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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, 2004
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on August 31, 2004, at a closing price of $1.80 as reported by the
OTC Bulletin Board, was approximately $2,062,022.
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 15, 2004
----- ------------------------------------
Common Stock, $.01 par value 7,042,393
DOCUMENTS INCORPORATED BY REFERENCE
None
EXHIBIT INDEX is located at Page 32
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 two
wholly-owned subsidiaries, Novapak Corporation and Airopak Corporation. Novapak
sells a general line of plastic bottles to the personal care, food, toner copier
containers, medical diagnostic equipment and household chemical markets. Airopak
sells a line of fluorinated containers primarily to the lawn and garden and
industrial chemical markets. The Company operates in two reportable business
segments: Plastic Containers and PVC Compounds. Of the Company's fiscal 2004 net
sales, approximately 84% were derived from the Plastic Containers segment and
approximately 16% were derived from the Compound segment. For additional
financial information relating to the Company's reportable business segments,
see Note 11 to the Company's Consolidated Financial Statements, which are
presented elsewhere in this Annual Report.
PVC compounds are consumed by the Company to manufacture some of the
Company's plastic bottles. These PVC compounds are produced and sold through the
Company's wholly-owned subsidiary, Novatec Plastics Corporation, Inc. Novatec
also manufactures a diverse range of rigid PVC compounds for non-bottle
applications ("specialty compounds"), sold to manufacturers of plastic injection
molded and extruded products for use in products such as fencing, furniture
edgebanding, electrical wiring devices, and electronic housings.
Sales. The Company's plastic bottles are sold primarily to
manufacturers of personal care products, food, household chemicals, and lawn and
garden and industrial chemical products, private label manufacturers of similar
products, and to bottle distributors who sell to such manufacturers. PVC
compounds are consumed internally or sold to other plastic manufacturers. A
limited amount of the company's total sales is made through commissioned sales
representatives. During the fiscal year ended June 30, 2004, no one customer
accounted for 10% or more of the Company's net sales.
Sales of the Company's plastic bottles and PVC bottle compounds have
accounted for most of the Company's net income; sales of specialty compounds to
non-bottle customers have accounted for the remainder of the Company's net
income. Plastic bottles are offered in food grade and non-food grade materials,
fluorinated or non-fluorinated, in clear and opaque colors and in a range of
sizes from one ounce to 225 ounces. The Company produces plastic bottles
utilizing its own molds in proprietary company designs ("stock bottles") and
also produces on a contractual basis plastic bottles in molds owned by the
customer, utilizing the customer's designs and specifications.
The sale of plastic bottles is generally a "regional" business. The
majority of the Company's customers are within a 300-mile radius of the
Company's manufacturing plants. Freight costs restrict shipping bulky plastic
bottles long distances, although customers are willing to pay freight for
specialty bottles of a unique design or fluorinated containers that are not
available from local manufacturers. In contrast, the Company's PVC compounds,
which are sold in the form of plastic pellets
2
and are denser than plastic bottles, can be shipped throughout the continental
United States and Canada and tend to be more of a "national" business.
The Company's business is usually characterized by low customer
demand during the months of July and August and the last half of December
because buyers' plants often shut down during those periods. Some of the markets
in which the Company sells are seasonal, such as Airopak's primary markets of
lawn, garden, and agricultural chemicals. These markets are characterized by
high demand in the period of December through June and low demand from July
through November of each year.
Manufacturing Operations. The Company utilizes two basic processes
to manufacture its plastic bottles - extrusion blow molding ("EBM") and
injection stretch blow molding ("ISBM"). Plastic bottles made from HDPE, PP, or
PVC resins are manufactured using the EBM process. EBM involves melting the
plastic resins in an extruder and forming a plastic tube or parison that is
placed inside a two- piece blow mold. The mold then closes and clamps around the
tube and the tube is blown (inflated) with compressed air against the walls of
the mold, forming the bottle to the shape of the mold. Some of the EBM
production also incorporates proprietary technology to manufacture fluorinated
HDPE plastic bottles.
The Company's PET bottles are manufactured using a two-step ISBM
process. This process involves injection molding PET resins into a parison
called a preform. These PET preforms are then used in a separate blow molding
machine, where they are re-heated and blown into bottles, also utilizing a blow
mold.
The Company also provides a variety of value added services such as
bottle decoration. The Company's decorating capabilities include automatic silk
screening for multiple color applications, pressure sensitive paper and plastic
film labels, and therimage heat transfer labeling.
The Company operates plastic bottle manufacturing and warehousing
facilities in Hazleton, Pennsylvania; Paris, Illinois; Manchester, Pennsylvania;
Walterboro, South Carolina; Philmont, New York; and Kingston, New York. However,
the Company has transferred most of the personnel and equipment from its
Kingston, New York plant to its Philmont, New York facility and converted the
Kingston plant to a warehouse. As indicated under "Properties", the Kingston
facility is currently being offered for sale. A description of the Company's
plastic bottle facilities are set forth below in Item 2 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. Occasionally, 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
3
(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.
The cost of the raw materials the Company uses is directly affected
by the cost of petroleum. Accordingly, any increases in the costs of petroleum,
such as the increases that have occurred over the last (two) years, increase the
cost of the raw materials that the Company uses. Additionally, 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 or the rising cost of petroleum, which has recently reached
unprecedented levels 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, 2004 and 2003. 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-Illinois, 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
4
level of customer service. Management believes that these constitute the primary
areas in which the Company can compete with others in the same industry.
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 $323,000,
$290,000 and $263,000 for the fiscal years ended June 30, 2004, 2003, and 2002,
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.
5
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 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 also 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, 2004, the Company employed 34 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, 2004, the Company employed 50 people at the Novatec
facility in Eatontown, New Jersey; 122 people in the manufacturing facility in
Hazleton, Pennsylvania; 131 people at the Paris, Illinois facility; 10 people at
the Walterboro, S.C. facility; 87 people at Airopak Corporation in the
Manchester, Pennsylvania facility; 171 people at the Philmont, New York facility
and a total of 8 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, 2003 until August 31,
2006 relating only to employees of Novatec. The Company considers its relations
with its work force and the union to be good.
6
Financial Information about Foreign and
Domestic Operations and Export Sales
The Company had export sales of $4,391,000, $5,348,000 and
$6,120,000 during the fiscal years ended June 30, 2004, 2003 and 2002,
respectively. During the fiscal year ended June 30, 2004, net sales to the
northeast of the United States amounted to $36,745,000, net sales to the midwest
of the United States amounted to $41,176,000, net sales to the southeast of the
United States amounted to $7,350,000, and net sales to other domestic regions
amounted to $8,085,000.
Item 2. Properties.
The Company's activities with respect to its continuing businesses
are conducted at the seven facilities described in the following table:
Building Area
Location Purpose of Facility (square feet)
- -------- ------------------- -------------
Hazleton, Pennsylvania Plastic bottle plant, warehouse, 160,000(1)
and office
Eatontown, New Jersey Plastic compounding plant, 50,162(2)
warehouse, and executive offices
Manchester, Pennsylvania Airopak Corporation plant and 145,221(3)
warehouse
Paris, Illinois Plastic bottle plant, warehouse, 125,000(4)
and office
Walterboro, S.C. Plastic bottle plant, warehouse, 61,430(5)
and office
Philmont, New York Plastic bottle plant, warehouse and 100,000(6)
office
Kingston, New York Plastic bottling plant, warehouse 34,000(7)
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 $455,321 plus real estate taxes, utilities, and certain
other charges payable under a lease that expires on April 30, 2013 (with the
option of two additional five
7
year terms). Management believes these facilities are large enough to allow for
future growth of the business there.
4. The Company commenced operations in 1993 in a new 62,500 square foot
concrete plastic bottle manufacturing facility located in Paris, Illinois. The
Company owns this facility and twenty acres of land on which it is located.
Financing for this facility was obtained from the Edgar County Bank, the City of
Paris, Illinois, and the Illinois Small Business Development Agency. In July
1997, the Company completed the construction of an additional 62,500 square feet
of warehouse and manufacturing space. The Company financed this expansion
through the issuance of Industrial Development Revenue Bonds by the City of
Paris, Illinois in the aggregate principal amount of $3,500,000.
5. In October 1996, the Company completed construction and began
operations in a new plastic bottle manufacturing plant in Walterboro, South
Carolina. This facility consists of 61,430 square feet of warehouse and
manufacturing space, located on 8.83 acres of property, owned by the Company.
Financing for this facility was obtained through the South Carolina Economic
Development Authority in the amount of $5,500,000.
6. On March 30, 1998, the Company acquired the plastic bottle
manufacturing facilities of McKechnie Investments, Inc. The facility consists of
100,000 square feet of warehouse and manufacturing space located on 37 acres of
property owned by the Company.
7. The Kingston facility consists of 34,000 square feet of
manufacturing, warehouse, and office space and is located on approximately 6
acres of property (with 2.4 adjacent acres for expansion), that are owned by the
Company. The manufacturing operations of this facility have been moved to the
Philmont facility. The Kingston facility is being used at this time for
warehouse purposes and is currently being offered for sale.
Item 3. 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
8
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 15, 2004
was at a price of $1.70 per share. The following is a summary of the high and
low close sales prices during the fiscal years of the Company ended June 30,
2004, and June 30, 2003:
Year Ended June 30, 2004 Low High
--- ----
1st Quarter $2.75 $5.00
2nd Quarter 3.15 4.00
3rd Quarter 3.05 3.57
4th Quarter 2.00 3.50
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
As of September 15, 2004, the number of holders of record of the
issued and outstanding common stock of the Company was approximately 400.
The Company has not declared or paid any cash dividends on the
shares of common stock since fiscal 1997 and does not anticipate declaring or
paying any such dividends in the foreseeable future. The Company intends to
retain earnings for the operation of its business.
9
Item 6. Selected Financial Data.
The selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements, related notes and other financial
information included in this report. The selected consolidated financial data
set forth below as of June 30, 2004 and 2003 and for the years ended June 30,
2004, 2003 and 2002 have been derived from our audited financial statements
included in this report. The selected consolidated financial data set forth
below as of June 30, 2002, 2001, and 2000 and for the years ended June 30, 2001
and 2000 have been derived from our audited financial statements that are not
included or incorporated by reference in this report. Our historical results are
not necessarily indicative of the results that may be expected for any future
period.
Years Ended June 30
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
SELECTED INCOME STATEMENT DATA:
Net sales $ 97,746,511 $ 90,433,217 $ 84,076,390 $ 89,892,821 $ 94,870,507
Income from operations $ 1,555,165 $ 3,339,730 $ 2,726,128 $ 1,113,966 $ 1,050,599
Net (loss) income $ (64,955) $ 872,552 $ 261,445 $ (1,141,174) $ (1,196,678)
Earnings per share:
Weighted average shares for
diluted shares 7,042,393 7,043,485 7,044,379 7,044,655 7,042,254
Net (loss) income per share $ (.01) $ .12 $ .04 $ (.16) $ (.17)
SELECTED BALANCE SHEET DATA
Current assets $ 30,306,853 $ 28,511,306 $ 26,921,243 $ 29,266,731 $ 30,547,896
Current liabilities $ 16,510,479 $ 14,159,902 $ 15,086,732 $ 14,845,192 $ 16,186,694
Working capital $ 13,796,374 $ 14,351,404 $ 11,834,511 $ 14,421,539 $ 14,361,202
Total assets $ 62,389,221 $ 62,444,191 $ 61,255,060 $ 68,126,386 $ 70,855,593
Long-term obligations $ 24,275,508 $ 27,024,324 $ 26,379,176 $ 32,506,507 $ 31,956,264
Stockholders' equity $ 18,974,942 $ 18,836,254 $ 18,010,053 $ 17,853,117 $ 19,168,853
10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following information should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in this report.
