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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2004
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______________
to ____________________
COMMISSION FILE NUMBER 0-08791
PVC CONTAINER CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2616435
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Industrial Way West, Eatontown, New Jersey 07724
----------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (732) 542-0060
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ( ) No (X)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 15, 2004
- --------------------- --------------------------------
Common $.01 par value 7,042,393 shares
CONTENTS
PAGE
NO.
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 2004 and June 30, 2004 3
(Unaudited)
Consolidated Statements of Operations - Three Months Ended September 30, 2004 and
2003 (Unaudited) 4
Consolidated Statements of Cash Flows - Three Months Ended
September 30, 2004 and 2003 (Unaudited) 5
Notes to Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 13-17
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 6. Exhibits 19
Signatures 20
Exhibits 21-23
Part I Financial Information
Item 1: Consolidated Financial Statements
PVC Container Corporation
Consolidated Balance Sheets
(Unaudited)
SEPTEMBER JUNE
30, 2004 30, 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 112,421 $ 365,820
Accounts receivable, net 12,352,635 14,901,390
Inventories 14,272,661 12,461,663
Prepaid expenses and other current assets 2,336,145 1,291,177
Deferred income taxes 1,217,972 1,286,803
------------ ------------
Total current assets 30,291,834 30,306,853
Properties, plant and equipment at cost, net 27,743,982 28,609,378
Goodwill, net of accumulated amortization 3,296,298 3,296,298
Other assets 148,155 176,692
------------ ------------
$ 61,480,269 $ 62,389,221
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,693,184 $ 10,207,342
Accrued expenses 2,627,832 2,373,488
Current portion of long-term debt 3,925,760 3,929,649
------------ ------------
Total current liabilities 16,246,776 16,510,479
Long-term debt 24,181,110 24,077,230
Interest rate swap 153,993 198,278
Deferred income taxes 2,694,223 2,628,292
Other liabilities 100,000 -
Stockholders' equity:
Preferred stock, par value $1.00, authorized 1,000,000 shares, none
issued -- --
Common stock, par value $.01, authorized 10,000,000 shares, 7,044,655
shares issued and outstanding as of September 30, 2004 and 2003. 70,446 70,446
Capital in excess of par value 3,810,981 3,810,981
Retained earnings 14,318,391 15,215,294
Accumulated other comprehensive loss (90,856) (116,984)
Treasury stock, at cost (2,262 shares at September 30,
2004 and June 30, 2004) (4,795) (4,795)
------------ ------------
Total stockholders' equity 18,104,167 18,974,942
------------ ------------
$ 61,480,269 $ 62,389,221
============ ============
See accompanying notes.
3
PVC Container Corporation
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30
---------------------------
2004 2003
------------ ------------
Net sales $ 23,664,848 $ 21,229,348
Cost and expenses:
Cost of goods sold (exclusive of
depreciation and amortization expense shown
separately below) 20,151,314 16,963,730
Selling, general and administrative expenses 3,214,420 2,436,857
Depreciation and amortization 1,399,969 1,514,336
Provision for restructuring And other exit
activities - 116,271
------------ ------------
24,765,703 21,031,194
(Loss) Income from operations (1,100,855) 198,154
Other income (expense):
Interest expense (428,047) (488,232)
Other income 41,500 -
------------ ------------
(386,547) (488,232)
------------ ------------
Loss before benefit for income taxes (1,487,402) (290,078)
Benefit for income taxes 590,499 118,932
------------ ------------
Net Loss $ (896,903) (171,146)
============ ============
Loss per share (basic and diluted) ($ 0.13) ($ 0.02)
============ ============
See accompanying notes.
