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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
( ) 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
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(Exact name of registrant as specified in its charter)
Delaware 13-2616435
- ----------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Industrial Way West, Eatontown, New Jersey 07724
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (732) 542-0060
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ( ) No (X)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 17, 2004
- ---------------------- --------------------------------
Common $.01 par value 7,042,393 shares
CONTENTS
PAGE
NO.
-----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2004 and June 30, 2003 3
Consolidated Statements of Operations - Three Months and Nine Months
Ended March 31, 2004 and 2003 (Unaudited) 4
Consolidated Statements of Cash Flows - Nine Months Ended
March 31, 2004 and 2003 (Unaudited) 5
Notes to Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14-18
Item 3. Quantitative and Qualitative Disclosure About Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibits 22-24
Part I Financial Information
Item 1: Consolidated Financial Statements
PVC Container Corporation
Consolidated Balance Sheets
(Unaudited)
MARCH JUNE
31, 2004 30, 2003
-----------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 196,697 $ 673,055
Accounts receivable, net 13,783,316 12,398,916
Inventories 15,246,806 12,525,741
Prepaid expenses and other current assets 2,013,291 1,255,440
Deferred income taxes 1,338,388 1,658,154
-----------------------------
Total current assets 32,578,498 28,511,306
Properties, plant and equipment at cost, net 29,255,803 30,297,375
Goodwill, net of accumulated amortization 3,296,298 3,296,298
Other assets 210,231 339,212
-----------------------------
$ 65,340,830 $ 62,444,191
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,013,347 $ 8,132,728
Accrued expenses 2,353,180 2,675,908
Current portion of long-term debt 3,984,079 3,351,266
-----------------------------
Total current liabilities 14,350,606 14,159,902
Long-term debt 29,210,868 26,480,888
Interest rate swap 322,019 543,436
Deferred income taxes 2,625,082 2,423,711
Stockholders' equity:
Preferred stock, par value $1.00, authorized 1,000,000 shares, none issued -- --
Common stock, par value $.01, authorized 10,000,000 shares, 7,044,655 shares
issued and outstanding as of March 31, 2004 and June 30, 2003 70,446 70,446
Capital in excess of par value 3,810,981 3,810,981
Retained earnings 15,145,614 15,280,249
Accumulated other comprehensive loss (189,991) (320,627)
Treasury stock, at cost (2,262 shares at March 31,
2004 and June 30, 2003) (4,795) (4,795)
-----------------------------
Total stockholders' equity 18,832,255 18,836,254
-----------------------------
$ 65,340,830 $ 62,444,191
=============================
See accompanying notes.
3
PVC Container Corporation
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
---------------------------- ----------------------------
2004 2003 2004 2003
---------------------------- ----------------------------
Net sales $ 26,954,948 $ 23,942,055 $ 68,845,845 $ 66,263,206
Cost and expenses:
Cost of goods sold (exclusive of depreciation and
amortization expense shown separately below) 21,414,791 18,324,270 55,095,922 52,358,766
Selling, general and administrative expenses 2,811,758 2,589,589 7,574,373 7,210,129
Depreciation and amortization 1,630,441 1,494,152 4,727,927 4,445,765
Provision for restructuring
And other exit activities 185,505 -- 461,990 --
---------------------------- ----------------------------
26,042,495 22,408,011 67,860,212 64,014,660
Income from operations 912,453 1,534,044 985,633 2,248,546
Other income (expense):
Interest expense (458,304) (487,786) (1,435,351) (1,448,586)
Other income 88,065 700 232,565 79,880
---------------------------- ----------------------------
(370,239) (487,086) (1,202,786) (1,368,706)
---------------------------- ----------------------------
Income (loss) before (provision)
benefit for income taxes 542,214 1,046,958 (217,153) 879,840
(Provision) benefit for income taxes (228,822) (429,252) 82,518 (360,733)
---------------------------- ----------------------------
Net income (loss) $ 313,392 617,706 $ (134,635) $ 519,107
============================ ============================
Earnings (loss) per share (basic and diluted) $ .04 $ .09 $ (.02) $ .07
============================ ============================
See accompanying notes.