GENERAL
To prepare our financial statements, management must make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue, and
expenses, and related disclosure of contingent liabilities. On a continuous
basis, management reviews its estimates, including those related to returns, bad
debts, inventories, intangible assets, and long lived assets. Management bases
its estimates on historical experience and on various other assumptions that are
believed to be reasonable. Actual results may differ from these estimates as
conditions may vary from those we anticipated.
Critical Accounting Policies
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
the Company's consolidated financial statements.
Bad Debt
The Company maintains allowances for doubtful accounts for estimated losses
resulting from customers' failure to make mandatory payments. If the financial
condition of the Company's customers were to erode, making them unable to make
payments, additional allowances may be required.
Inventory
Inventories are valued at the lower of cost or market, using the first-in,
first-out method. The Company provides reserves for estimated obsolescence of
its inventory at an amount determined by assessing future demand and market
conditions. If actual market conditions deteriorate, additional inventory
reserves may be required. Any change to the reserve is reflected in cost of
sales in the period the revision is made.
Revenue recognition
We recognize revenue when products are shipped to our customers. Sales are shown
net of returns, allowances and discounts. The Company's policy is to reserve for
returns once it has knowledge of the return. The change in product returns,
allowances and cash discounts between fiscal 2004 and 2003 reflects an increase
of $188,000, and a decrease of $293,000 between fiscal 2003 and 2002. The
increase is consistent with the increase in revenues, cash discount policy and
customer incentive programs. The decrease is a result of changes to customer
incentive programs.
Income Taxes
The Company records the estimated future tax effects of differences between the
tax basis of assets and liabilities and amounts reported in the accompanying
consolidated balance sheets, as well as operating loss carry-forwards, if any.
We follow specific guidelines regarding the recoverability of any tax assets
recorded on the balance sheet and provide any necessary allowances as required.
11
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:
2004 2003 2002
----------------------
Federal tax at statutory rate (34%) 34% 34%
Effect of:
State income taxes, net of federal income tax benefit (1) 6 9
Goodwill amortization 0 0 16
Meals and entertainment and other permanent differences 20 (1) (2)
---------------------
Effective income tax rate (15%) 41% 57%
=====================
The change in the effective tax rate from 2003 to 2004 is primarily attributed
to the decrease in pre tax income, while the amount of meals, entertainment and
other permanent differences remained consistent from year to year. The change in
the effective tax rate from 2002 to 2003 is primarily attributed to the annual
amortization of goodwill which was no longer required in 2003.
Operating Performance
In the discussion of the Company's result of operations that follows, the
Company presents EBITDA, which it defines as earnings before interest, taxes,
depreciation and amortization. The Company believes that the presentation of
EBITDA provides useful information to investors because management uses EBITDA
to assess our operating performance. Additionally, management believes that
EBITDA is a measurement widely used in the Company's industry and accordingly
provides this information to allow investors to analyze our performance relative
to its competitors. However, EBITDA is not a measurement of operating
performance computed in accordance with generally accepted accounting principles
and this measure should not be considered in isolation or as a substitute for
any measure of performance as determined in accordance with generally accepted
accounting principles. EBITDA may not be comparable to similarly titled measures
of other companies. The following table provides a reconciliation from net
income (loss) to EBITDA.
Fiscal Year Ended June 30th
2004 2003 2002
---- ---- ----
Net (loss) income as reported $ (64,955) $ 872,552 $ 261,445
Add back:
(Benefit) provision for income taxes (11,753) 606,349 349,298
Interest expense (net) 1,864,438 1,942,708 2,186,937
Depreciation and amortization 6,263,328 6,022,207 6,431,351
----------- ----------- -----------
EBITDA $ 8,051,058 $ 9,443,816 $ 9,229,031
=========== =========== ===========
12
Results of Operations
FISCAL 2004 COMPARED TO FISCAL 2003
The Company's net sales for the fiscal year ended June 30, 2004 were
$97,747,000, an increase of approximately 8.1% from the fiscal 2003 total of
$90,433,000. This increase in revenue reflects an increase in revenue in both
our plastic bottle and compound segments.
The increase in the plastic bottle segment reflects a 32.4% growth in PET bottle
sales resulting from the Company's continued innovations in PET blow molding
technology, in an effort to expand its market share for this line of business.
However, this growth was offset by a 4.7% decrease in general line HDPE and PVC
extrusion blown bottle sales. Also, the Company's fluorinated specialty bottle
business had strong growth of 7.4%.
Our plastic compound segment also achieved an 8.3% sales growth due to an
overall stronger demand for PVC compounds.
Cost of goods sold as a percentage of net sales increased to 80.6% in fiscal
2004 from 79.0% in fiscal 2003. The increase in cost of goods sold was caused
primarily by increased raw material costs, and unabsorbed direct labor and
factory overhead costs for the temporary loss of productivity due to the
integration of equipment and personnel transferred from our Kingston, New York
facility to our Philmont, New York facility. With other cost increases
anticipated, we are dedicated to increased emphasis on cost containment,
strategic sourcing, reduction in manufacturing overhead and better manufacturing
yields.
Selling, general and administrative ("SG&A") expenses were $10,694,000, or 10.9%
of net sales, for the fiscal year ended June 30, 2004, as compared to
$9,615,000, or 10.6% of net sales, for fiscal 2003. SG&A expenses have increased
and are mainly attributed to increased computer services, professional fees
associated with the potential sale of the Company (a proposed transaction that
has now been abandoned) and consulting fees related to operational improvements.
Depreciation and amortization expense increased by $241,000 from fiscal 2003,
primarily associated with new capital equipment in our PET bottle line. The
annual amortization of goodwill which would have approximately $293,000 is no
longer required in 2004 as a result of adopting FASB Statement No. 142,
effective July 1, 2002.
The Company recorded a $476,000 pre-tax charge for restructuring and loss on the
sale of its Ardmore, Oklahoma facility. The restructuring involved the transfer
of most of the personnel and equipment from the Kingston, New York facility to
the Philmont, New York plant and conversion of the Kingston facility to a
warehouse.
EBITDA decreased from approximately $9,444,000 in fiscal 2003 to $8,051,000 in
fiscal 2004. This entire decrease was a result of the Company plastic container
segment's higher raw material costs, unabsorbed direct labor and factory
overhead costs for the temporary loss of productivity due to the integration of
equipment and the transfer of personnel from our Kingston, New York facility to
our Philmont, New York facility, as well as professional fees that were incurred
for assistance in implementing operational improvements.
Income from operations for fiscal year ended June 30, 2004 decreased to
$1,555,000, or 1.6% of net sales, compared to $3,340,000, or 3.7% of net sales,
in fiscal 2003 due to reasons discussed above.
13
Net interest expense decreased $78,000 during the fiscal year ended June 30,
2004. This net decrease is mainly attributed to lower interest rates and
reduction in debt.
Other income represents the profit generated on the sale of various production
equipment taken out of service during fiscal 2004.
Net loss for fiscal year ended June 30, 2004 was $65,000 or $.01 per diluted
share compared to a profit of $873,000 or $.12 per diluted share for fiscal 2003
due to factors discussed above.
FISCAL 2003 COMPARED TO FISCAL 2002
The Company's net sales for the fiscal year ended June 30, 2003, were
$90,433,000, an increase of approximately 8% from the fiscal 2002 total of
$84,076,000. The increase in revenue reflects an 11% increase in plastic bottle
sales, offset by a 6% decrease in merchant compounds.
Growth in plastic bottle sales benefited from strong demand for PET bottles by
27% resulting from the Company's recent innovations in PET blow molding
technology. In addition, the Company's fluorinated specialty bottle business
also had strong growth of 19%.
Although PVC compound revenue declined, sales actually increased by 7% on a unit
volume basis, primarily because the Company engaged in more "toll manufacturing"
in fiscal 2003 than in fiscal 2002. In toll manufacturing, the Company uses
customer-provided raw materials and collects only conversion costs and profit.
Our Novatec plastic compound business experienced an overall weaker demand for
rigid PVC compounds during this past fiscal year.
Cost of goods sold as a percentage of net sales increased to 79.0% in fiscal
2003 from 77.3% in fiscal 2002. The cost of virtually all plastic resins used in
both the bottle and compound businesses increased dramatically, exacerbated by
the turmoil in the energy markets as a result of political events in the Middle
East. This has had an adverse effect on all areas of the Company's business, but
particularly our PVC compounding business. Start-up expenses associated with the
addition of new capacity in our PET bottle line also contributed to the higher
cost of goods sold.
SG&A expenses were $9,615,000, or 10.6% of net sales, for the fiscal year ended
June 30, 2003, as compared to $9,934,000, or 11.8% of net sales, for fiscal
2002. SG&A expenses have decreased primarily due to improved monitoring of
accounts receivable. This monitoring reduced the Company's exposure to
uncollectible accounts and, accordingly, its provision for bad debts.
Depreciation and amortization expense for fiscal 2003 decreased by $409,000
primarily because of certain manufacturing assets becoming fully depreciated in
fiscal 2003. The annual amortization of goodwill which would have approximately
$293,000 is no longer required in 2003 as a result of adopting FASB Statement
No. 142, effective July 1, 2002.
EBITDA increased from approximately $9,229,000 in fiscal 2002 to approximately
$9,444,000 in fiscal 2003. Performance improvements in the Company's plastic
container segment raised EBITDA by approximately $838,000, but this increase was
offset by a decrease of $623,000 in the performance of the Novatec Plastics
division, mainly due to higher raw material costs.
Income from operations for the fiscal year ended June 30, 2003, increased to
$3,340,000, or 3.7% of net sales, compared to $2,726,000, or 3.2% of net sales,
in fiscal 2002.
14
Net interest expense decreased $244,000 during fiscal year ended June 30, 2003.
This net decrease is mainly attributable to lower interest rates.
Net income for the fiscal year ended June 30, 2003, increased to $873,000, or
$.12 per diluted share, compared to $261,000, or $.04 per diluted share, for
fiscal 2002 due to factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Because management generally does not monitor liquidity and capital resources on
a segment basis, this discussion is presented on a consolidated basis.
Cash flow from operations during fiscal 2004 totaled $5,829,000, representing an
increase of $934,000 from the prior fiscal year. Cash flow from operations was
favorably impacted by improved inventory management and timing of income tax
payments.
Cash used for accounts receivable, net of allowances, during fiscal year ended
June 30, 2004 was $2,502,000, an increase of $2,315,000 from the prior fiscal
period. The increase was primarily due to the increase in sales during the
fourth quarter of fiscal 2004.
The Company generated net cash from operating activities and additional
long-term debt in the amount of $8,361,000. These funds were primarily used to
acquire capital assets of $4,611,000, to reduce long-term debt by $3,763,000,
and to reduce borrowings under our revolving credit line by $594,000.
Capital expenditures decreased by $1,151,000 to $4,611,000 during fiscal year
ended June 30, 2004 as compared to $5,762,000 during fiscal year ended June 30,
2003. This decrease is mainly attributed to the initial entry into the PET
product line, which required new equipment and start up expenses during fiscal
year 2003.