4
PVC Container Corporation
Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (896,903) $ (171,146)
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization 1,399,969 1,514,336
Amortization of deferred financing costs 24,113 44,125
Deferred income taxes 116,607
Gain on sale of equipment (41,500) --
Changes in assets and liabilities:
Accounts receivable, net 2,548,755 1,129,443
Inventories (1,810,998) (717,872)
Prepaid expenses and other current assets (1,044,968) (590,621)
Other assets 4,424 4,428
Accounts payable and accrued expenses (159,814) (483,220)
----------- -----------
Net cash provided by operating activities 139,685 729,473
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (534,575) (2,007,256)
Proceeds from sale of equipment 41,500 --
----------- -----------
Net cash used in investing activities (493,075) (2,007,256)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from revolving credit line 775,637 434,624
Proceeds from long-term debt 331,117 1,519,670
Payments of long-term debt (1,006,763) (845,877)
Deferred financing costs - (20,000)
----------- -----------
Net cash provided by financing activities 99,991 1,088,417
----------- -----------
Net decrease in cash and cash equivalents (253,399) (189,366)
Cash and cash equivalents at beginning of period 365,820 673,055
----------- -----------
Cash and cash equivalents at end of period $ 112,421 $ 483,689
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 429,045 $ 488,916
=========== ===========
Income taxes paid $ 10,825 $ 250,825
=========== ===========
See accompanying notes.
5
Note 1 Description of Business
General
PVC Container Corporation (the "Company") was incorporated in Delaware in
1968. The Company's major business activity is manufacturing and selling a
line of plastic bottles made from polyvinyl chloride ("PVC") compounds,
high-density polyethylene ("HDPE"), and polyethylene terephthalate ("PET")
resins. The Company sells these bottles through Novapak Corporation, which
is a wholly-owned subsidiary. Another wholly-owned subsidiary, Airopak
Corporation, produces bottles that are fluorinated to improve the chemical
resistance and barrier properties. The Company's products are used
primarily to package cosmetics, toiletries, foods, household chemicals,
and lawn and garden and industrial chemical products.
The Company produces and sells PVC compounds through its wholly-owned
subsidiary, Novatec Plastics Corporation, Inc. These compounds are used by
the Company or sold to other plastic bottle manufacturers whose products
compete with those the Company produces.
During the last several years, the Company has endeavored to diversify its
PVC compound business. The Company has developed and begun to sell several
categories of specialty PVC compounds for non-bottle applications,
including extruded profiles and accessories, furniture, molding and other
indoor fixtures, and a variety of injection molded electrical and
electronic housings.
Note 2 Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States for interim financial reporting, pursuant to the rules
and regulations of the Securities and Exchange Commission. In the opinion
of the Company, the accompanying consolidated financial statements contain
all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the Company's financial position as of
September 30, 2004, and the results of operations and cash flows for the
three-month periods ended September 30, 2004 and 2003.
The accompanying consolidated financial statements include the accounts of
PVC Container Corporation and its wholly-owned subsidiaries, Novapac
Corporation, Novatec Plastics Corporation, Marpac Industries, Inc.,
Airopak Corporation, and PVC Container International Sales Corporation, a
foreign sales company incorporated in the U.S. Virgin Islands . All
inter-company accounts have been eliminated.While the Company believes the
disclosures presented are adequate to make the information not misleading,
these consolidated financial statements should be read in conjunction with
the financial
6
statements and the notes included in the Company's annual report on Form
10-K for the fiscal year ended June 30, 2004.
Diluted earnings per share are based on the average number of common
shares outstanding during each period, assuming exercise of all stock
options having exercise prices less than the average market price of the
common stock using the treasury stock method. The weighted average number
of shares of common stock used in computing basic and diluted loss per
share were as follows:
THREE MONTHS ENDED
SEPTEMBER 30
2004 2003
----------- -----------
Weighed average common shares outstanding used to calculate
basic earnings (loss) per share 7,042,393 7,042,393
Net effect of dilutive securities based upon the treasury
stock method using an average market price -- --
Weighed average common and dilutive securities outstanding
used to calculate diluted earnings (loss) per share 7,042,393 7,042,393
--------- ---------
The Company has excluded all outstanding stock options because they would
have had an anti-dilutive effect.
Note 3 Stock-Based Compensation
As permitted by SFAS 123, the Company has elected to follow the intrinsic
value method under Accounting Principle Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25), and related interpretations in
accounting for its employee stock option plans. Pursuant to APB 25, the
Company does not recognize compensation expense at the time an option is
granted as long as the exercise price of the option is fixed and equals or
exceeds the fair market value of the underlying common stock on the date
of grant.