4
PVC Container Corporation
Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED
MARCH 31
2004 2003
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (134,635) $ 519,107
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 4,727,927 4,445,765
Amortization of deferred financing costs 135,709 119,043
Deferred income taxes 430,356 445,899
Gain on sale of equipment (144,500) --
Loss on sale of building 122,322
Changes in assets and liabilities:
Accounts receivable, net (1,384,400) (313,186)
Inventories (2,721,065) (2,446,858)
Prepaid expenses and other current assets (1,020,103) (1,538,246)
Other assets 13,272 13,274
Accounts payable and accrued expenses (442,109) 671,587
Income taxes payable -- (583,844)
---------------------------
Net cash (used in) provided by operating activities (417,226) 1,332,541
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (3,722,012) (3,485,790)
Proceeds from sale of equipment 144,500 --
Proceeds from sale of building 175,587
---------------------------
Net cash used in investing activities (3,401,925) (3,485,790)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from revolving credit line 3,606,415 1,298,178
Payments of long-term debt (2,775,440) (2,385,585)
Proceeds from long-term debt 2,531,818 2,748,636
Deferred financing costs (20,000) (37,208)
---------------------------
Net cash provided by financing activities 3,342,793 1,624,021
---------------------------
Net decrease in cash and cash equivalents (476,358) (529,228)
Cash and cash equivalents at beginning of period 673,055 657,123
---------------------------
Cash and cash equivalents at end of period $ 196,697 $ 127,895
===========================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 1,436,155 $ 1,449,166
===========================
Income taxes paid $ 316,617 $ 944,078
===========================
See accompanying notes.
5
Part I
PVC Container Corporation
Notes to Consolidated Financial Statements
Note 1 Description of Business
General
PVC Container Corporation (the "Company") was incorporated in Delaware
in 1968. The Company's major business activity consists of the
manufacture and sale of a line of plastic bottles ("bottles") made from
polyvinyl chloride ("PVC") compounds, high-density polyethylene
("HDPE") and polyethylene terephthalate ("PET") resins. The Company
sells these bottles through Novapak Corporation, which is a
wholly-owned subsidiary. Another wholly-owned subsidiary, Airopak
Corporation, produces bottles that are fluorinated to improve the
chemical resistance and barrier properties. All of these bottles are
used primarily for the packaging of cosmetics, toiletries, foods,
household chemicals, lawn and garden and industrial chemical products.
The Company produces and sells PVC compounds through its wholly-owned
subsidiary, Novatec Plastics Corporation, Inc. These compounds are used
by the Company or sold to other plastic bottle manufacturers whose
products compete with those produced by the Company.
During the last several years, the Company has endeavored to diversify
its PVC compound business. The Company has developed and begun to sell
several categories of specialty PVC compounds for non-bottle
applications including extruded profiles and accessories, furniture,
molding and other indoor fixtures, and a variety of injection molded
electrical and electronic housings.
Note 2 Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States for interim financial reporting, pursuant to the
rules and regulations of the Securities and Exchange Commission. In the
opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of
March 31, 2004, and the results of operations and cash flows for the
three and nine month periods ended March 31, 2004 and 2003.
6
While the Company believes that the disclosures presented are adequate
to make the information not misleading, these consolidated financial
statements should be read in conjunction with the financial statements
and the notes included in the Company's annual report on Form 10-K for
the fiscal year ended June 30, 2003.