The Company's liquidity position and working capital remained adequate for the
fiscal period ended June 30, 2004. Net working capital decreased to $13,796,000
from $14,351,000 as at June 30, 2003. The current ratio of assets to liabilities
decreased from 2.0 at June 30, 2003 to 1.8 at June 30, 2004. This decrease was
primarily attributable to an increase in accounts payable.
The Company's Midwest facility, located in Ardmore, Oklahoma, reflected in the
June 30, 2003 balance sheet in the amount of $262,000, plus $36,000 cost of
land, was sold below fair value during the fourth quarter of 2004. The Company
recorded a loss of $122,000, which is included in provision for restructuring
and other exit activities.
The Company's short-term liquidity and short-term capital resources are
projected to be adequate to allow the Company to continue to meet its financial
obligations. The Company believes the financial resources available to it,
including internally generated funds and borrowing under its revolving credit
facility, will be sufficient to meet foreseeable working capital requirements.
At June 30, 2004, the Company had unused sources of liquidity consisting of cash
and cash equivalents of $366,000 and unused credit under a revolving credit
facility of $10,238,000.
15
The Company's revolving credit facility includes financial and other covenants,
including, without limitation, a minimum equity covenant and a fixed charge
coverage covenant. As of June 30, 2004, the Company was in compliance with the
covenants under its revolving credit facility.
The Company utilizes its revolving loan facilities for seasonal working capital
needs and for other general corporate purposes. Amounts available under the
Company's revolving loan facilities in excess of its seasonal working capital
needs are available to pursue the Company's growth strategy and for other
permitted purposes.
There were no material changes during the twelve months ended June 30, 2004 in
the contractual obligations presented in the consolidated financial statements
in the Company's annual report on Form 10-K for the fiscal year ended June 30,
2004.
The effective portion of the gain or loss on a derivative instrument that is
designated and qualifies as a cash flow hedge is reported as a component of
other comprehensive income and reclassified into earnings in the period or
periods during which the hedged transaction affects earnings.
Off-Balance Sheet Arrangements
The Company does not have any material off balance sheet arrangements that have
or are reasonably likely to have a current or future effect on the Company's
financial condition.
Contractual Obligations and Commercial Commitments
As of June 30, 2004, the Company is party to notes payable, working capital
lines and various operating leases. These contractual obligations and other
commercial commitments are summarized below. The Company has no other
contractual obligations or commercial commitments as of June 30, 2004.
Payments Due by Period
Contractual Obligations Total 2005 2006 2007 2008 2009 Thereafter
- -----------------------------------------------------------------------------------------------------------------------------------
Long term notes payable ..................... $28,006,879 $3,929,649 $14,073,041 $2,299,565 $1,704,683 $ 743,998 $5,255,943
Non-cancelable operating leases ............. 5,476,774 934,197 1,098,602 714,364 686,430 577,771 1,465,410
------------------------------------------------------------------------------------
Total contractual cash obligations .......... $33,483,653 $4,863,846 $15,171,643 $3,013,929 $2,391,113 $1,321,769 $6,721,353
====================================================================================
The operating leases relate to office and plant facilities, vehicles, and office
equipment. We expect the majority of the leases upon expiration will be renewed
or replaced by other leases.
Payments Due by Period
Other Commercial Commitments Total 2005 2006 2007 2008 2009 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
====================================================================================
16
Impact of Recently Issued Accounting Standards
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 is the interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, which addresses
consolidation by business enterprises of variable interest entities. FIN 46 is
effective immediately for all variable interest entities created after January
31, 2003 and became effective for the Company for periods ending after March 15,
2004 for variable interest entities in which it holds a variable interest that
it acquired before February 1, 2003. The adoption of FIN 46 did not have any
impact on the Company's financial position, results of operations and cash
flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (FAS 149). This statement amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133). The Statement is effective for contracts entered into or modified after
June 30, 2003, and hedging relationships designated after June 30, 2003. Certain
provisions of this statement relating to FAS 133 implementation issues that have
been effective for prior fiscal quarters will continue to be applied in
accordance with their respective effective dates. The Company does not expect
that the adoption of FAS 149 will have an impact on its financial position,
results of operations or cash flows.
In December of 2003, the FASB revised Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement, as revised,
retains the disclosure requirements of the original statement, which it
replaces, and requires additional disclosures about the assets, obligations,
cash flows and net periodic benefit cost of denied benefit pension plans and
other defined benefit postretirement plans. The annual financial statement
disclosures are effective for the Company for the fiscal year ended June 30,
2004.
Cautionary Note on Forward-Looking Statements
Certain statements in this report that are not reported financial results or
other historical information are "forward-looking statements" and within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements give current expectations or forecasts of future events and are not
guarantees of future performance. They are based on management's expectations
that involve a number of business risks and uncertainties, any of which could
cause actual results to differ materially from those expressed in or implied by
the forward-looking statements. You can identify these statements by the fact
that they do not relate strictly to historic or current facts. They use words
such as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe" and other words and terms of similar meaning in connection with any
discussion of future operating or financial performance. In particular, these
include statements relating to future actions; prospective changes in raw
material costs, product pricing or product demand; future performance or results
of current and anticipated market conditions and market strategies; sales
efforts; expenses; and financial results. There are risks and uncertainties that
may cause results to differ materially from those set forth in these
forward-looking statements. In particular,
17
unanticipated changes in the economic, competitive, governmental, technological,
marketing or other factors identified in this report and in the Company's other
filings with the Securities and Exchange Commission could cause such results to
differ materially and could include, but are not limited to, changes in U.S.,
regional or world polymer growth rates affecting the Company's markets; changes
in global industry capacity or in the rate at which anticipated changes in
industry capacity come online in the polyvinyl chloride or other industries in
which the Company participates; fluctuations in raw material prices, quality and
supply and in energy prices and supply, in particular fluctuations outside the
normal range of industry cycles; and an inability to raise prices or sustain
price increases for products.
The Company cannot guarantee that any forward-looking statement will be
realized, although it believes that management has been prudent in its plans and
assumptions. Achievement of future results is subject to risks, uncertainties
and inaccurate assumptions. Should known or unknown risks or uncertainties
materialize, or should underlying assumptions prove inaccurate, actual results
could vary materially from those anticipated, estimated or projected. Investors
should bear in mind as they consider forward-looking statements.
The Company undertakes no obligation to publicly update forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures the Company makes
on related subjects in its filings with the Securities and Exchange Commissions.
You should understand that it is not possible to predict or identify all risk
factors. Consequently, you should not consider any such list to be a complete
set of all potential risks or uncertainties.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
Market risks relating to the Company's operations result primarily from changes
in interest rates. Interest rate pricing transactions are used only to the
extent considered necessary to meet our objectives. The Company does not utilize
derivative financial instruments for trading or other speculative purposes.
Interest Rate Risk
The Company's interest rate risk management objective is to limit the impact of
interest rate changes on its net income and cash flow and to lower its overall
borrowing cost. The Company manages our exposure to interest rate fluctuations
with variable rate swap agreements, which effectively convert interest rate
exposure from variable rates to fixed rates of interest. The Company has entered
into these agreements with banks under its senior secured credit facility. Refer
to Notes 1 and 5 to the Company's Consolidated Financial Statements (included
elsewhere in this Annual Report), which outline the principal amounts, interest
rates, fair values, and other terms required to evaluate the expected cash flows
from these agreements.
As of June 30, 2004, the Company had total outstanding indebtedness of
$28,007,000. Of this amount, the total indebtedness subject to variable interest
rates was approximately $20,272,000. Based on the Company's June 30, 2004
variable debt levels, a one quarter percent increase or decrease in interest
rates would have had a $51,000 impact on the Company's annual interest expense.
18
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.
During the last quarter of fiscal 2004, there have been no changes in the
Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
Item 9B. Other Information
Not applicable
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth the directors and executive officers
of the Company. Each director holds office until his successor is elected and
qualified.
Name Age Held Office Since Offices with the Company
- ---- --- ----------------- ------------------------
Phillip L. Friedman 57 1981 Chairman and Director
William J. Bergen 39 2004 President, Chief Executive Officer &
Director
Joel F. Roberts 62 1999 Senior Vice President Operations
Jeffrey Shapiro 55 2000 Senior Vice President & Chief Financial
Officer
19
John F. Turben 69 1996 Director
Michael Sherwin 63 1996 Director
John G. Nestor 59 2001 Director
Michael Lynch 59 2002 Director
PHILLIP L. FRIEDMAN joined the Company in 1981 and served as
President and Chief Executive Officer until 2004 when he resigned on September
2, 2004 and was appointed Chairman of the Board. Prior to joining the Company,
he was employed by Occidental Chemical Corporation (formerly Hooker Chemical
Corporation), a leading manufacturer and supplier of PVC resins and compounds,
for 12 years. His responsibilities at Occidental culminated in a five-year
tenure as Manager of Business Development and Director of Commercial Development
for the Polyvinyl Chloride Plastics Division. As the Director of Commercial
Development, he was responsible for coordinating and commercializing various
research and development projects within the plastics industry. Mr. Friedman
received a BS in chemical engineering from Pratt Institute and pursued graduate
studies in business administration at Temple University. He is a member of the
Executive Committee of the Company.
WILLIAM J. BERGEN joined the Company on September 2, 2004 when he
was elected President and Chief Executive Officer and a Director. Mr. Bergen
served as Vice President and General Manager--Plastics Americas Business Unit of
Alcan, Inc., a provider of aluminum and packaging products, from 2003 to
September 2004. Mr. Bergen also served in various capacities for International
Paper Company, a forest products company, including as its General Manager of
its Release Products Business, from 2001 to 2003, Regional Vice
President-Sherwood Packaging Division from 2000 to 2001, and Business Unit
Manager, Folding Cartons, from 1997 to 2000.
JOEL F. ROBERTS joined the Company in 1986 and has served as the
Senior Vice President of Operations for the bottle division since 1999. Before
assuming his current position, he was the Director of Operations for ten years
and a plant manager for three years. Prior to joining the Company, Mr. Roberts
was employed by Technical Plastics Extruders, an extruder of sheet material.
JEFFREY SHAPIRO has served as Chief Financial Officer since March
2000. Prior to joining the Company, he was employed as the Chief Operating
Officer of Universal Process Equipment, a worldwide manufacturer of process
equipment from 1996 to 2000. Mr. Shapiro has nearly twenty years of experience
in the printing and packaging industry and has held various executive positions
from Vice President to Controller to Chief Financial Officer. Prior companies
include Webcraft Technologies and Klearfold Packaging. Mr. Shapiro is a graduate
of Rutgers University and a CPA in New Jersey. He holds CITP certification and
memberships in FEI, NJSCPA, and AICPA.
JOHN F. TURBEN is Chairman and Chief Executive Officer of Kirtland
Capital Corporation, a privately funded investment company founded by Jack in
1977. Prior to joining Kirtland, he served as Chairman of the Executive
Committee and Vice Chairman of the Board of Prescott, Ball & Turben, an
investment banking firm headquartered in Cleveland, and Chairman of the
Executive Committee and Director of the Geneve Corp. Jack serves as Chairman of
Instron Corporation and Fairport Asset Management LLC and is Chairman of the
Executive Committee of Fairmount Minerals, Ltd. He is a member of Kirtland
Capital Partners' Advisory Board, a Director of PVC Container Corporation,
Stonebridge Industries, Inc., Gries Financial LLC, PDM Bridge LLC and NACCO
Industries, Inc. Jack is a member of the Board of Trustees and is past President
of the Board of Trustees of University School, past Chairman of the Board of
Trustees of Lake Erie College, a Trustee of Vocational Guidance Services and is
the Mayor of Kirtland Hills, Ohio. He is a 1957 graduate of Yale University.