7
As required by the disclosure provisions of SFAS 123, the following table
illustrates the effect on net loss and net loss per common share as if the
Company had applied the fair value method to measure stock-based
compensation.:
THREE MONTHS ENDED
SEPTEMBER 30
2004 2003
----------- -----------
Net loss, as reported $ (896,903) $ (171,146)
Add: Stock-based compensation
included in reported net loss, net
of tax -- --
Deduct: Stock-based compensation
expense under fair value
reporting, net of tax 7,077 (6,507)
Pro forma net loss $ (889,826) $ (177,653)
=========== ===========
Loss per share:
Net loss, as reported:
Basic $ .(0.13) $ (0.02)
Diluted $ (0.13) $ (0.02)
Pro forma net loss:
Basic $ (0.13) $ (0.03)
Diluted $ (0.13) $ (0.03)
Note 4 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 in the quarter ended March 31, 2004, for variable interest
entities in which the Company has held a variable interest since before
February 1, 2003. The adoption of FIN 46 did not have any impact on the
Company's financial position, results of operations, or cash flows.
In December 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, and requires additional disclosures about the assets,
obligations, cash flows, and net periodic benefit cost of denied benefit
pension plans and other defined benefit postretirement plans. The interim
period disclosures required by the Statement were effective for the
Company for the quarter ended March 31, 2004, and have been incorporated
in Note 10. The annual financial statement disclosures were effective for
the Company for the fiscal year ended June 30, 2004.
8
Note 5 Inventories consist of:
SEPTEMBER JUNE
30, 2004 30, 2004
----------- -----------
Raw materials $ 5,293,586 $ 4,980,080
Finished goods 8,049,359 6,742,899
Reserves (927,420) (876,888)
----------- -----------
Total FIFO inventories 12,415,525 10,846,091
Molds for resale, in production 1,134,588 945,212
Supplies 722,548 670,360
----------- -----------
$14,272,661 $12,461,663
=========== ===========
Note 6 PNC Bank Agreement
The Company entered into a $43,750,000 senior secured credit facility
("PNC Bank Agreement") with PNC Bank in August 2000. The PNC Bank
Agreement created a five year, $25,000,000 senior revolving credit
facility; a five year, $12,183,000 senior term loan; a five year,
$4,192,000 standby letter of credit; and a $2,000,000 capital expenditure
line. In November 2004, the Company amended the PNC Bank Agreement to
extend the maturity of the credit facility, senior term loan, standby
letter of credit and capital expenditure line to 2007. See Note 12. At
September 30, 2004, the Company was in compliance with the annual minimum
equity and fixed charge coverage covenants in the PNC Bank Agreement.
The term loan bears interest at LIBOR plus 275 basis points; the revolving
credit facility bears interest at LIBOR plus 225 basis points. The Company
entered into interest-rate swap agreements to effectively convert a
portion of the floating term loan debt interest to a fixed rate. The $2
million capital expenditure line of credit bears interest at LIBOR plus
275 basis points. Borrowings under the PNC Bank Agreement totaled
approximately $15.1 million at September 30, 2004.
Note 7 Segments
The Company has two reportable segments identified by product type:
Plastic Containers and Compound. The Plastic Containers segment
manufactures custom designed PET, HDPE, and PVC containers mainly for
cosmetics, toiletries, foods, household chemicals, and lawn and garden and
industrial chemical products. The Compound segment manufactures PVC
compound for use by the Company and sale to external customers.
9
The reportable segments are managed separately because they use different
manufacturing processes and operate in different strategic markets. The
Company evaluates each segment's performance based on net income (loss).
The accounting policies for the reportable segments are the same as those
for the Company. Inter-segment sales and transfers are recorded at market
prices.
