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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 December 31, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______________
to ____________________
COMMISSION FILE NUMBER 0-08791
PVC CONTAINER CORPORATION
------------------------------------------------------
(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 February 14, 2005
- --------------------- --------------------------------
Common $.01 par value 7,042,393 shares
CONTENTS
PAGE
NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 2004 and June 30, 2004 3
(Unaudited)
Consolidated Statements of Operations - Three and Six Months Ended
December 31, 2004 and 2003 (Unaudited) 4
Consolidated Statements of Cash Flows - Six Months Ended
December 31, 2004 and 2003 (Unaudited) 5
Notes to Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-19
Item 3. Quantitative and Qualitative Disclosure About Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits 20
Signatures 21
Page 2
Part I Financial Information
Item 1: Financial Statements
PVC Container Corporation
Consolidated Balance Sheets
(Unaudited)
December June
31, 2004 30, 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 438,132 $ 365,820
Accounts receivable, net 12,000,526 14,901,390
Inventories 15,003,484 12,461,663
Prepaid expenses and other current assets 1,164,383 945,951
Deferred income taxes 2,768,587 1,632,029
Net assets held for disposition 700,000 --
------------ ------------
Total current assets 32,075,112 30,306,853
Properties, plant and equipment at cost, net 25,496,990 28,609,378
Goodwill, net of accumulated amortization -- 3,296,298
Other assets 131,230 176,692
------------ ------------
$ 57,703,332 62,389,221
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,494,219 $ 10,207,342
Accrued expenses 2,254,328 2,373,488
Current portion of long-term debt 2,973,001 3,929,649
------------ ------------
Total current liabilities 15,721,548 16,510,479
Long-term debt 25,844,789 24,077,230
Interest rate swap 93,550 198,278
Deferred income taxes 2,745,456 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
December 31, 2004 and June 30, 2004 70,446 70,446
Capital in excess of par value 3,810,981 3,810,981
Retained earnings 9,376,552 15,215,294
Accumulated other comprehensive loss (55,195) (116,984)
Treasury stock, at cost (2,262 shares at December 31,
2004 and June 30, 2004) (4,795) (4,795)
------------ ------------
Total stockholders' equity 13,197,989 18,974,942
------------ ------------
$ 57,703,332 $ 62,389,221
============ ============
See accompanying notes
Page 3
PVC Container Corporation
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
December 31 December 31
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 23,043,928 $ 20,661,549 $ 46,708,776 $ 41,890,897
Cost and expenses:
Cost of goods sold (exclusive of
depreciation and amortization expense
shown separately below) 19,500,465 16,717,401 39,651,779 33,681,131
Selling, general and administrative expenses 2,774,268 2,325,758 5,988,688 4,762,615
Depreciation and amortization 1,409,142 1,583,150 2,809,111 3,097,486
Goodwill impairment charge 3,296,299 -- 3,296,299 --
Provision for restructuring 572,899 160,214 572,899 276,485
Asset impairment 448,615 -- 448,615 --
------------ ------------ ------------ ------------
28,001,688 20,786,523 52,767,391 41,817,717
------------ ------------ ------------ ------------
(Loss) income from operations (4,957,760) (124,974) (6,058,615) 73,180
Other income (expense):
Interest expense (452,134) (488,815) (880,181) (977,047)
Other income 31,500 144,500 73,000 144,500
------------ ------------ ------------ ------------
(420,634) (344,315) (807,181) (832,547)
------------ ------------ ------------ ------------
Loss before benefit for income taxes (5,378,394) (469,289) (6,865,796) (759,367)
Benefit for income taxes 436,555 192,408 1,027,054 311,340
------------ ------------ ------------ ------------
Net loss $ (4,941,839) $ (276,881) $ (5,838,742) $ (448,027)
============ ============ ============ ============
Loss per share (basic and diluted) $ (.70) $ (0.04) $ (.83) $ (0.06)
============ ============ ============ ============
See accompanying notes.