20
MICHAEL SHERWIN has served as the Vice Chairman of Mid-West Forge
Corporation, a manufacturer of shafts, since 1987 and as Chairman and Chief
Executive Officer of Columbiana Boiler Company, a manufacturer of kettles,
pressure vessels and transportation packages, since 1980. Prior to joining
Mid-West Forge Corporation, Mr. Sherwin was the President of National City
Venture Corporation and National City Capital Corporation, both subsidiaries of
National City Corporation, a bank holding company. He is a member of the
Executive Committee and Audit Committee.
JOHN G. NESTOR, President of Kirtland Capital Corporation, joined
the company in March 1986. Prior to joining Kirtland, John spent 16 years at
Continental Illinois Bank in a variety of lending positions. He is a member of
Kirtland Capital Partners' Advisory Board, serves as Chairman of Essex Crane
Rental Corp. and is a Director of Fairmount Minerals, Ltd., R Tape Corporation,
PVC Container Corporation and PDM Bridge LLC. John is the Board Chair of the
National Conference for Community and Justice (NCCJ) and Chairman of the Board
of Trustees of The Cleveland Food Bank. A graduate of Georgetown University,
John also holds an MBA from the University of Notre Dame and an MA in Urban
Studies from Loyola University in Chicago.
MICHAEL LYNCH has served as the Senior Vice President of Oldcastle,
Inc., a U.S. subsidiary of CRH pl, an international buildings materials company
headquartered in Ireland, since 1982. Mr. Lynch has also served as the Chief
Executive Officer of Allied Buildings Products Corp., which is a subsidiary of
Oldcastle, Inc., since 2001. He is a member of the Audit Committee.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's executive officers and directors, and persons who own more than 10% of
a registered class of the Company's equity securities, file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Executive
officers, directors and greater than 10% equity holders are required by
Securities and Exchange Commission rules to furnish the Company with copies of
all forms they file. Based solely on its review of the copies of such forms
received by us and written representations from certain reporting persons, the
Company believes that, during fiscal 2004, all Section 16(a) filing requirements
applicable to its executive officers, directors and 10% equity holders were
satisfied.
The board of directors has determined that the audit committee has at least one
"audit committee financial expert" (as such term is defined in item 401 of
Regulation S-K) and such expert is Mr. Lynch, who is also "independent" (as such
term is used in item 7 (D) (3) (iv) of Schedule 14A under the Exchange Act).
The Company has adopted a code of ethics that applies to its principal executive
officer, principal financial officer, comptrollers and principal accounting
officer and all persons performing similar functions. The Company will provide
to any person without charge, upon written or oral request, a copy of such code
of ethics. Requests should be directed to: PVC Container Corporation, Attention:
Gayle Jarema, Assistant Secretary, 2 Industrial Way West, Eatontown, New Jersey,
07724-2202, telephone number: (732) 542-0060.
21
Item 11. Executive Compensation.
The following table sets forth, for the fiscal years ended June 30,
2004, 2003 and 2002, compensation paid by the Company to its chief executive
officer and to each of the executive officers of the Company whose total annual
salary and bonus exceed $100,000:
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation
Compensation Awards
----------------------------- ------------
LTIP All Other
Name and Salary Bonus Payouts Compensation
Principal Position Year ($) ($) $ ($)
- ------------------ ---- ------- ------- ------- ------------
Phillip L. Friedman 2004 250,000 50,000 -- 1,901
President, Chief 2003 250,000 112,500 45,497 3,509
Executive Officer & 2002 225,000 121,000 81,472 1,050
Chairman (1)
2004 173,688 10,000 -- 11,298
Jeffrey Shapiro 2003 157,658 26,566 -- 12,022
Chief Financial Officer 2002 149,127 55,900 -- 2,042
Joel F. Roberts 2004 147,272 10,000 -- 11,088
Sr. V.P.-Operations 2003 132,252 20,150 30,673 10,350
2002 126,073 29,282 50,369 1,350
(1) Mr. Friedman resigned as President and Chief Executive Officer on September
2, 2004. Mr. Friedman was named Chairman of the Board on September 2, 2004 and
remains an employee of the Company.
STOCK OPTION GRANTS
During the fiscal year ended June 30, 2004, the Company did not grant any
options to purchase share of Common Stock to any of the above-named executive
officers of the Company.
AGGREGATED FISCAL YEAR-END OPTION VALUES
Number of Securities
Shares Underlying Value of Unexercised
Acquired Value Unexercised Options at Fiscal In-The-Money Options
On Realized Year End (#) At Fiscal Year End ($)
Name (1) Exercise ($) Exercisable/Unexercisable Exercisable/Unexercisable(2)
- -----------------------------------------------------------------------------------------------------------------
Phillip L. Friedman -- -- 171,250 / 3,750 -- / --
Jeffrey Shapiro -- -- 29,750 / 3,250 -- / --
Joel F. Roberts -- -- 39,000 / 3,000 -- / --
(1) Only those options held at the end of the fiscal year ended June 30, 2004
of the Company are listed.
(2) All exercisable options were out-of-the-money as at June 30, 2004.
22
LONG TERM INCENTIVE PLAN
Under the Company's Long Term Incentive Plan, there were no grants
during the fiscal year ended June 30, 2004.
PROFIT SHARING SAVINGS PLAN
On September 29, 1983, the Board of Directors adopted the PVC
Container Corporation Profit Sharing Savings Plan (the "Plan"), which Plan
became effective July 1, 1984. The Plan supersedes the 1980 PVC Container
Corporation Profit Sharing Pension Plan. All employees of the Company who have
completed one year of service and are not covered by a collective bargaining
agreement are eligible for participation in the Plan.
The Plan has been drafted to comply with Section 401(k) of the
Internal Revenue Code. Each participating employee can defer from 1% to 6% of
his salary into his Plan account, and the Company makes a matching contribution.
Such contribution for the fiscal year ended June 30, 2004 was in an amount equal
to 25% on the first 6% of the union and non-union employees pre-tax
contributions. Contributions are made by the Company on a monthly basis. In
addition to matching contributions, the Company, at its option, may make
payments based on a percentage of quarterly profits. Such payments can be made
directly to or for the Plan account of participating employees and are based on
a percentage of the employee's compensation. The Company made discretionary
payments during the fiscal year ended June 30, 2004 of $136,894, which amount
includes the 25% and 10% contributions referred to above. All amounts deferred
by and paid to executive officers of the Company pursuant to the Plan have been
included in "Executive Compensation and Transactions with Management."
DEFERRED COMPENSATION PLAN
On June 4, 1986, the Board of Directors approved the establishment
of a Deferred Compensation Plan, effective July 1, 1986, under which executives
of the Company may defer and accrue for three years a certain amount of the
compensation due them. No deferred compensation was accrued as at June 30, 2004.
EMPLOYMENT AGREEMENT
William J. Bergen and the Company entered into an employment
agreement, effective as of September 2, 2004, pursuant to which Mr. Bergen
agreed to serve as the Company's President and Chief Executive Officer. The
employment agreement currently provides for, among other things, compensation
consisting of a base salary of $240,000 per annum until Sept 1, 2005, when the
term of agreement expires unless further extended. Additionally, the employment
agreement provides for incentive compensation based upon the equity value of the
Company. The employment agreement also provides for certain benefits payable to
Mr. Bergen in the event the agreement is not renewed, or the death or disability
of Mr. Bergen.
Mr. Phillip L. Friedman has resigned from his position as President
and Chief Executive Officer effective September 2, 2004. As severance
compensation, the Company shall pay Mr. Friedman an amount equal to $710,000.
The agreement provides for other benefits to be provided subsequent to December
31, 2004. He will continue as an employee of the Company and will serve as the
Chairman of the Board of Directors.
23
COMPENSATION OF THE BOARD OF DIRECTORS
Directors are reimbursed for reasonable expenses actually incurred
in connection with attending each formal meeting of the Board of Directors or
any committee thereof. In addition, each director of the Company is paid $1,250
per quarter.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has not established a compensation committee.
Decisions with respect to the compensation of the Company's executive officers
are made by the entire Board of Directors. During the fiscal year ended June 30,
2004. Mr. Friedman, the President and Chief Executive Officer of the Company who
is also a member of the Board of Directors, participated in deliberations of the
Board of Directors concerning executive officer compensation. No interlocking
relationship presently exists between any member of the Board of Directors and
any member of the board of directors or compensation committee of any other
company.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The common stock, par value $.01 per share, of the Company (the
"Common Stock") is the only authorized voting security of the Company. There are
7,042,393 shares of Common Stock were outstanding, each of which is entitled to
one vote. The Common Stock does not have cumulative voting rights.
The following table sets forth, as of August 31, 2004, the
beneficial ownership of Common Stock of (i) any person who is known by the
Company to own more than 5% of the voting securities of the Company, (ii) each
of the Company's executive officers named in the Summary Compensation Table
(collectively, the "Named Executive Officers"), (iii) each director, and (iv)
all directors and executive officers of the Company as a group. Except as
otherwise indicated, the Company believes, based on information furnished by
such owners, that the beneficial owners of the Company's common stock listed
below have sole voting and investment power with respect to such shares, subject
to any applicable community property laws. Beneficial ownership of the Common
Stock has been determined for this purpose in accordance with the applicable
rules and regulations promulgated under the Securities Exchange Act of 1934 (the
"Exchange Act").
24
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership Percent of Class
- ------------------------ -------------------- ----------------
Kirtland Capital Partners II L.P. ("KCP II" )(1) 4,110,679 58.4%
Lionheart Group Inc.(2) 978,869 14.0%
Kirtland Capital Company II ("KCC II" )(1) 356,736 5.1%
Phillip L. Friedman(3) 567,666 7.9%
William Bergen -0- *
Jeffrey Shapiro(4) 41,000*
Joel F. Roberts(5) 47,375*
Michael Sherwin(6) 31,000*
John F. Turben(7) 4,502,415 63.8%
Michael Lynch(8) 10,000*
John G. Nestor(9) 4,477,415 63.5%
All directors and executive officers as a group (7
persons)(10) 5,209,456 71.3%
*Less than 1%
(1) KCP II acquired on December 12, 1996 an aggregate of 4,110,679 shares of
Common Stock and KCC II acquired on December 12, 1996 and January 3, 1997
an aggregate of 356,736 shares of Common Stock, which shares are owned
directly and beneficially by KCP II and KCC II, respectively.
Collectively, KCP II and KCC II beneficially own 4,467,415 shares of
Common Stock, which constitutes 63.4% of the outstanding shares of Common
Stock. The address for each of KCP II and KCC II is 3201 Enterprises
Parkway-3200 Beachwood, Ohio 44122.
(2) Information reported is based on a Form 4 as filed with the Securities and
Exchange Commission on June 7, 2004 by Lionheart Group Inc. and C. Duncan
Soukup. The Form 4 provided that 978,869 shares of Common Stock were owned
by Lionheart Group Inc. and 34,000 shares of Common Stock were owned
individually by Mr. Soukup, President of Lionheart Group Inc. Mr. Soukup
disclaims beneficial ownership of the shares owned by Lionheart Group
Inc., except to the extent of his pecuniary interest therein. The address
for each of Lionheart Group Inc. and Mr. Soukup is 118 E. 25th Street, 8th
Floor, New York, New York 10010.
(3) Includes 167,500 shares of Common Stock that may be acquired upon exercise
of options granted under the 1996 Incentive Stock Option Plan of the
Company ("Option Plan") that are exercisable within 60 days of August 31,
2004.