Diluted earnings per share are based on the average number of common
shares outstanding during each period, assuming exercise of all stock
options having exercise prices less than the average market price of
the common stock using the treasury stock method. The weighted average
number of shares of Common Stock used in computing basic and diluted
earnings (loss) per share were as follows:
THREE MONTHS ENDED NINE MONTHS MARCH
MARCH 31 ENDED 31
2004 2003 2004 2003
Weighed average common shares outstanding used to
calculate basic earnings (loss) per share 7,042,393 7,042,393 7,042,393 7,042,393
Net effect of dilutive securities based upon the
treasury stock method using an average market
price 32,632 719 * 313
Weighed average common and dilutive securities
outstanding used to calculate diluted earnings
(loss) per share 7,075,025 7,043,112 7,042,393 7,042,706
========= ========= ========= =========
- --------------
* Any dilution arriving from the Company's outstanding stock options are not
included as their affect is anti-dilutive.
The accompanying consolidated financial statements include the accounts
of PVC Container Corporation and its wholly-owned subsidiaries Novapac
Corporation, Novatec Plastics Corporation, Marpac Industries, Inc.,
Airopak Corporation, and PVC Container International Sales Corporation,
a foreign sales company incorporated in the U.S. Virgin Islands in
1993. All inter-company accounts have been eliminated.
Note 3 Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
7
Note 4 Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board (FASB)
issued Statement 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, SFAS 148 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 as below.
As permitted by SFAS 123, the Company has elected to follow the
intrinsic value method under Accounting Principle 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, no compensation expense is recognized at the time of
option grant as long as the exercise price of the Company's employee
stock options is fixed and equals or exceeds the fair market value of
the underlying common stock on the date of grant.
The following table illustrates the effect on net loss and net loss per
common share as if the Company had applied the fair value method to
measure stock-based compensation, required under the disclosure
provisions of SFAS 123:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
2004 2003 2004 2003
Net income (loss), as reported $ 313,392 $ 617,706 $ (134,625) $ 519,107
Add: Stock-based compensation included
in reported net loss, net of tax -- -- -- --
Deduct: Stock-based
compensation expense under
fair value reporting, net of tax (6,507) (796) (19,521) (3,475)
Pro forma net income (loss) $ 306,885 $ 616,910 $ (154,146) $ 515,632
======================== ========================
Income (loss) per share:
Net income (loss), as reported:
Basic $ .04 $ .09 $ (.02) $ .07
Diluted $ .04 $ .09 $ (.02) $ .07
Pro forma net income (loss):
Basic $ .04 $ .09 $ (.02) $ .07
Diluted $ .04 $ .09 $ (.02) $ .07
8
Note 5 Impact of Recently Issued Accounting Standards
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" (FIN 46). FIN 46 is the interpretation
of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", which addresses consolidation by business enterprises of
variable interest entities. FIN 46 is effective immediately for all
variable interest entities created after January 31, 2003 and becomes
effective for the Company in the quarter ended March 31, 2004 for
variable interest entities in which it holds a variable interest that
it acquired before February 1, 2003. The adoption of FIN 46 did not
have any impact on the Company's financial position, results of
operations and cash flows.
In 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 was 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. SFAS 150 has been deferred indefinitely
with respect to mandatorily redeemable non-controlling interests. The
adoption of SFAS 150 is not expected to have any effect on the
Company's financial position, results of operations or cash flows.
In December of 2003, the FASB revised Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This
Statement, as revised, retains the disclosure requirements of the
original Statement, which it replaces, and requires additional
disclosures about the assets, obligations, cash flows and net periodic
benefit cost of denied benefit pension plans and other defined benefit
postretirement plans. The interim period disclosures required by the
Statement are effective for the Company for the quarter ended March 31,
2004 and have been incorporated in Note 11. The annual financial
statement disclosures are effective for the Company for the fiscal year
ended June 30, 2004.