Information on segments and a reconciliation to consolidated totals are as
follows:
THREE MONTHS ENDED
SEPTEMBER 30
------------ ------------
2004 2003
------------ ------------
Net revenues:
Company total $ 5,405,652 $ 5,191,125
Intersegment revenue - Compound (1,418,964) (1,528,975)
------------ ------------
Revenues from external customers Compound 3,986,688 3,662,150
Plastic containers 19,678,160 17,567,198
------------ ------------
Total consolidated net revenues $ 23,664,848 $ 21,229,348
============ ============
Net (loss) income
Compound $ (35,030) $ 201,467
Plastic containers (861,873) (372,613)
------------ ------------
Total consolidated net loss $ (896,903) $ (171,146)
============ ============
Total assets: SEPTEMBER 30,2004 June 30,2004
----------------- ------------
Compound $ 5,477,985 $ 6,058,541
Plastic containers 56,002,284 56,330,680
------------ ------------
Total consolidated assets $ 61,480,269 $ 62,389,221
============ ============
Note 8 Comprehensive Income (Loss)
The following table sets forth comprehensive income (loss) for the three
month periods ended September 30, 2004 and 2003:
THREE MONTHS ENDED
SEPTEMBER 30
--------------------
2004 2003
--------- ---------
Net loss $(896,903) $(171,146)
Unrealized gain on interest rate
swap, net of taxes 26,128 53,411
--------- ---------
Comprehensive loss $(870,775) $(117,735)
========= =========
10
Note 9 Provision for Restructuring
The Company recorded a $116,000 pre-tax charge for restructuring during
the quarter ended September 30, 2003. 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.
This restructuring was completed during the fiscal year ended June 30, 2004.
Note 10 Pension
The following table presents the components of net periodic benefit cost
for pension benefits for the three-month period ended September 30:
THREE MONTHS ENDED
SEPTEMBER 30
-------------------
2004 2003
-------- --------
Pension benefits
Service cost with interest to the
end of the quarter $ 2,409 $ 1,625
Interest cost 14,981 15,610
Expected return on plan assets (21,051) (21,102)
Amortization of transition
obligation (asset) 761 759
Amortization of prior service
cost (gain) 422 421
Amortization of experience loss
(gain) 1,954 2,424
-------- --------
Net periodic benefits cost $ (524) $ (263)
======== ========
The Company did not make any contributions during the three months ended
September 30, 2004.
Note 11 Other
The Company has entered into a contract with a regional realtor to sell
its Kingston, New York facility at an amount that in management's opinion
is expected to exceed the fair value of the property. Management believes
this property will be sold in the second half of fiscal 2005.
The Company recorded a charge of $100,000 related to lifetime medical
benefits for the retiring Chief Executive Officer and his spouse under the
terms of his severance agreement.
The Company recorded executive severance costs of $178,000 in the current
quarter. An equal amount will be recorded in each of the next three fiscal
quarters to coincide with the required service period as per the severance
agreement.
The charges relating to lifetime medical benefits and executive severance
costs are reflected in sales, general and administrative expenses.
11
Actuary and liability balances related to the severance related charges
for the three months ended September 30, 2004 were as follows:
Charged to
Costs and
June 30, 2004 Expenses Sept.30, 2004
Severance $ -0- $177,500 $177,500
Lifetime medical $ -0- $100,000 $100,000
---------- -------- --------
$ -0- $277,500 $277,500
Note 12 Subsequent Event
In November 2004, the Company extended the PNC Bank Agreement described in
Note 6, which was scheduled to mature in 2005. The terms and conditions
are substantially the same as the original agreement. As of the date the
Company entered into the agreement to extend the PNC Bank Agreement, the
total senior secured credit facility approximated $28,500.00.
12
PVC CONTAINER CORPORATION
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides information and analysis of our results of
operations for the thirteen weeks ended September 30, 2004, and the thirteen
weeks ended September 30, 2003, and our liquidity and capital resources. The
following discussion and analysis should be read in conjunction with our
consolidated financial statements included elsewhere in this report.
OVERVIEW
PVC Container Corporation is a major producer of plastic containers for the
packaging industry. We operate several wholly-owned subsidiaries that
manufacture and sell general line plastic bottles and specialty plastic
containers and supply PVC compounds and specialty plastic alloys in the United
States. Our plastic bottles are sold primarily to manufacturers and distributors
of personal care products, food, household chemicals, and lawn and garden and
industrial chemical products. PVC compounds are used internally or sold to other
plastic manufacturers.