(4) Includes 24,000 shares of Common Stock that may be acquired upon exercise
of options granted under the Option Plan that are exercisable within 60
days of August 31, 2004.
(5) Includes 33,500 shares of Common Stock that may be acquired upon exercise
of options granted under the Option Plan that are exercisable within 60
days of August 31, 2004.
25
(6) Includes 10,000 shares of Common Stock that may be acquired upon exercise
of options granted under the Option Plan that are exercisable within 60
days of August 31, 2004. Mr. Sherwin has a 10% interest in Midwest Forge
Corporation, which has a .0143% direct interest as a limited partner in
KCP II. Mr. Sherwin disclaims beneficial ownership of the interest of
Midwest Forge Corporation in KCP II.
(7) Includes 10,000 shares of Common Stock that may be acquired upon exercise
of options granted under the Option Plan that are exercisable within 60
days of October 24, 2004 and 25,000 shares of Common Stock owned
individually by Mr. Turben. Also includes 4,110,679 shares of Common Stock
owned by KCP II and 356,736 shares of Common Stock owned by KCC II. Mr.
Turben is the Chairman of the Board of Directors of Kirtland Capital
Corp., an Ohio corporation, which is the general partner that controls KCP
II and has sole voting and investment power over all of the Common Stock
owned by KCP II. Kirtland Capital Corp. is also the general partner of
Evergreen Partners II L.P., an Ohio limited partnership, which is the
managing member of KCC II. Kirtland Capital Corp. has sole voting and
investment power over all of the common stock owned by KCC II. Mr. Turben
disclaims beneficial ownership of the shares of Common Stock owned by of
KCP II and KCC II. Mr. Turben's address is c/o Kirtland Capital Corp.,
3201 Enterprise Parkway - 3200 Beachwood, Ohio 44122.
(8) Includes 10,000 shares of Common Stock that may be acquired upon exercise
of options granted under the Option Plan that are exercisable within 60
days of August 31, 2004.
(9) Includes 10,000 shares of Common Stock that may be acquired upon exercise
of options granted under the Option Plan that are exercisable within 60
days of August 31, 2004. Also includes 4,110,679 shares of Common Stock
owned by KCP II and 356,736 shares of Common Stock owned by KCC II. Mr.
Nestor is the President and a director of Kirtland Capital Corp., an Ohio
corporation, which is the general partner that controls KCP II and has
sole voting and investment power over all of the Common Stock owned by KCP
II. Kirtland Capital Corp. is also the general partner of Evergreen
Partners II L.P., an Ohio limited partnership, which is the managing
member of KCC II. Kirtland Capital Corp. has sole voting and investment
power over all of the common stock owned by KCC II. Mr. Nestor disclaims
beneficial ownership of the shares of Common Stock owned by of KCP II and
KCC II. Mr. Nestor's address is c/o Kirtland Capital Corp., 3201
Enterprise Parkway - 3200 Beachwood, Ohio 44122.
(10) Includes 265,000 shares of Common Stock that may be acquired upon exercise
of options granted under the Option Plan that are exercisable within 60
days of August 31, 2004.
Shown below is information concerning all equity compensation plans
and individual compensation arrangements in effect as of the end of the last
fiscal year.
26
EQUITY COMPENSATION PLAN INFORMATION
Number of Securities Remaining
Plan Category Number of Securities To Be Issued Weighted Average Exercise Available for Future Issuance
Upon Exercise of Outstanding Options Price of Outstanding Options 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 Corp., pursuant to which Kirtland Capital Corp. receives $25,000 per
month for providing management services to the Company. Mr. Turben is Chairman
of Kirtland Capital Corp., and Mr. Nestor is President of Kirtland Capital Corp.
Kirtland Capital Corp. is the General Partner of Kirtland Capital Partners II
L.P. and Kirtland Capital Company II, which collectively own 63.9% of the issued
and outstanding common stock of the Company.
The Board of Directors of the Company has established an Audit
Committee and adopted an Audit Committee Charter. The current members of the
Audit Committee are Messrs. Sherwin (Chairman), Lynch and Nestor.
Notwithstanding the management agreement and the ownership of the Company's
common stock by Kirtland Capital Partners II L.P. and Kirtland Capital Company
II and Mr. Nestor's position with Kirtland Capital Corp. described above, the
Company's Board of Directors does not believe that such relationships interfere
with the exercise by Mr. Nestor of independent judgment in carrying out his
responsibilities as a director and as a member of the Audit Committee in
accordance with Rule 4200(a)(15) of NASD listing standards and that, based upon
his considerable business and financial background, his membership on the Audit
Committee is in the best interests of the Company and its stockholders.
27
PART III
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements.
Report of Independent Auditors
Consolidated Balance Sheets at June 30, 2004 and 2003
Consolidated Statements of Operations for the years ended June 30,
2004, 2003 and 2002
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended June 30,
2004, 2003 and 2002
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules.
Report of Independent Auditors on Consolidated Financial Statement
Schedules
For the three years ended June 30, 2004
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits.
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 Amended and Restated By-Laws (filed as Exhibit 3.1, to
the Company's report on Form 8-K filed on September 8, 2004, is
incorporated herein by reference). The Company's By-Laws (filed as
Exhibit 3.2 to the 1988 10-K, and incorporated herein by reference.
28
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). Employment Agreement between the Company and
William J. Bergen dated September 2, 2004, filed on September 8, 2004
as Exhibit 10.1 to the Company's report on Form 8-K is 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). Agreement dated September 2, 2002 between the Company
and Phillip L. Friedman, filed on September 8, 2004 as Exhibit 10.2 to
the Company's report on Form 8-K is incorporated herein by reference.
10.3 1981 Incentive Stock Option Plan (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).
29
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 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).
10.20 Employment Agreement between the Company and William J. Bergen dated
September 2, 2004 (filed as Exhibit 10.1 to the Company's report on
Form 8-K filed on September 8, 2004 and incorporated herein by
reference).
30
10.21 Agreement dated September 2, 2002 between the Company and Phillip L.
Friedman (filed as Exhibit 10.2 to the Company's report on Form 8-K
filed on September 8, 2004 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.
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.)
31
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 Amended and Restated By-Laws (filed as Exhibit 3.1 to
the Company's report on Form 8-K filed on September 8, 2004 is
incorporated herein by reference). 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). Employment Agreement between the
Company and William J. Bergen dated September 2, 2004, filed on
September 8, 2004 as Exhibit 10.1 to the Company's report on Form
8-K is 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). Agreement dated September 2, 2002 between the
Company and Phillip L. Friedman, filed on September 8, 2004 as
Exhibit 10.2 to the Company's report on Form 8-K is incorporated
herein by reference.
10.3 1981 Incentive Stock Option Plan (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).
32
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 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).
33
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).
10.20 Employment Agreement between the Company and William J. Bergen dated
September 2, 2004 (filed as Exhibit 10.1 to the Company's report on
Form 8-K filed on September 8, 2004 and incorporated herein by
reference).
10.21 Agreement dated September 2, 2002 between the Company and Phillip L.
Friedman (filed as Exhibit 10.2 to the Company's report on Form 8-K
filed on September 8, 2004 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.
34
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.)
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
PVC CONTAINER CORPORATION
(Registrant)
By: /s/Phillip L. Friedman
---------------------------
Phillip L. Friedman
Chairman
Date: October 1, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Phillip L. Friedman Chairman and Director October 1, 2004
- ------------------------------ (Principal Executive Officer)
Phillip L. Friedman
/s/William J. Bergen President, Chief Executive October 1, 2004
- ------------------------------ Officer and Director
William J. Bergen
/s/Jeffrey Shapiro Senior Vice President and Chief October 1, 2004
- ------------------------------ Financial Officer (Principal
Jeffrey Shapiro Financial and Accounting Officer)
/s/John F. Turben Director October 1, 2004
- ------------------------------
John F. Turben
/s/John G. Nestor Director October 1, 2004
- ------------------------------
John G. Nestor
/s/Michael Sherwin Director October 1, 2004
- ------------------------------
Michael Sherwin
/s/Michael Lynch Director October 1, 2004
- ------------------------------
Michael Lynch
PVC CONTAINER CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-K
JUNE 30, 2004
CONSOLIDATED FINANCIAL STATEMENTS
PVC Container Corporation
June 30, 2004, 2003 and 2002
PVC Container Corporation
Consolidated Financial Statements
June 30, 2004, 2003 and 2002
CONTENTS
Report of Independent Registered Public Accounting Firm..................... 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 Registered Public Accounting Firm
The Board of Directors and Stockholders
PVC Container Corporation
We have audited the accompanying consolidated balance sheets of PVC Container
Corporation as of June 30, 2004 and 2003, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 2004. Our audit also included the
financial statement schedule listed in the index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PVC
Container Corporation at June 30, 2004 and 2003 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2004 in conformity with U.S. generally accepted accounting
principles . Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
As discussed in Note 1, the Company changed its method of accounting for
goodwill and other intangible assets effective July 1, 2002.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey
September 23, 2004
1
PVC Container Corporation
Consolidated Balance Sheets
JUNE 30
2004 2003
------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 365,820 $ 673,055
Accounts receivable, net of allowance of $687,000 and
$999,000 at June 30, 2004 and 2003, respectively 14,901,390 12,398,916
Inventories, net 12,461,663 12,525,741
Prepaid expenses and other current assets 1,291,177 1,255,440
Deferred income taxes 1,286,803 1,658,154
------------------------------
Total current assets 30,306,853 28,511,306
Properties, plant and equipment, net 28,609,378 30,297,375
Goodwill 3,296,298 3,296,298
Other assets 176,692 339,212
------------------------------
$ 62,389,221 $ 62,444,191
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,207,342 $ 8,132,728
Accrued expenses 2,373,488 2,675,908
Current portion of long-term debt 3,929,649 3,351,266
------------------------------
Total current liabilities 16,510,479 14,159,902
Long-term debt 24,077,230 26,480,888
Interest rate swap 198,278 543,436
Deferred income taxes 2,628,292 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 as of June 30, 2004 and 2003
70,446 70,446
Capital in excess of par value 3,810,981 3,810,981
Retained earnings 15,215,294 15,280,249
Accumulated other comprehensive loss (116,984) (320,627)
Treasury stock, at cost (2,262 shares at June 30, 2004 and 2003) (4,795) (4,795)
------------------------------
Total stockholders' equity 18,974,942 18,836,254
------------------------------
$ 62,389,221 $ 62,444,191
==============================
See accompanying notes.
2
PVC Container Corporation
Consolidated Statements of Operations
FISCAL YEAR ENDED JUNE 30
2004 2003 2002
---------------------------------------------
Net sales $ 97,746,511 $ 90,433,217 $ 84,076,390
Cost and expenses:
Cost of goods sold (exclusive of depreciation and
amortization expense shown separately below)
78,757,935 71,456,597 64,985,299
Selling, general and administrative expense 10,694,406 9,614,683 9,933,612
Depreciation and amortization expense 6,263,328 6,022,207 6,431,351
Provision for restructuring and other
exit activities 475,677
---------------------------------------------
96,191,346 87,093,487 81,350,262
---------------------------------------------
Income from operations 1,555,165 3,339,730 2,726,128
Other expenses:
Interest expense (1,864,438) (1,944,091) (2,214,658)
Interest income -- 1,383 27,721
Other income 232,565 81,879 71,552
---------------------------------------------
(1,631,873) (1,860,829) (2,115,385)
---------------------------------------------
(Loss) income before provision (benefit) for income
taxes (76,708) 1,478,901 610,743
(Benefit) provision for income taxes (11,753) 606,349 349,298
---------------------------------------------
Net (loss) income $ (64,955) $ 872,552 $ 261,445
=============================================
(Loss) income earnings per share:
Basic $ (.01) $ .12 $ .04
Diluted $ (.01) $ .12 $ .04
See accompanying notes.