9
Note 6 Inventories consist of:
MARCH JUNE
31, 2004 30, 2003
----------------------------
Raw materials $ 6,372,019 $ 6,023,810
Finished goods 7,720,610 6,264,247
Reserves (985,354) (1,036,762)
----------------------------
Total FIFO inventories 13,107,275 11,251,295
Molds for resale, in production 1,422,290 840,605
Supplies 717,241 433,841
----------------------------
$ 15,246,806 $ 12,525,741
============================
Note 7 PNC Bank Agreement
The Company entered into a $43,750,000 senior secured credit facility
("PNC Bank Agreement") with PNC Bank in August 2000. The credit
facility is structured as a five year $25,000,000 senior revolving
credit facility, a five year $12,183,000 senior term loan, a five year
$4,192,000 standby letter of credit and a $2,000,000 capital
expenditure line. The credit facility contains annual minimum equity
and fixed charge coverage covenants with which the Company was in
compliance at March 31, 2004.
The term loan bears interest at LIBOR plus 275 basis points and the
revolving credit facility bears interest at LIBOR plus 225 basis
points. The Company entered into interest-rate swap agreements to
effectively convert a portion of the floating term loan debt interest
to a fixed rate. The $2 million capital expenditure line of credit
bears interest at LIBOR plus 275 basis points. Borrowings under the PNC
Bank Agreement totaled approximately $19.5 million at March 31, 2004.
10
Note 8 Segments
The Company currently has two reportable segments identified by product
type: Plastic Containers and Compound. The Plastic Containers segment
manufactures custom designed PET, HDPE and PVC containers mainly for
cosmetics, toiletries, foods, household chemicals, lawn and garden and
industrial chemical products. The Compound segment manufactures PVC
compound for use by the Company and sale to external customers.
The reportable segments are each managed separately due to their
different manufacturing processes and the different strategic markets
in which each operates. The Company evaluates each segment's
performance based on profit or loss from operations before income
taxes. The accounting policies for the reportable segments are the same
as those for the Company. Inter-segment sales and transfers are
recorded at market prices.
Information on segments and a reconciliation to consolidated totals are
as follows:
NINE MONTHS ENDED
MARCH 31
----------------------------
2004 2003
----------------------------
Net revenues:
Company total $ 15,874,608 $ 16,052,556
Intersegment revenue - Compound (4,881,348) (5,045,019)
----------------------------
Revenues from external customers -
Compound 10,993,260 11,007,537
Plastic containers 57,852,585 55,255,669
----------------------------
Total consolidated net revenues $ 68,845,845 $ 66,263,206
============================
Net (loss) income
Compound $ 393,945 $ 470,868
Plastic containers (528,580) 48,239
----------------------------
Total consolidated net (loss) income $ (134,635) $ 519,107
============================
Total assets:
Compound $ 6,291,380 $ 5,793,960
Plastic containers 59,049,450 57,729,179
----------------------------
Total consolidated assets $ 65,340,830 $ 63,523,139
============================
11
Note 9 Comprehensive Income (Loss)
The following table sets forth comprehensive income (loss) for the
three and nine month periods ended March 31, 2004 and 2003:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
------------------- --------------------
2004 2003 2004 2003
------------------- --------------------
Net income (loss) $313,392 $617,706 $(134,635) $519,107
Unrealized gain (loss) on interest rate
swap, net of taxes 23,452 23,892 130,636 (63,834)
------------------- --------------------
Comprehensive income $336,844 $641,598 $ (3,999) $455,273
=================== ====================
Note 10 Provision for Restructuring
During the quarter ended September 30, 2003, the Company decided to
transfer a majority of the personnel and most of the equipment at its
Marpac Industries subsidiary located in Kingston, NY to its Philmont,
NY plant. The Kingston facility was converted to a warehouse. The
workforce reduction includes 48 employees of which 19 are direct labor,
27 indirect labor and 2 administrative.