CRITICAL ACCOUNTING POLICIES
Several of our accounting policies involve significant judgments and
uncertainties. The policies with the greatest potential effect on our results of
operations and financial position include the estimated collectability of
accounts receivable, the recovery value of obsolete or overstocked inventory,
and impairment analysis of long-lived assets and goodwill. For impairment
analysis, we measure the present value of future cash flows against the carrying
value of the long-lived asset. For accounts receivable, we estimate the net
collectibiliti, considering both historical and anticipated trends of trade
discounts and allowances and the possibility of non-collection due to the
financial position of our customers. For inventory, we estimate the amount of
goods that we will not be able to sell in the normal course of business and
write down the value of those goods to the recovery value expected to be
realized through off-price channels. Historically, actual results in these areas
have not been materially different than our estimates, and we do not anticipate
that our estimates and assumptions are likely to materially change in the
future. However, if we incorrectly anticipate trends or unexpected events occur,
our results of operations could be materially affected.
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
13
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 loss to EBITDA.
THREE MONTHS ENDED
SEPTEMBER 30
----------------------
2004 2003
---------- ----------
Net loss as reported $ (896,903) $ (171,146)
Add back:
(Benefit) for income
taxes (590,499) (118,932)
Interest Expense (net) 428,047 488,232
Depreciation & Amortization 1,399,969 1,514,336
---------- ----------
EBITDA $ 340,614 $1,712,490
========== ==========
RESULTS OF OPERATIONS
Net sales for the three-month period ended September 30, 2004, increased by
11.5% to $23,665,000, compared to $21,229,000 for the three-month period ended
September 30, 2003. The increase in revenue reflects an increase in revenue in
both our plastic bottle and compound segments.
The increase in the plastic bottle segment reflected a 9.7% growth in our
general line HDPE and PVC extrusion blow bottle sales, along with a 14.9% growth
in PET bottle sales resulting from our continued innovations and related new
products in PET blow molding technology. In addition, our fluorinated specialty
bottle business had strong growth of 13.1% in sales volume compared to the same
period last year. The sales increase was also partially driven by higher average
selling prices resulting from the pass through of high raw material costs.
Our plastic compound segment experienced an increase of 8.8% in sales volume
from the same period last year due to overall stronger demand for rigid PVC
compounds during this period. The sales increase was also partially driven by
higher average selling prices resulting from the pass through of high raw
material costs.
Cost of goods sold for the three months ended September 30, 2004, was
$20,151,000, or 85.2% of net sales, as compared to $16,964,000, or 79.9% of net
sales, for the three months ended September 30, 2003. This increase in cost of
goods sold was caused primarily by increased raw material and energy costs,
along with unabsorbed direct labor and factory overhead costs. With the expected
continuation of raw material costs increases, we are increasing our focus on
cost containment, mitigating the cost increases with our strategic sourcing
initiative, reducing our manufacturing overhead, improved manufacturing yields,
and improving our ability to pass on material price increases to our customers.
Selling, general and administrative ("SG&A") expenses were $3,214,000 or 13.6%
of net sales for the three month period ended September 30, 2004, as compared to
$2,437,000 or 11.5% of net sales compared to the same period a year ago. This
increase is mainly attributed to increased consulting fees related to
operational improvements, executive severance agreements and executive
recruitment costs. We are analyzing several potential initiatives targeted at
reducing our SG&A expenses as a percentage of sales.
Depreciation and amortization expenses decreased to $1,400,000 for the
three-month period ended September 30, 2004, compared to $1,514,000 for the
three months ended September 30, 2003. The primary cause for this
14
reduction during the quarter ended September 30, 2004 is the effect of certain
manufacturing and computer assets becoming fully depreciated in the current
fiscal year.
Net loss from operations was $1,101,000, or 4.7% of net sales, for the quarter
ended September 30, 2004, compared to net income from operations of $198,000, or
0.09% of net sales, for the same quarter a year ago due to the increased costs
and expenses discussed above.