3
PVC Container Corporation
Consolidated Statements of Stockholders' Equity
CAPITAL ACCUMULATED
COMMON STOCK IN OTHER TOTAL
ISSUED & OUTSTANDING EXCESS OF RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
SHARES AMOUNT PAR VALUE EARNINGS LOSS STOCK EQUITY
--------------------------------------------------------------------------------------------------
Balance, June 30, 2001 7,044,655 $ 70,446 $ 3,810,981 $ 14,146,252 $ (174,562) $ $ 17,853,117
Comprehensive income:
Net income 261,445 261,445
Unrealized loss on interest
rate swap, net of
taxes of $66,476 (99,714) (99,714)
------------
Total comprehensive income 161,731
Repurchase of common stock (2,262) (4,795) (4,795)
-------------------------------------------------------------------------------------------------
Balance, June 30, 2002 7,042,393 70,446 3,810,981 14,407,697 (274,276) (4,795) 18,010,053
Comprehensive income:
Net income 872,552 872,552
Unrealized loss on interest
rate swap, net of
taxes of $39,958 (46,351) (46,351)
------------
Total comprehensive income 826,201
-------------------------------------------------------------------------------------------------
Balance, June 30, 2003 7,042,393 $ 70,446 $ 3,810,981 $ 15,280,249 ($ 320,627) ($ 4,795) $ 18,836,254
Comprehensive income:
Net loss (64,955) (64,955)
Unrealized gain on
Interest Rate swap, net of 203,643 203,643
Taxes of $141,515
------------
Total comprehensive income 138,688
-------------------------------------------------------------------------------------------------
Balance June 30, 2004 7,042,393 $ 70,446 $ 3,810,981 $ 15,215,294 $ (116,984) $ (4,795) $ 18,974,942
=================================================================================================
See accompanying notes.
4
PVC Container Corporation
Consolidated Statements of Cash Flows
FISCAL YEAR ENDED JUNE 30
2004 2003 2002
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (64,955) $ 872,552 $ 261,445
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 6,263,328 6,022,207 6,431,351
Amortization of deferred financing costs 164,823 160,388 126,385
Deferred income taxes 434,417 754,484 (893,993)
Gain on sale of equipment (144,500) (2,700)
Loss (gain) on sale of building 122,322 (40,952)
Changes in assets and liabilities:
Accounts receivable (2,502,474) (187,528) 127,758
Inventories 64,078 (1,590,738) 1,397,080
Prepaid expenses and other current assets (297,989) 134,221 794,063
Other assets 17,697 17,696 655,956
Accounts payable and accrued expenses 1,772,193 (371,904) (140,417)
Income taxes payable (913,548) 913,548
--------------------------------------------
Net cash provided by operating activities 5,828,940 4,895,130 9,632,224
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (4,610,987) (5,761,598) (2,729,520)
Proceeds from sale of equipment 144,500 2,700
Proceeds from sale of building 175,587 112,618
--------------------------------------------
Net cash (used in) investing activities (4,290,900) (5,758,898) (2,616,902)
CASH FLOWS FROM FINANCING ACTIVITIES
Treasury shares purchased (4,795)
Net (payments) proceeds from revolving credit line (594,113) 1,384,515
Proceeds from long-term debt 2,531,818 2,772,866 576,893
Payments on indebtedness (3,762,980) (3,239,920) (7,402,005)
Deferred financing costs (20,000) (37,761) (30,000)
--------------------------------------------
Net cash (used in) provided by financing activities (1,845,275) 879,700 (6,859,907)
--------------------------------------------
Net (decrease) increase in cash and cash equivalents (307,235) 15,932 155,415
Cash and cash equivalents, beginning of year 673,055 657,123 501,708
--------------------------------------------
Cash and cash equivalents, end of year $ 365,820 $ 673,055 $ 657,123
============================================
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 (PVC) compounds, high density
polyethylene resins and polyethylene terephthalate (PET). These bottles are used
primarily for packaging cosmetics, toiletries, foods, household chemicals, lawn
and garden supplies, and industrial chemical products. The Company produces and
sells polyvinyl chloride which is used by the Company or sold to other plastic
bottle manufacturers whose products compete with those produced by the Company.
Our businesses are based in the United States.
CONSOLIDATION
The accompanying financial statements include the accounts of PVC Container
Corporation and its wholly-owned subsidiaries, Novatec Plastics Corporation,
Novapak Corporation, Airopak Corporation, Marpac Industries Inc., Marpac
Southwest, Inc., and PVC Container International Sales Corporation, a foreign
sales company incorporated in the U.S. Virgin Islands. All inter-company
accounts have been eliminated.
CASH EQUIVALENTS
The Company considers investments with maturities of three months or less when
acquired to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is determined
under the first-in, first-out ("FIFO") method.
DEPRECIATION
Depreciation is provided on a straight-line method over the estimated useful
lives of the related assets. Maintenance and repairs are charged to operations
as incurred. Major renewals and betterments are capitalized.
6
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INTANGIBLES
Effective July 1, 2002, the Company adopted the provisions of FASB Statement No.
142, Goodwill and Other Intangible Assets (SFAS 142). Under these rules,
goodwill is no longer subject to amortization but is reviewed for potential
impairment upon adoption and thereafter annually or upon the occurrence of an
impairment indicator. SFAS 142 prescribes a two-phase process for impairment
testing of goodwill. The first phase screens for impairment, while the second
phase measures the impairment. The carrying amount of the Company's goodwill is
reviewed on a regular basis for any signs of an impairment. The Company
determines if the carrying amount is impaired based on anticipated cash flows.
In the event of impairment, a loss is recognized based on the amount by which
the carrying amount exceeds the fair value of the asset. Fair value is
determined primarily using the anticipated cash flows, discounted at a rate
commensurate with the associated risk. The Company completed the annual
impairment test in fiscal 2004 and passed the first phase of the impairment
test; therefore, no further testing was required.
The annual amortization of goodwill, which would have approximated $293,000 is
no longer required in 2004 or 2003. The following table reflects unaudited
adjusted results of operations of the Company giving effect to SFAS 142 as if it
were adopted on July 1, 2001.
Year Ended June 30,
---------------------------------------
2004 2003 2002
---------- ----------- -----------
Net (loss) income, as reported $ (64,955) $ 872,552 $ 261,445
Add back: amortization expense -- -- 293,000
---------- ----------- -----------
Net (loss) income, as adjusted $ (64,955) $ 872,552 $ 554,445
========== =========== ===========
Basic and diluted net (loss) income
per share, as adjusted
Basic $ (.01) $ .12 $ .08
Diluted $ (.01) $ .12 $ .08
7
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which requires
an asset and liability approach to financial accounting and reporting for income
taxes. Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
CONCENTRATION OF CREDIT RISK
The Company grants trade credit to its customers, who are primarily
manufacturers of personal care products, food, household chemicals, and lawn and
garden and industrial chemical products, and to bottle distributors who sell to
such manufacturers. The Company performs periodic credit evaluations of its
customers and generally does not require collateral. Sales and accounts
receivable from customers are denominated in U.S. dollars. The Company has not
experienced significant losses related to receivables from individual customers.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from customers' failure to make mandatory payments.
REVENUE RECOGNITION
Revenue is recognized upon shipment of the product. Sales are shown net of
returns, allowances and discounts. In accordance with Emerging Issues Task Force
EITF 00-10, Accounting for Shipping and Handling Fees and Costs, the Company
reports amount billed to customers for shipping and handling fees as sales in
the Company's Consolidated Statements of Operations. Costs incurred by the
Company for shipping and handling fees are reported as cost of sales.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to expense as incurred and
amounted to $323,000, $290,000 and $263,000, in 2004, 2003 and 2002,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in operations or
expected to be disposed of when events and circumstances indicate that the
assets might be impaired and when those assets are expected to generate
undiscounted cash flows that would be less than their carrying amounts.
8
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK-BASED COMPENSATION
As permitted by Financial Accounting Standards Board (FASB) Statement No. 123,
Accounting for Stock-Based Compensation (SFAS 123), the Company has elected to
follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25) and related interpretations in accounting for its employee
stock option plans. Under APB 25, compensation expense is calculated at the time
of option grant based upon the difference between the exercise price of the
option and the fair market value of the Company's common stock at the date of
grant, and is recognized over the vesting period.
SFAS 123 requires pro forma information regarding net income and earnings per
share as if the Company had accounted for its employee stock options and
warrants ("equity awards") under the fair value method of SFAS 123. The fair
value of the Company's equity awards was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 2003 and 2002, respectively: risk-free interest rates of
approximately 2.4% and 4.1%, expected volatility of 0.6 and 0.4; expected option
life equal to the vesting period, and an expected dividend yield of 0.0%. No
options were granted in 2004.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing model does not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The following table illustrates the effect on net income (loss) and net income
(loss) per common shares for the three fiscal years ended June 30, 2003, as if
the Company had applied the fair value method to measure stock-based
compensation, required under the disclosure provision of SFAS 123:
2004 2003 2002
---- ---- ----
Net (loss) income as reported $ (64,955) $ 872,552 $ 261,445
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 (26,028) (9,225) (45,917)
---------- ----------- -----------
Pro forma net (loss) income (90,983) $ 863,327 $ 215,528
9
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income (loss) per share:
Net income (loss) as reported:
Basic $ (.01) $ .12 $ .04
Diluted $ (.01) $ .12 $ .04
Pro forma net income (loss)
Basic $ (.01) $ .12 $ .04
Diluted $ (.01) $ .12 $ .04
PER SHARE INFORMATION
Per share information is presented in accordance with SFAS No. 128, Earnings Per
Share. Basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share includes the
dilutive effect of all such securities.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company recognizes all of its derivative instruments on the balance sheets
as either assets or liabilities at fair value. The accounting for changes in the
fair value (i.e., gains or losses) of a derivative instrument depends on whether
it has been designated and qualifies as part of a hedging relationship and
further, on the type of hedging relationship. For those derivative instruments
that are designated and qualify as hedging instruments, the Company must
designate the hedging instrument, (based upon the exposure being hedged), as
either a fair value hedge, a cash flow hedge, or a hedge of a net investment in
a foreign operation.
For a derivative instrument that is designated and qualifies as cash flow hedge
(i.e., hedges the exposure to variability on expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on
a derivative instrument that is designated and qualifies as a cash flow hedge is
reported as a component of other comprehensive income and reclassified into
earnings in the period or periods during which the hedged transaction affects
earnings. The remaining gain or loss on the derivative instrument, if any, is
recognized in current earnings to the extent it exceeds the cumulative change in
the present value of future cash flows of the hedged item. There have been no
such gains or losses recorded by the Company.
At June 30, 2004, the Company had interest-rate swap agreements, designated as
cash flow hedges, that effectively convert approximately $6,008,213 of its
floating-rate debt to a fixed-rate through August 2005. The interest rate swap
agreements hedge the floating interest rate by reducing the impact of interest
rate changes on future interest expense. The fair value of the interest-rate
swap at June 30, 2004, was approximately $198,000, based upon bank valuation,
and is included in the accompanying consolidated balance sheet. Losses reported
in accumulated, other comprehensive loss, that are expected to be reclassified
into earnings in the next twelve months total approximately $170,000 before
taxes.