The total restructuring cost is estimated to be $380,000, of which
$340,000 has been incurred and paid as of March 31, 2004. The Company
expects to complete the restructuring by June 30, 2004. During the
quarter ended September 30, 2003, $116,000 was incurred and recognized
which included $43,000 for severance and other personnel related costs
for 38 employees and $73,000 for equipment relocation and other
transfer costs. During the quarter ended December 31, 2003, the Company
incurred and recorded restructuring costs in the amount of $160,000,
which included $130,000 for severance and other personnel costs and
$30,000 for equipment relocation and other transfer costs. During the
quarter ended March 31, 2004, the Company substantially completed the
restructuring and recorded $63,000, which included $43,000 for
severance and other personnel costs and $20,000 for equipment
relocation and other transfer costs. These costs are reflected in the
plastic container segment of our business. In addition, the plastic
container segment experienced manufacturing inefficiencies related to
the move. These additional costs are reflected in cost of goods sold.
12
Note 11 Pension
The following tables present the components of net periodic benefit
cost for pension benefits for the three and nine-month periods ended
March 31:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
------------------ ------------------
Pension benefits 2004 2003 2004 2003
------------------ ------------------
Service cost with interest to
the end of the quarter 2,263 2,010 6,740 6,009
Interest cost 18,599 17,051 56,538 52,413
Expected return on plan assets (20,929) (20,590) (63,702) (63,154)
Amortization of transition
obligation (asset) 750 744 2,268 2,266
Amortization of prior service cost (gain) 416 413 1,258 1,257
Amortization of experience loss (gain) 7,422 2,681 22,430 8,161
------------------ ------------------
Net periodic benefits cost 8,521 2,309 25,532 6,952
================== ==================
The Company paid no contributions during the nine months ended March
31, 2004.
Note 12 Subsequent Events
Certain facilities held for disposition and included in prepaid
expenses and other current assets in the Plastic Containers segment at
March 31, 2004 were sold effective April 29, 2004 for an amount less
than carrying value. The Company recorded a loss of $122,322 on the
sale of the assets during the quarter ended March 31, 2004, which is
included in provision for restructuring and other exit activities.
The Company also has entered into a contract with a regional realtor to
sell its Kingston, New York facility at an amount which should exceed
the fair value of the property. Management believes that the
disposition of this property will occur in the second half of fiscal
2005.
13
PVC CONTAINER CORPORATION
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides information and analysis of our results of
operations for the thirteen weeks ended March 31, 2004 and the thirteen weeks
ended March 31, 2003 and our liquidity and capital resources. The following
discussion and analysis should be read in conjunction with our consolidated
financial statement included elsewhere herein.
OVERVIEW
PVC Container Corporation is a major producer of plastic containers for the
packaging industry. We operate several wholly owned subsidiaries for the
manufacture and sale of general line plastic bottles, specialty plastic
containers and supply of PVC compounds and specialty plastic alloys in the
United States. Our plastic bottles are sold primarily to manufacturers and
distributors of personal care products, food, household chemicals, lawn and
garden and industrial chemical products. PVC compounds are consumed internally
or sold to other plastic manufacturers.
CRITICAL ACCOUNTING POLICIES
Several of our accounting policies involve significant judgments and
uncertainties. The policies with the greatest potential effect on our results of
operations and financial position include the estimated collectibility of
accounts receivable, the recovery value of obsolete or overstocked inventory and
impairment analysis of long-lived assets and goodwill. For accounts receivable,
we estimate the net collectibility, considering both historical and anticipated
trends of trade discounts and allowances, we provide to our customers, and the
possibility of non-collection due to the financial position of our customers.
For inventory, we estimate the amount of goods that we will not be able to sell
in the normal course of business and write down the value of these goods to the
recovery value expected to be realized through off-price channels. Historically,
actual results in these areas have not been materially different than our
estimates, and we do not anticipate that our estimates and assumptions are
likely to materially change in the future. However, if we incorrectly anticipate
trends or unexpected events occur, our results of operations could be materially
affected.