Page 4
PVC Container Corporation
Consolidated Statements of Cash Flows
(Unaudited)
SIX MONTHS ENDED
DECEMBER 31
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,838,742) $ (448,027)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 2,809,111 3,097,486
Goodwill impairment 3,296,298 --
Asset impairment 448,615 --
Amortization of deferred financing costs 86,578 89,917
Deferred income taxes (52,264) --
Gain on sale of equipment (43,000) (144,500)
Insurance recovery (30,000) --
Changes in assets and liabilities:
Accounts receivable, net of allowances 2,900,864 2,753,582
Inventories (2,541,821) (3,028,746)
Prepaid expenses and other current assets (1,228,501) (819,273)
Other assets 8,884 8,848
Accounts payable and accrued expenses 267,717 (65,923)
----------- -----------
Net cash provided by operating activities 83,739 1,443,364
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (845,338) (3,004,410)
Proceeds from sale of equipment 43,000 144,500
Insurance recoveries 30,000 --
----------- -----------
Net cash used in investing activities (772,338) (2,859,910)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (payments) from revolving credit line 2,415,435 276,517
Payments of indebtedness (1,935,641) (1,792,807)
Proceeds from long-term debt 331,117 2,531,818
Deferred financing costs (50,000) (20,000)
----------- -----------
Net cash provided by financing activities 760,911 995,528
----------- -----------
Net increase (decrease) in cash and cash equivalents 72,312 (421,018)
Cash and cash equivalents at beginning of period 365,820 673,055
----------- -----------
Cash and cash equivalents at end of period $ 438,132 $ 252,037
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 871,438 $ 975,033
=========== ===========
Income taxes paid $ 32,625 $ 264,525
=========== ===========
See accompanying notes.
Page 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.
In addition to plastic bottles, the Company produces and sells PVC compounds
through its wholly-owned subsidiary, Novatec Plastics Corporation. The Company
uses these compounds, and also sells them 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 types 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 management's opinion, 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 December 31, 2004, and the results of operations and
cash flows for the three and six month periods ended December 31, 2004 and 2003.
Operating results for the three and six month periods ended December 31, 2004,
are not necessarily indicative of the results that may be expected for the year
ended June 30, 2005.
The accompanying consolidated financial statements include the accounts of PVC
Container Corporation and its wholly-owned subsidiaries, Novapak Corporation,
Novatec Plastics Corporation, Marpac Industries, Inc., Airopak Corporation, and
PVC Container International Sales Corporation, a foreign sales company that was
dissolved effective June 29, 2004. 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 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:
Page 6
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
--------------------- ---------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Weighed average common shares outstanding used to
calculate basic loss per share 7,042,393 7,042,393 7,042,393 7,042,393
Net effect of dilutive securities based upon
the treasury stock method using an average market
price -- -- -- --
Weighed average common and dilutive securities outstanding
used to calculate diluted loss per share
7,042,393 7,042,393 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.
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.
Page 7
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
------------------------------ ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net loss, as reported $ (4,941,839) $ (276,881) $ (5,838,742) $ (448,027)
Add: Stock-based compensation
included in reported net loss,
net of tax
Deduct: Stock-based compensation
expense under fair value
reporting, net of tax $ (2,122) $ (6,507) $ 4,955 $ (13,014)
------------- ------------- ------------- -------------
Pro forma net loss $ (4,943,961) $ (283,388) $ (5,833,787) $ (461,041)
============= ============= ============= =============
Loss per share:
Net loss, as reported:
Basic $ (0.70) $ (0.04) $ (0.83) $ (0.06)
Diluted $ (0.70) $ (0.04) $ (0.83) $ (0.06)
Pro forma net loss:
Basic $ (0.70) $ (0.04) $ (0.83) $ (0.07)
Diluted $ (0.70) $ (0.04) $ (0.83) $ (0.07)
Note 4 Impact of Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Boards issued its final
standard on accounting for share-based payments (SBP), FASB Statement No. 123R
(revised 2004), that requires companies to expense the value of employee stock
options and similar awards. The standard is effective for public companies for
interim and annual periods beginning after June 15, 2005, and applies to all
outstanding and unvested SBP awards. The Company is in the process of assessing
the impact of this standard that will be adopted as of July 1, 2005 upon
adoption in July 2005. The Company plans to measure the fair value of the stock
options using the Black-Scholes-Merton option pricing model. Management does not
expect the adoption of FASB Statement No. 123R to have a significant impact on
the financial position or results of operation of the Company.