10
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 is the interpretation of Accounting
Research Bulletin No. 51 Consolidated Financial Statements, which addresses
consolidation by business enterprises of variable interest entities. FIN 46 is
effective immediately for all variable interest entities created after January
31, 2003 and became effective for the Company for periods ending after March 15,
2004, for variable interest entities in which it holds a variable interest that
it acquired before February 1, 2003. The adoption of FIN 46 did not have any
impact on the Company's financial position, results of operations and cash
flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). This statement amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133). The Statement is effective for contracts entered into or modified after
June 30, 2003, and hedging relationships designated after June 30, 2003. Certain
provisions of this statement relating to SFAS 133 implementation issues that
have been effective for prior fiscal quarters will continue to be applied in
accordance with their respective effective dates. The Company does not expect
that the adoption of SFAS 149 will have an impact on its financial position,
results of operations or cash flows.
In December of 2003, the FASB revised Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement, as revised,
retains the disclosure requirements of the original statement, which it
replaces, and requires additional disclosures about the assets, obligations,
cash flows and net periodic benefit cost of defined benefit pension plans and
other defined benefit postretirement plans. The annual financial statement
disclosures are effective for the Company for the fiscal year ended June 30,
2004 and have been incorporated in Note 7.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates that affect the financial statements include, but are not
limited to, recoverability of inventories, collectibility of accounts
receivable, returns, useful lives of property, plant and equipment and related
amortization periods, recoverability of long-lived assets and fair value of net
assets held for sale.
11
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
2. INVENTORIES
Inventories consist of the following:
2004 2003
-----------------------------
Raw materials $ 4,980,080 $ 6,023,810
Finished goods 6,742,899 6,264,247
Reserves (876,888) (1,036,762)
-----------------------------
10,846,091 11,251,295
Molds for resale, in production 945,212 840,605
Supplies 670,360 433,841
-----------------------------
Total inventories $ 12,461,663 $ 12,525,741
=============================
3. PROPERTIES, PLANT AND EQUIPMENT
ESTIMATED
USEFUL LIFE IN
2004 2003 YEARS
--------------------------------------------
Land $ 650,686 $ 686,343
Building and improvements 16,822,306 16,773,267 20-25
Machinery and equipment 57,720,614 53,722,845 7-10
Molds 7,218,843 6,003,311 3-5
Office furniture and equipment 4,225,096 3,845,375 5-10
Motor vehicles 125,718 125,718 3-5
Leasehold improvements 24,845 24,845 12
Construction in Progress 31,262 1,589,124
---------------------------
86,819,370 82,770,828
Less accumulated depreciation 58,209,992 52,473,453
---------------------------
$ 28,609,378 $ 30,297,375
===========================
Depreciation expense and amortization expense for 2004, 2003 and 2002 were
$6,262,000, $6,021,000 and $6,430,000 and $1,000, $1,000 and $294,000
respectively.
12
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
4. ACCRUED EXPENSES
Accrued expenses at June 30 consists of:
2004 2003
---------------------------
Accrued payroll $ 236,307 $ 433,316
Accrued vacation 731,135 713,247
Accrued employee benefits 535,921 737,654
Other accrued expenses 870,125 791,691
---------------------------
$ 2,373,488 $ 2,675,908
===========================
5. LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt at June 30 consists of the following:
2004 2003
-----------------------------
Notes payable:
South Carolina Economic Development Authority:
Loan $ 3,595,765 $ 3,595,955
Pennsylvania Industrial Development Authority:
Loan 617,043 695,905
GE Capital Public Finance:
Equipment loans 1,224,080 1,575,350
Building loan 3,083,305 3,300,488
PNC Bank:
Term notes 6,522,052 8,528,844
Revolving line of credit 8,305,291 8,899,404
Other 4,659,344 3,236,208
-----------------------------
28,006,879 29,832,154
Less current portion (3,929,649) (3,351,266)
-----------------------------
$ 24,077,230 $ 26,480,888
=============================
Maturities of long-term debt are as follows: 2005-$3,929,649; 2006-$14,073,041;
2007-$2,299,565; 2008-$1,704,683; 2009-$743,998; and 2010 to 2016-$5,255,943.
Interest paid amounted to $1,871,346, $1,946,630, and $2,358,089 in 2004, 2003,
and 2002, respectively.
13
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT AND PLEDGED ASSETS (continued)
PNC AGREEMENT
The Company entered into a $43,750,000 senior secured credit facility with PNC
Bank in August 2000. The credit facility is structured as a five-year
$25,000,000 senior revolving credit facility, a five-year $12,183,000 senior
term loan, a five-year $3,846,000 standby letter of credit, and a $2,000,000
capital expenditure line. At June 30, 2004, the Company was in compliance with
all of the credit facility's covenants. The credit facility is secured by
accounts receivable, inventories, property, plant and equipment.
The Term Notes bear interest at LIBOR plus 250 basis points and the revolving
line bears interest at LIBOR plus 200 basis points. The effective interest rates
of the term loan and revolver were 3.98% and 3.49%, respectively, in fiscal
2004. The Company entered into interest-rate swap agreements (Note 1) to
effectively convert a portion of the floating Term Note debt interest to a fixed
rate.
The $2 million capital expenditure line of credit bears interest at the prime
rate. Borrowings against this line totaled approximately $.9 million at June 30,
2004.
NOTE PAYABLE - SOUTH CAROLINA ECONOMIC DEVELOPMENT AUTHORITY ("S.C. EDA")
This note was obtained to finance the construction of the Company's South
Carolina manufacturing facility and is due April 1, 2016. Prepayments may be
made without penalty. This note is subject to prior mortgages in favor of the
PNC Bank. The effective interest rate on this obligation was 1.1% in fiscal 2004
and 1.4% in fiscal 2003. The note is secured by property, plant and equipment.
S.C. EDA has issued tax exempt bonds to fund the debt. Should the tax exempt
status of this bond issue be negated, the interest rate on this note would be
retroactively adjusted. The Company has an unused letter of credit amounting to
approximately $3.6 million in conjunction with this note.
NOTE PAYABLE - PENNSYLVANIA INDUSTRIAL DEVELOPMENT AUTHORITY
During fiscal year 1999, the Company obtained a $1.0 million loan from the
Pennsylvania Industrial Development Authority ("PIDA") to assist in financing
the construction of its Hazleton, Pennsylvania manufacturing facility. The loan
is payable in 145 equal monthly installments of $8,634, with an interest rate of
3.75% and a maturity date of March 1, 2011. The loan may be prepaid in whole or
in part subject to certain requirements stated in the loan agreement. The loan
is secured by the property of the manufacturing facility.
14
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT AND PLEDGED ASSETS (continued)
GE CAPITAL PUBLIC FINANCE BUILDING AND EQUIPMENT LOANS
During fiscal year 1998, the Hazleton Area Industrial Development Authority
approved $7,250,000 tax-exempt Industrial Development Bonds. The Bonds were
purchased and are held by GE Capital Public Finance, Inc. to finance a loan to
the Company in conjunction with the Company's Hazleton, Pennsylvania
manufacturing facility. The loan is payable in 144 decreasing monthly
installments at an interest rate of 5.15%, with a final lump sum payment of
$1,860,530 due June 15, 2010. The loan may be prepaid in whole or in part
subject to certain requirements stated in the loan agreement. The loan is
secured by the property of the manufacturing facility.
During fiscal 1997, the City of Paris, Illinois approved $1,200,000 Series 1997A
and $2,300,000 Series 1997B Industrial Development Revenue Bonds. The bonds were
purchased and are held by GE Capital Public Finance, Inc. to finance a loan to
the Company in conjunction with the Company's expansion of its Paris, Illinois
manufacturing facility. The loan is payable in 120 decreasing monthly
installments at an interest rate of 5.90%, with a final lump sum payment of
$602,952 due April 1, 2007. The loan may be prepaid in whole or in part subject
to certain requirements stated in the loan agreement. The loan is secured by the
property and the equipment. The Company has unused letters of credit amounting
to approximately $1.2 million in conjunction with this loan.
The bonds issued by the City of Paris to fund the debt are tax exempt. Should
the tax-exempt status of these bonds be negated, the interest rate of on the
related note would be retroactively adjusted.
OTHER
Other loans consist of notes payable to various banks for equipment, real estate
improvements and development and expansion of the Company's manufacturing
plants. The notes bear interest at rates ranging from 3% to 9.5% and are payable
in monthly installments through 2011. The loans are secured by the Company's
equipment, land and buildings.
The carrying amounts of the aforementioned debt agreements approximate fair
value.
15
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
6. OPERATING LEASES
Minimum rental commitments under non-cancelable operating leases are payable as
follows:
YEAR AMOUNT
- ------------------------
2005 $ 934,197
2006 1,098,602
2007 714,364
2008 686,430
2009 577,771
Thereafter 1,465,410
Rental expense for operating leases amounted to $1,316,506 and $1,139,611, and
$1,124,857 in fiscal 2004, 2003, and 2002, respectively. The executive office
lease is for a term of ten years that commenced January 1, 1999 and has a rent
escalation clause as follows: monthly rental is $15,500 until December 31, 2004,
then $16,275 until December 31, 2006 and then $17,050 until the end of the term.
7. PENSION PLAN
On September 1, 1990, the Company instituted a non-contributory defined benefit
pension plan for all eligible full-time union employees. Benefits are based on
years of service. The Company contributes to the plan amounts, actuarially
determined by the Unit Credit Actuarial Cost Method, that provides the plan with
sufficient assets to meet future benefit payment requirements. The plan's assets
are invested principally in short-term investments.
The pension plan assets are invested with the objective of being able to meet
current and future benefit payment needs, while controlling pension expense
volatility and future contributions. Plan assets are diversified between fixed
income investments, cash and U.S. equities. The strategic target allocation is
100% fixed income investments. The weighted-average asset allocation for our
pension plans at June 30, 2004, 2003 and 2002 was 100% for fixed income
securities.
The following table sets forth the plan's funded status and the amount
recognized in the Company's consolidated balance sheet:
16
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
7. PENSION PLAN (continued)
JUNE 30
2004 2003
----------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,002,864 $ 933,277
Service cost 6,788 8,298
Interest cost 62,765 70,492
Actuarial loss (gain) (52,888) 22,018
Benefits paid 42,172 (31,221)
----------------------------
Benefit obligation at end of year $ 977,357 $ 1,002,864
============================
Change in plan assets:
Fair value of plan assets at beginning of year $ 1,025,551 $ 1,017,742
Actual return on plan assets 52,600 39,030
Expenses (17,126) --
Benefits paid, including expenses (42,172) (31,221)
----------------------------
Fair value of plan assets at end of year $ 1,018,852 $ 1,025,551
============================
Funded status $ 41,495 $ 22,687
Unrecognized net actuarial gain 279,785 292,328
Unrecognized prior service cost 10,055 11,730
Unrecognized transition obligation 12,069 15,087
----------------------------
Prepaid Pension asset $ 343,404 $ 341,832
============================
Weighted-average assumptions at year-end:
Interest rate used to calculate Net Periodic Pension Cost 6.75% 7.51%
Interest rate used to calculate year end disclosure
information 6.75% 7.51%
Expected return on plan assets 8.50% 8.50%
Rate of compensation increase 0.00% 0.00%
Components of net periodic benefit cost:
Service cost $ 6,788 $ 8,299
Interest cost 62,765 70,492
Expected return on plan assets (85,461) (85,199)
Amortization of transition obligation 3,018 3,018
Amortization of prior service cost 1,675 1,675
Recognized net actuarial loss 9,642 10,872
----------------------------
Net periodic benefit cost $ (1,573) $ 9,157
============================
17
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
7. PENSION PLAN (continued)
Projection of benefits paid by the plan for next ten fiscal years
Fiscal Years Projected Benefits
2005 $ 41,732
2006 $ 40,857
2007 $ 40,904
2008 $ 40,900
2009 $ 43,687
Sum of Fiscal Years 2010 thru 2014 $ 276,257
Contributions for the fiscal year beginning July 1, 2004 are not available until
the next valuation date is completed. In the meantime, a reasonable projection
of the minimum contribution for the fiscal year beginning July 1, 2004 would be
$8,662.
