Capital expenditures:
Compound $ 321,358 $ 190,708 $ 483,093
Plastic Containers 5,440,240 2,538,812 3,768,424
------------ ------------ ------------
Total consolidated capital expenditures $ 5,761,598 $ 2,729,520 $ 4,251,517
============ ============ ============
24
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
12. QUARTERLY FINANCIAL DATA
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present selected financial data by quarter for the years
ended June 30, 2003, and 2002:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ----------- ----------
2003
Net sales $ 21,336,996 $ 20,984,155 $23,942,055 24,170,011
Cost of goods sold (exclusive of
depreciation and amortization) 17,543,569 16,490,927 18,324,270 19,097,831
Selling, general and administrative
expenses 2,277,619 2,342,921 2,589,589 2,404,554
Depreciation and amortization 1,461,242 1,490,371 1,494,152 1,576,442
Net (loss) earnings (201,425) 102,826 617,706 353,445
(Loss) earnings per share of common
stock:
Basic:
Net (loss) earnings $ (0.03) $ 0.01 $ 0.09 $ 0.05
Diluted:
Net (loss) earnings $ (0.03) $ 0.01 $ 0.09 $ 0.05
2002
Net sales $ 19,686,279 $ 18,038,353 $22,034,855 $24,316,903
Cost of goods sold (exclusive of
depreciation and amortization) 15,872,305 13,868,467 16,325,620 18,918,907
Selling, general and administrative
expenses 2,388,805 2,479,907 2,739,888 2,325,012
Depreciation and amortization 1,554,425 1,562,216 1,579,280 1,735,430
Net (loss) earnings (483,630) (252,753) 588,261 409,567
(Loss) earnings per share of common
stock:
Basic:
Net (loss) earnings $ (0.07) $ (0.04) $ 0.08 $ 0.06
Diluted:
Net (loss) earnings $ (0.07) $ (0.04) $ 0.08 $ 0.06
13. SUBSEQUENT EVENT
In the first quarter of fiscal 2004, the Company decided, after Board approval,
to transfer most of the personnel and equipment from its Kingston, New York
plant to its Philmont, New York facility and convert the Kingston plant to a
warehouse on or around October 1, 2003. The Company does not expect the transfer
to result in material impairment losses on its long-lived assets.
25
PVC Container Corporation
Schedule II - Valuation and Qualifying Accounts
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS
--------------------------- AMOUNT
CHARGED WRITTEN
BALANCE CHARGED TO TO OTHER OFF BALANCE
BEGINNING COSTS AND ACCOUNTS AGAINST END OF
DESCRIPTION OF YEAR EXPENSES (DESCRIBED) RESERVE YEAR
- --------------------- --------- ------------ ----------- -------- --------
Valuation accounts
deducted from assets
to which they apply:
June 30, 2003:
Accounts receivable $ 970,000 $ 137,000 $ 108,000 $ 999,000
Inventory 1,155,000 412,000 $ 530,000 $1,037,000
June 30, 2002:
Accounts receivable 2,012,000 874,000 1,916,000 970,000
Inventory 710,000 1,137,000 692,000 1,155,000
June 30, 2001:
Accounts receivable 1,010,000 1,135,000 133,000 2,012,000
Inventory 587,000 909,000 786,000 710,000