EBITDA decreased to approximately $341,000 for the three-month period ended
September 30, 2004, compared to $1,712,000 for the three months ended September
30, 2003. This decrease was the result of higher raw material costs in the
Company's plastic container segments, unabsorbed direct labor and factory
overhead costs, professional fees incurred in connection with implementing
operational improvements, and severance and executive procurement costs.
Net interest expense decreased $60,000 to $428,000 during the three months ended
September 30, 2004, as compared to $488,000 for the three months ended September
30, 2003. This net decrease is mainly attributed to the reduction in outstanding
debt.
Other income represents profit generated on the sale of certain production
equipment taken out of service during this fiscal quarter.
LIQUIDITY AND CAPITAL RESOURCES
This discussion is presented on a consolidated basis because management
generally does not monitor liquidity and capital resources on a segment basis.
Because we sell plastic containers used in seasonal industries such as lawn and
garden, we have seasonal sales like the rest of the industry. Due to these
seasonal requirements, we incur short-term indebtedness to finance our working
capital requirements.
Our liquidity position and working capital remained adequate for the three-month
period ended September 30, 2004. Net working capital increased by $249,000 as at
September 30, 2004, compared to June 30, 2004. The current ratio of assets to
liabilities increased from 1.8 at June 30, 2004, to 1.9 at September 30, 2004,
and is primarily attributed to the net increase in inventories and prepaid
expenses, offset by lower accounts receivable.
During the three-month period ended September 30, 2004, we generated net cash
from operating activities of $140,000 and proceeds from our revolving credit
line and additional long-term debt of $1,107,000. These funds were primarily
used to acquire capital assets of $535,000, and to reduce debt by $1,007,000.
Cash provided from accounts receivable, net of allowances, during the
three-month period ended September 30, 2004, was $2,549,000, compared to
$1,129,000 for the three-month period ended September 30, 2003, primarily due to
the decrease in the day's sales outstanding from September 30, 2003 to September
30, 2004.
15
Cash used for inventories during the three-month period ended September 30,
2004, was $1,811,000, an increase of $1,093,000 from the corresponding period of
the prior year. We increased production and spent more to generate inventories
in the first fiscal quarter of 2005 for two reasons. First, management
anticipates increased sales in future periods and prefers to avoid shipping
delays. Second, we purchased a large quantity of PET compound and PVC resins to
hedge against future price increases.
Cash used for prepaid and other current assets during the three-month period
ended September 30, 2004 increased by $454,000 to $1,045,000 as compared to the
same period a year ago. The primary contributing factor for this increase
relates to the increase in the prepaid federal income tax benefit.
Cash used for capital assets during the three-month period ended September 30,
2004, decreased $1,473,000 over the same period a year ago. For the three-month
period ended September 20, 2003, capital assets were purchased to support our
PET product line.
Our short-term liquidity and short-term capital resources are projected to be
adequate to allow us to continue to meet financial obligations. Management
believes the financial resources available to the Company, including internally
generated funds and borrowings under our revolving credit facility, will be
sufficient to meet foreseeable working capital requirements. At September 30,
2004, we had unused sources of liquidity consisting of cash and cash equivalents
of $112,000 and unused credit under a revolving credit facility of $7,317,000.
Our revolving credit facility includes financial and other covenants, including
a minimum equity covenant and a fixed charge coverage covenant. As of September
30, 2004, we were in compliance with all applicable covenants. In November 2004,
the Company extended the PNC Bank Agreement described in Note 7, which was
scheduled to mature in 2005. The terms and conditions are substantially the same
as the original agreement. The total senior secured credit facility approximated
$28,500,000.
We utilize revolving loan facilities for seasonal working capital needs and for
other general corporate purposes. We can use amounts available under revolving
loan facilities in excess of seasonal working capital needs to pursue our growth
strategy and for other permitted purposes.
There were no material changes during the three months ended September 30, 2004,
in the contractual obligations presented in the consolidated financial
statements in our 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
There are no material off balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition.