RESULTS OF OPERATIONS
Net sales for the three-month period ended March 31, 2004, increased by 12.6% to
$26,955,000, compared to $23,942,000 for the three-month period ended March 31,
2003. For the nine-month period ended March 31, 2004, sales increased by 3.9% to
$68,846,000, compared to $66,263,000 for the nine month period ended March 31,
2003. The increase in net sales reflects a 25.6% growth in PET bottle sales for
the nine months ended March 31, 2004. The Company continues to expand its market
share for this line of business. However, this growth was offset by a 1.8%
decrease in general line HDPE and PVC extrusion blown bottle sales during the
nine months ended March 31, 2004, compared to the same period a year ago.
14
The Company's specialty bottle group experienced a 5.7% sales decrease during
the nine-month period ended March 31, 2004, compared to the same period a year
ago. Our plastic compounding segment achieved approximately the same sales
volume ($11,000,000) for the nine-month period ended March 31, 2004 as it
achieved during the same period last year.
Cost of goods sold for the three months ended March 31, 2004, was $21,415,000,
or 79.4% of net sales, compared to $18,324,000, or 76.5% of net sales, for the
three months ended March 31, 2003. For the nine months ended March 31, 2004,
cost of goods sold was $55,096,000, or 80% of net sales, compared to
$52,359,000, or 79% of net sales, for the nine months ended March 31, 2003. The
recent increase in cost of goods sold was caused primarily by increased raw
material costs, unabsorbed direct labor and factory overhead costs for the
temporary loss of productivity due to the integration of the equipment and
personnel transferred from our Kingston, New York facility to our Philmont, New
York facility. With other cost increases anticipated, we are dedicated to
increased emphasis on cost containment, strategic sourcing, reduction in
manufacturing overhead and better manufacturing yields.
Selling, general and administrative ("SG&A") expenses increased by $222,200 for
the three-month period ended March 31, 2004, and by $364,200 for the nine-month
period ended March 31, 2004, over the amounts recorded the same periods a year
ago. For the quarter ended March 31, 2004, SG&A expenses were $2,812,000, or
10.4% of net sales, compared to $2,590,000 or 10.8% of net sales for the quarter
ended March 31, 2003. For the nine months ended March 31, 2004, SG&A expenses
were $7,574,000, or 11% of net sales, compared to $7,210,000, or 10.9% of net
sales, for the nine-month period ended March 31, 2003. This increase for the
nine-month period is mainly attributable to increased computer services,
professional fees associated with the potential sale of the Company (a proposed
transaction that has now been terminated) and consulting fees related to
operational improvements.
Depreciation and amortization expense increased to $1,630,000 for the three
months ended March 31, 2004, compared to $1,494,000 for the three months ended
March 31, 2003. For the nine-month period ended March 31, 2004, depreciation and
amortization expense was $4,728,000, compared to $4,446,000 for the nine months
ended March 31, 2003. The primary cause for this increase is the additional
depreciation associated with new capital equipment in our PET bottle line.
The Company recorded a $63,000 pre-tax charge for restructuring during the
quarter ended March 31, 2004. The restructuring involved the transfer of most of
the personnel and equipment from the Kingston, New York facility to the
Philmont, New York plant and conversion of the Kingston facility to a warehouse.
Management believes this restructuring will be completed by June 30, 2004, the
end of our fiscal year.
For the three-month period ended March 31, 2004, income from operations was
$1,035,000, or 3.8% of net sales, compared to income from operations of
$1,534,000, or 6.4% of net sales, for the same period one year ago. Income from
operations for the nine months ended March 31, 2004 decreased to $1,108,000, or
1.6% of net sales, compared to income from operations of $2,249,000, or 3.4% of
net sales, for the nine- month period ended March 31, 2003. This reduction in
operating income is the result of increased depreciation, SG&A expenses,
restructuring charges and raw material costs.
15
Net interest expense decreased to $458,000 for the quarter ended March 31, 2004,
compared to $488,000 for the quarter ended March 31, 2003. For the nine months
ended March 31, 2004, interest expense was $1,435,000, compared to $1,449,000
for the nine month period ended March 31, 2003. This minimal reduction is
attributable to lower interest rates.