Page 8
Note 5 Inventories consist of:
DECEMBER JUNE
31, 2004 30, 2004
------------ ------------
Raw materials $ 6,569,946 $ 4,980,080
Finished goods 8,192,543 6,742,899
Reserves (1,219,445) (876,888)
------------ ------------
Total FIFO inventories 13,543,044 10,846,091
Molds for resale, in production 847,084 945,212
Supplies 613,356 670,360
------------ ------------
$ 15,003,484 $ 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 was 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. On November 15, 2004, the PNC Bank
Agreement was amended to extend the maturity of the credit facility, senior term
loan, standby letter of credit and capital expenditure line to 2007, and to make
specific changes to the credit facilities. The total senior secured credit
facility was reduced to $28,532,000 (which represents the outstanding facility
amount at the extension date) consisting of the following components: a senior
revolving credit facility of $18,000,000; a senior term loan of $5,686,000; a
standby letter of credit of $3,846,000; and a capital expenditure line of
$1,000,000. At December 31, 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 250 basis points; the revolving
credit facility bears interest at the prime rate. 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 $1 million capital expenditure line
of credit bears interest at the prime rate. Borrowings under the PNC Bank
Agreement totaled approximately $16.3 million at December 31, 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.
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:
Page 9
SIX MONTHS ENDED
DECEMBER 31
2004 2003
------------ ------------
Net revenues:
Company total $ 9,461,558 $ 9,639,741
Inter segment revenue - Compound (2,314,783) (2,945,874)
------------ ------------
Revenues from external customers-Compound 7,146,775 6,693,867
Plastic containers 39,562,001 35,197,030
------------ ------------
Total consolidated net revenues $ 46,708,776 $ 41,890,897
============ ============
Net loss
Compound $ (351,460) $ 198,221
Plastic containers (5,487,282) (646,248)
------------ ------------
Total consolidated net loss $ (5,838,742)(1) $ (448,027)
============ ============
(1) Includes $3.7 million of impairment charges for goodwill and other long-term assets.
December 31,2004 June 30,2004
Total assets:
Compound $ 6,052,792 $ 6,058,541
Plastic containers 51,650,540 56,330,680
------------ ------------
Total consolidated assets $ 57,703,332 $ 62,389,221
============ ============
Note 8 Comprehensive Loss
The following table sets forth comprehensive loss for the three and six-month
periods ended December 31, 2004 and 2003:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss $(4,941,839) $ (276,881) $(5,838,742) $ (448,027)
Unrealized gain on interest rate swap,
net of taxes 35,661 53,773 61,789 107,184
----------- ----------- ----------- -----------
Comprehensive loss $(4,906,178) $ (223,108) $(5,776,953) $ (340,843)
=========== =========== =========== ===========
Page 10
Note 9 Provision for Restructuring
In the second fiscal quarter 2005, the Company recorded a $573,000 pre-tax
charge for restructuring to compensate for the escalating cost of raw materials
and its inability, for competitive reasons, to pass these increases to its
customers. The Company has begun a cost reduction initiative, which it expects
will reduce its payroll and benefits by nearly $1,700,000 annually. This
initiative is expected to improve operating efficiency and position the Company
to take advantage of new business opportunities.
We have begun to implement work force reductions and will continue to do so in
stages through April 30, 2005. The work force reductions will be accomplished
through both involuntary and voluntary terminations. The voluntary program was
offered to all employees, but the Company retained the right to reject offers to
resign on a case-by-case basis.
Beginning in the second fiscal quarter 2005 and continuing through the fourth
fiscal quarter 2005, management estimates the Company will recognize total
charges of up to $600,000, including severance and related benefit costs
associated with work force reductions. We expect to eliminate 22 salaried
positions through the end of the fiscal year ending June 30, 2005. As of
December 31, 2004, 18 of these positions have been eliminated and these
employees are no longer with the Company. All of the $573,000 charge was paid as
of December 31, 2004.
During the six months ended December 31, 2003, the Company incurred total
restructuring costs of $276,000, all of which was paid through December 31,
2003. Approximately $116,000 of that amount, including $43,000 for severance and
other personnel related costs for 38 employees and $73,000 for equipment
relocation and other transfer costs, was incurred and recognized during the
quarter ended September 30, 2003. During the quarter ended December 31, 2003,
the Company continued the restructuring and recorded $160,000 for the three
months ended December 31, 2004, all of which has been paid, which includes
$130,000 for severance and other personnel costs and $30,000 for equipment
relocation and other transfer costs. These costs are reflected in the plastic
container segment of our business. In addition, the plastic container segment
experienced manufacturing inefficiencies related to the transfer of operations
from Kingston to Philmont. These additional costs are reflected in cost of goods
sold.