To develop the expected long-term rate of return on assets assumption, the
Company considered the current level of expected returns on risk free
investments (primarily government bonds), the historical level of the risk
premium associated with the other asset classes in which the portfolio is
invested and the expectations for future returns of each asset class. The
expected return for each asset class was then weighted based on the target asset
allocation to develop the expected long-term rate of return on assets assumption
for the portfolio. The measurement date for our pension plan is June 30 of each
year.
The Company maintains a voluntary salary reduction 40l(k) plan covering all
non-union and union employees with more than one year of service. Eligible
employees may elect to contribute up to 15% of their salaries on a pre-tax basis
and an additional 10% of their salaries on an after-tax basis up to ERISA's
maximum annual level. The Company contributes 25% on the first 6% of the union
and non-union employees' pre-tax contribution. The Company may make additional
discretionary contributions to the plan based on earnings. The Company
contributed $136,894, $143,716 and $136,340 in 2004, 2003, and 2002,
respectively.
8. COMMON STOCK AND STOCK OPTIONS
In 1997, the Company's Board of Directors approved and ratified an incentive
stock option plan to enable the Company to grant options to purchase up to
600,000 shares of the Company's common stock through the plan's expiration on
January 16, 2007. This plan conforms to the requirements of Rule 16b-3 of the
Securities Exchange Act of 1934. The options granted vest at the rate of 25% per
year. All options have been granted at fair market value.
18
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, 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
Granted -- --
Forfeited -- --
Exercised -- --
--------------------
Outstanding at June 30, 2004 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
====================
Exercisable at June 30, 2004 467,050 $ 4.22
====================
Exercise prices for options outstanding as of June 30, 2004, ranged from $1.55
to $6.38 per share. The weighted average remaining contractual life of these
options is 7 years.
19
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES
The provision (benefit) for income taxes consists of:
2004 2003 2002
-------------------------------------------
Current:
Federal $ (345,780) $ 746,934 $ 897,168
State (100,390) 220,186 274,947
-------------------------------------------
(446,170) 967,120 1,172,115
Deferred:
Federal 336,677 (277,794) (637,683)
State 97,740 (82,977) (185,134)
-------------------------------------------
434,417 (360,771) (822,817)
-------------------------------------------
Total provision (benefit) $ (11,753) $ 606,349 $ 349,298
===========================================
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:
2004 2003
--------------------------
Deferred tax liabilities:
Long-lived assets and other $ 2,628,292 $ 2,423,711
--------------------------
Total deferred tax liabilities $ 2,628,292 $ 2,423,711
Deferred tax assets:
Bad debt reserves 301,766 359,793
Inventory reserves 350,755 414,704
Accrued liabilities and other 634,282 883,657
--------------------------
Total deferred tax assets 1,286,803 1,658,154
--------------------------
Net deferred tax liabilities $ 1,341,489 $ 765,557
==========================
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:
2004 2003 2002
-----------------------
Federal tax at statutory rate (34%) 34% 34%
Effect of:
State income taxes, net of federal income tax benefit (1) 6 9
Goodwill amortization 0 0 16
Meals and entertainment and other permanent differences 20 (1) (2)
----------------------
Effective income tax rate (15%) 41% 57%
======================
The change in the effective tax rate from 2003 to 2004 is primarily attributable
to the decrease in pre tax income, while the amount of meals and entertainment
and other permanent differences remain consistent from year to year.
20
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (continued)
Income taxes paid amounted to $334,779, $1,246,078, and $244,000, in fiscal
2004, 2003, and 2002, respectively.
10. EARNINGS PER SHARE
The following table sets forth the computation of weighted-average shares
outstanding for calculating basic and diluted earnings per share for the years
ended June 30, 2004, 2003, and 2002. Income available to common stockholders for
both basic and diluted earnings per share is the same as net income presented in
the statements of income for the years ended June 30, 2004, 2003, and 2002.
2004 2003 2002
-----------------------------------------
Weighted-average shares for basic earnings
per share 7,042,393 7,042,393 7,044,379
Effect of dilutive securities:
Employee stock options -- 1,092 --
-----------------------------------------
Adjusted weighted-average shares for diluted
earnings per share 7,042,393 7,043,485 7,044,379
=========================================
11. SEGMENTS
The Company identifies its segments based upon differences in the types of
products each sells. The Company currently has two reportable segments: Plastic
Containers and Compound. The Plastic Containers segment manufactures custom
designed PET, HDPE, and PVC containers mainly for cosmetics, toiletries, foods,
household chemicals, lawn and garden supplies, and industrial chemical products.
The Compound segment manufactures PVC compound for internal use and for sale.
Our customers use PVC compound for extruded profiles and accessories, furniture,
molding and other indoor fixtures, and molded electrical and electronic
housings. Both of the Company's segments sell to customers located primarily in
the United States.
The reportable segments are managed separately because they use different
manufacturing processes and serve different markets. The Company evaluates each
segment's performance based on profit or loss from operations after income
taxes. The accounting policies for the reportable segments are the same as those
for the Company (described in Note 1). Intersegment sales and transfers are
recorded at market prices. Information on segments and a reconciliation to a
consolidated total are as follows:
21
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
11. SEGMENTS (continued)
2004 2003 2002
----------------------------------------------
Net revenues:
Compound total $ 22,305,864 $ 20,851,641 $ 21,261,456
Intersegment revenue - Compound (6,723,968) (6,466,334) (5,971,921)
----------------------------------------------
Revenues from
External customers - compound $ 15,581,896 $ 14,385,307 $ 15,289,535
Plastic Containers 82,164,615 76,047,910 68,786,855
----------------------------------------------
Total consolidated net revenues $ 97,746,511 $ 90,433,217 $ 84,076,390
==============================================
Depreciation and amortization expense:
Compound $ 433,770 $ 383,044 $ 367,316
Plastic Containers 5,829,558 5,639,163 6,064,035
----------------------------------------------
Total consolidated depreciation and
amortization expense $ 6,263,328 $ 6,022,207 $ 6,431,351
==============================================
Interest expense:
Compound $ 92,259 $ 85,618 $ 107,055
Plastic Containers 1,772,179 1,858,473 2,107,603
----------------------------------------------
Total consolidated interest expense $ 1,864,438 $ 1,944,091 $ 2,214,658
==============================================
Net income (loss):
Compound $ 651,759 $ 510,949 $ 905,606
Plastic Containers (716,714) 361,603 (644,161)
----------------------------------------------
Total consolidated net (loss) income $ (64,955) $ 872,552 $ 261,445
==============================================
Total assets:
Compound $ 6,058,541 $ 5,933,014 $ 6,612,289
Plastic Containers 56,330,680 56,511,177 54,642,771
----------------------------------------------
Total consolidated assets $ 62,389,221 $ 62,444,191 $ 61,255,060
==============================================
Capital expenditures:
Compound $ 675,446 $ 321,358 $ 190,708
Plastic Containers 3,935,541 5,440,240 2,538,812
----------------------------------------------
Total consolidated capital expenditures $ 4,610,987 $ 5,761,598 $ 2,729,520
==============================================
22
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
12. QUARTERLY FINANCIAL DATA
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present selected financial data by quarter for the years
ended June 30, 2004, and 2003:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------------------------------------------------------------
2004
Net sales $ 21,229,348 $ 20,661,549 $ 26,954,948 $ 28,900,666
Cost of goods sold (exclusive of
depreciation and amortization) 16,963,730 16,717,401 21,414,791 23,662,013
Selling, general and administrative
expenses 2,436,857 2,325,758 2,811,758 3,120,033
Depreciation and amortization 1,514,336 1,583,150 1,630,441 1,535,401
Provision for restructuring and other
Exit activities 116,271 160,214 185,505 13,687
Net (loss) earnings (171,146) (276,881) 313,392 69,680
(Loss) earnings per share of common
stock:
Basic:
Net (loss) earnings $ (0.02) $ (0.04) $ 0.04 $ 0.01
Diluted:
Net (loss) earnings $ (0.02) $ (0.04) $ 0.04 $ 0.01
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) $ .01 $ 0.09 $ 0.05
Diluted:
Net (loss) earnings $ (0.03) $ .01 $ 0.09 $ 0.05
13. PROVISION FOR RESTRUCTURING AND OTHER EXIT ACTIVITIES
In 2004, the Company recorded charges for restructuring and other exit
activities of $475,000, which is reflected in the plastic container segment.
During the quarter ended September 30, 2003, the Company decided to transfer a
majority of the personnel and most of the equipment at its Marpac Industries
subsidiary located in Kingston, NY to its Philmont, NY plant. The Kingston
facility was converted to a warehouse. The workforce reduction included 48
employees of which 19 were direct labor, 27 indirect labor and 2 administrative.
During 2004, the Company recorded restructuring
23
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
13. PROVISION FOR RESTRUCTURING AND OTHER EXIT ACTIVITIES (continued)
charges of $229,000 related to severance and other personnel related costs and
$124,000 for equipment relocation and other transfer costs. As of June 30, 2004,
$353,000 has been incurred and paid. The plastic container segment experienced
manufacturing inefficiencies related to the move. These additional costs are
reflected in cost of good sold.
Certain facilities, previously classified as net assets held for disposition,
were sold in April 2004 for an amount less than carrying value. The Company
recorded a loss of $122,322 on the sale of the assets in provision for
restructuring and other exit activities.
14. SUBSEQUENT EVENT
On September 2, 2004, Phillip L. Friedman announced his resignation as President
and Chief Executive Officer of the Company and will be assuming the role of
Chairman of the Company's Board of Directors. As severance compensation, the
Company shall pay Mr. Friedman an amount equal to $710,000. This agreement
provides for other benefits to be provided subsequent to December 31, 2004.
William J. Bergen will be assuming the titles of President and Chief Executive
Officer and will serve as a Director. Mr. Bergen served as Vice President and
General Manager for the Plastics Americas Business Unit of Alcan Inc., a
provider of aluminum and packaging products, from 2003 to August 2004.
24
PVC Container Corporation
Schedule II - Valuation and Qualifying Accounts
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------------------------------------------------------------------------
ADDITIONS
----------------------------
CHARGED AMOUNT
BALANCE CHARGED TO WRITTEN BALANCE
BEGINNING TO COSTS OTHER OFF END
OF AND ACCOUNTS AGAINST OF
DESCRIPTION YEAR EXPENSES (DESCRIBED) RESERVE YEAR
- -----------------------------------------------------------------------------------------------------------
Valuation accounts deducted
from assets to which they
apply:
June 30, 2004
Accounts receivable $ 999,000 $ 356,000 $ 277,000* $ 945,000 $ 687,000
Inventory 1,037,000 1,019,207 -- 1,179,207 877,000
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
* Charges to revenues to accrue for customer returns and allowances.
25