For the reasons described above, net income for the quarter ended March 31,
2004, was $313,000, or $.04 on a diluted earnings per share basis, compared to
net income of $618,000, or $.09 on a diluted earnings per share basis, for the
same period a year ago. For the nine months ended March 31, 2004, the net loss
was $135,000, or $.02 on a diluted earnings per share basis, compared to net
income of $519,000, or $.07 on a diluted earnings per share basis, for the nine
month period ended March 31, 2003.
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.
The Company's liquidity position and working capital remained adequate for the
nine-month period ended March 31, 2004. Net working capital as of March 31,
2004, increased to $18,228,000 from $14,351,000 as at June 30, 2003. The current
ratio of assets to liabilities increased from 2.0 at June 30, 2003, to 2.3 at
March 31, 2004, and is primarily attributable to increased accounts receivable,
inventories, and prepaid expenses.
During the nine-month period ended March 31, 2004, the Company generated net
cash from proceeds from its revolving credit line and additional long-term debt
in the amount of $6,138,000. These funds were primarily used to acquire capital
assets of $3,722,000, to reduce long-term debt by $2,775,000, and to fund
operating activities of $417,000.
Cash used for accounts receivable, net of allowances, during the nine month
period ended March 31, 2004, was $1,384,000, compared to $313,000 for the
nine-month period ended March 31, 2003, primarily due to the substantial
increase in sales during this current fiscal quarter as compared to the third
quarter of 2003.
Cash used for inventories during the nine-month period ended March 31, 2004 was
$2,721,000, an increase of $274,000 from the corresponding period of the prior
year. The Company increased production and spent more to generate inventories in
the first nine months of fiscal 2004 because management anticipates increased
sales in future periods and prefers to avoid shipping delays. We also placed
more emphasis on our stock bottle program so there would be more inventory
readily available to meet customer short-term demand.
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Cash used for capital assets during the nine-month period ended March 31, 2004,
increased $236,000 over the same period a year ago because the Company continued
to add capacity to support its PET bottle line.
Cash used for accounts payable and accrued expenses during the nine-month period
ended March 31, 2004 was $442,000, an increase from the corresponding period of
the prior year, primarily due to higher current payroll and related fringe
benefits.
Assets held for sale, consisting of the Company's Ardmore, Oklahoma facility,
totaled approximately $262,000 at June 30, 2003. Management has entered into a
contract to sell these assets and expects to receive proceeds that will be below
fair value during the fourth fiscal quarter of 2004. The Company recorded a loss
of $122,000 on the sale of the assets during the third fiscal quarter of 2004,
which is included in provision for restructuring and other exit activities. This
transaction should be completed in accordance with that contract.
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 March 31, 2004, the Company had unused sources of liquidity consisting of
cash and cash equivalents of $197,000 and unused credit under a revolving credit
facility of $6,008,000.
The Company utilizes its revolving loan facilities for seasonal working capital
needs and for other general corporate purposes. The Company can use amounts
available under revolving loan facilities in excess of seasonal working capital
needs to pursue the Company's growth strategy and for other permitted purposes.
There were no material changes during the nine months ended March 31, 2004 in
the contractual obligations presented in the consolidated financial statements
in the Company's annual report on Form 10-K for the fiscal year ended June 30,
2003.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" (FIN 46). FIN 46 is the interpretation
of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", which addresses consolidation by business enterprises of
variable interest entities. FIN 46 is effective immediately for all
variable interest entities created after January 31, 2003 and becomes
effective for the Company in the quarter ended March 31, 2004 for
variable interest entities in which it holds a variable interest that
it acquired before February 1, 2003. The adoption of FIN 46 did not
have any impact on the Company's financial position, results of
operations and cash flows.
In 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
17
characteristics of both liabilities and equity. SFAS 150 was 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. SFAS 150 has been deferred indefinitely
with respect to mandatorily redeemable non-controlling interests. The
adoption of SFAS 150 is not expected to have any effect on the
Company's financial position, results of operations or cash flows.