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STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
Certain statements in this report that are not reported financial results or
other historical information are "forward-looking statements" and within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements give current expectations or forecasts of future events and are not
guarantees of future performance. They are based on management's expectations
that involve a number of business risks and uncertainties, any of which could
cause actual results to differ materially from those expressed in or implied by
the forward-looking statements. You can identify these statements by the fact
that they do not relate strictly to historic or current facts. They use words
such as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe" and other words and terms of similar meaning in connection with any
discussion of future operating or financial performance. In particular, these
include statements relating to future actions; prospective changes in raw
material costs, product pricing or product demand; future performance or results
of current and anticipated market conditions and market strategies; sales
efforts; expenses; and financial results. There are risks and uncertainties that
may cause results to differ materially from those set forth in these
forward-looking statements. In particular, unanticipated changes in the
economic, competitive, governmental, technological, marketing or other factors
identified in this report and in the Company's other filings with the Securities
and Exchange Commission could cause such results to differ materially and could
include, but are not limited to, changes in U.S., regional or world polymer
growth rates affecting the Company's markets; changes in global industry
capacity or in the rate at which anticipated changes in industry capacity come
online in the polyvinyl chloride or other industries in which the Company
participates; fluctuations in raw material prices, quality and supply and in
energy prices and supply, in particular fluctuations outside the normal range of
industry cycles; and an inability to raise prices or sustain price increases for
products.
The Company cannot guarantee that any forward-looking statement will be
realized, although it believes that management has been prudent in its plans and
assumptions. Achievement of future results is subject to risks, uncertainties
and inaccurate assumptions. Should known or unknown risks or uncertainties
materialize, or should underlying assumptions prove inaccurate, actual results
could vary materially from those anticipated, estimated or projected. Investors
should bear in mind as they consider forward-looking statements.
The Company undertakes no obligation to publicly update forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures the Company makes
on related subjects in its filings with the Securities and Exchange Commissions.
You should understand that it is not possible to predict or identify all risk
factors. Consequently, you should not consider any such list to be a complete
set of all potential risks or uncertainties.
17
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Market risks relating to our operations result primarily from changes in
interest rates. Interest rate pricing transactions are used only to the extent
considered necessary to meet our objectives. We do not utilize derivative
financial instruments for trading or other speculative purposes.
Our interest rate risk management objective is to limit the impact of interest
rate changes on our net income and cash flow and to reduce our overall borrowing
cost. We use variable rate swap agreements to manage our exposure to interest
rate fluctuations. These agreements effectively convert variable interest rates
to fixed rates, enabling management to predict interest expense and avoid the
risk of dramatic rate fluctuations. We have entered into these agreements with
banks under our senior secured credit facility.
As of September 30, 2004, the Company had total outstanding indebtedness of
$28,107,000. Of this amount, the total indebtedness subject to variable interest
rates was approximately $20,800,000. Based on the Company's September 30, 2004,
variable debt level, a 25 basis point increase or decrease in interest rates
would have had a $13,000 impact on interest expense for the quarter ended
September 30, 2004.
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including the
Company's principal executive officer and principal financial officer, the
Company has evaluated the effectiveness of its disclosure controls and
procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934. Based upon that evaluation, the Company's principal
executive officer and principal financial officer believe, as of the end of the
period covered by this Quarterly Report, that disclosure controls and procedures
were effective in ensuring that all material information relating to the
Company, including its consolidated subsidiaries, required to be disclosed in
the reports the Company files with the Securities and Exchange Commission has
been made known in a timely manner.
There were no changes made in the Company's internal control over financial
reporting during the period covered by this Quarterly Report that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
18
PART II OTHER INFORMATION
Item 6: Exhibits
31.1 Certification of William J. Bergen, President, Chief Executive Officer,
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Jeffrey A. Shapiro, Senior Vice President, Chief
Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of William J. Bergen, Chief Executive Officer, and Jeffrey
Shapiro, Chief Financial Officer, Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 15, 2004 PVC Container Corporation
/s/ William J. Bergen
William J. Bergen
President and Chief Executive Officer
Date: November 15, 2004 PVC Container Corporation
/s/ Jeffrey Shapiro
Jeffrey Shapiro
Chief Financial Officer
20