In December of 2003, the FASB revised Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This
Statement as revised retains the disclosure requirements of the
original Statement, which it replaces, and requires additional
disclosures about the assets, obligations, cash flows and net periodic
benefit cost of denied benefit pension plans and other defined benefit
postretirement plans. The interim period disclosures required by the
Statement are effective for the Company for the quarter ended March 31,
2004 and have been incorporated in Note 11 to the Company's financial
statements included elsewhere in this Report. The annual financial
statement disclosures are effective for the Company for the fiscal year
ended June 30, 2004.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Report includes, and incorporates by reference, "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All statements regarding our expected financial position, business and
financing plans are forward-looking statements. The words "believes," "expects,"
"plans," "intends," "anticipates" and similar expressions identify
forward-looking statements. Forward-looking statements also include
representations of our expectations or beliefs concerning future events that
involve risks and uncertainties, including our future operating and financial
performance, the effect of national and regional economic conditions, lowered
levels of consumer spending resulting from a general economic downturn or
generally reduced shopping activity caused by public safety concerns, the
performance of our products within the prevailing retail environment, customer
acceptance of both new designs and newly-introduced product lines, financial
difficulties encountered by customers, the effects of vigorous competition in
the markets in which we operate, the integration of the organizations and
operations of any acquired businesses into our existing organization and
operations, changes in the costs of raw materials and labor. All statements
other than statements of historical facts included in this Report, including,
without limitation, the statements under "Management's Discussion and Analysis
of Financial Condition and Results of Operations," are forward-looking
statements. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, such expectations may prove to be
incorrect. Important factors that could cause actual results to differ
materially from our expectations.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
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Market risks relating to our operations result primarily from changes in
interest rates. Interest rate pricing transactions are used only to the extent
considered necessary to meet our objectives. We do not utilize derivative
financial instruments for trading or other speculative purposes.
Our interest rate risk management objective is to limit the impact of interest
rate changes on our net income and cash flow and to reduce our overall borrowing
cost. We use variable rate swap agreements to manage our exposure to interest
rate fluctuations. These agreements effectively convert variable interest rates
to fixed rates, enabling the Company to predict interest expense and avoid the
risk of dramatic rate fluctuations. We have entered into these agreements with
banks under our senior secured credit facility.
As of March 31, 2004, the Company had a total outstanding indebtedness of
$33,200,000. Of this amount, the total indebtedness subject to variable interest
rates was approximately $25,100,000. Based on the Company's March 31, 2004
variable debt level, a 25 basis point increase or decrease in interest rates
would have had a $15,700 impact on the Company's interest expense for the
quarter ended March 31, 2004.
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including the
Company's principal executive officer and principal financial officer, the
Company has evaluated the effectiveness of its disclosure controls and
procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934, as of the end of the period covered by this Quarterly
Report. Based upon that evaluation, the Company's principal executive officer
and principal financial officer, as of the end of the period covered by this
Quarterly Report, believe disclosure controls and procedures were effective in
ensuring that all material information relating to the Company, including its
consolidated subsidiaries, required to be filed in the reports the Company files
with the Securities and Exchange Commission has been made known in a timely
manner.
There were no changes made in the Company's internal control over financial
reporting during the period covered by this Quarterly Report that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II OTHER INFORMATION
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Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Phillip L. Friedman, President, Chief Executive
Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Jeffrey A. Shapiro, Senior Vice President, Chief
Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Phillip L. Friedman, Chief Executive Officer, and
Jeffrey Shapiro, Chief Financial Officer, Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Reports on Form 8-K filed by the Registrant during the three months ended
March 31, 2004:
None
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 17, 2004 PVC Container Corporation
/s/ Phillip L. Friedman
Phillip L. Friedman
President and Chief Executive Officer
Date: May 17, 2004 PVC Container Corporation
/s/ Jeffrey Shapiro
Jeffrey Shapiro
Chief Financial Officer
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