Note 10 Pension
The following table presents the components of net periodic benefit cost for
pension benefits for the three and six-month periods ended December 31, 2004:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Pension benefits
Service cost with interest to the end
of the quarter $ 2,449 $ 1,652 $ 4,858 $ 3,277
Interest cost 15,095 15,721 30,076 31,331
Expected return on plan assets (21,314) (21,321) (42,365) (42,423)
Amortization of transition obligation (asset) 761 759 1,522 1,518
Amortization of prior service
cost (gain) 422 421 844 842
Amortization of experience loss (gain) 1,954 2,424 3,908 4,848
-------- -------- -------- --------
Net periodic benefits cost $ (633) $ (344) $ (1,157) $ (607)
======== ======== ======== ========
The Company made a minimum required contribution during the six months ended
December 31, 2004, in the amount of $8,662.
Page 11
Note 11 Impairment of Goodwill
During the second quarter of fiscal 2005, the Company's New York extrusion blow
molding facility experienced significant reductions in gross margin and declines
in revenue that were not anticipated due to the loss of several customer
contracts and the inability to successfully pass on rising resin prices to
customers. The second quarter loss exceeded expectations by the largest variance
to date. Management's forecast of future cash flows from the Philmont, New York
operation was substantially lower than previous forecasts. Additionally, certain
cost containment and cost reduction initiatives at this facility did not have
the expected impact on operating performance. Accordingly, impairment indicators
were present, and therefore, the Company performed an interim test for goodwill
impairment using the discounted cash flow evaluation approach and determined
that the goodwill was impaired, necessitating a charge of $3.3 million for the
full carrying value of goodwill. This charge is presented in the "goodwill
impairment charges" line item in the Company's consolidated statement of
operations for the quarter ended December 31, 2004.
Note 12 Income Taxes
The effective income tax rate decreased from 41% during the three and six month
period ended December 31, 2003 to 15% during the three and six month period
ended December 31, 2004, due to the tax benefits received through the
utilization of net operating losses, offset by non-deductible permanent charges
for impairment of goodwill.
Note 13 Other
During the first fiscal quarter 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 entered into a $710,000 severance agreement with the retiring Chief
Executive Officer, and $355,000 has been paid pursuant to the agreement as of
December 31, 2004. The Company will record severance costs of $177,500 in each
of the next two fiscal quarters to coincide with the additional $355,000 payable
on June 29, 2005.
The charges relating to lifetime medical benefits and executive severance costs
are reflected in selling, general and administrative expenses.
Actuary and liability balances related to the severance charges for the six
months ended December 31, 2004 were as follows:
Charged to
Costs and
Expenses For Amount
June 30, 2004 Six Months Paid Dec 31, 2004
Severance $ -- $355,000 $355,000 $ --
Lifetime medical $ -- $100,000 $ -- 100,000
-------- -------- -------- -------
$ -- $455,000 $355,000 100,000
======== ======== ======== =======
Page 12
Note 14 Net Assets Held For Disposition
The Company has an asset held for sale in the amount of $700,000 (selling price
of $750,000 less disposal costs). During the second quarter of fiscal year
2005, the Company recorded a $450,000 pre-tax charge to operations for asset
impairment related to the expected loss on the sale of its Kingston, New York
manufacturing facility. Accordingly the Company has classified this facility in
net assets held for disposition at December 31, 2004 and is included in the
Plastic Container segment. In January, the Company entered into a contract to
sell the Kingston facility. The anticipated closing date is on or about March
15, 2005.
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 three and six months ended December 31, 2004, and the three
and six months ended December 31, 2003, and our liquidity and capital resources.
This discussion 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 in our own operations or
sold to other plastic manufacturers.
CRITICAL ACCOUNTING POLICIES
Several of our accounting policies involve significant judgments and
uncertainties. Three policies have the potential to significantly affect our
results of operations and financial position:
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 collectibility, 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 volume 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.
Our income tax policy records the estimated future tax effects of
differences between the tax basis of assets and liabilities and the amount
reported in the accompanying consolidated balance sheets, as well as
operating loss carry forwards. We follow very specific guidelines
regarding the recoverability of any tax assets recorded on the balance
sheet and provide any necessary allowances as required.
Page 13
Historically, actual results in these areas have not been materially different
than our estimates, and we do not anticipate that our estimates and assumptions
will 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 results of operations that follows, the
Company presents EBITDA, which is 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 its
operating performance. In addition, management believes that EBITDA is a
measurement widely used in the Company's industry, so we provide this
information to allow investors to analyze our performance relative to our
competitors. However, EBITDA is not computed in accordance with generally
accepted accounting principles and should not be considered in isolation or as a
substitute for any measure of performance that is 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 SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
------------------------------- -------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss as reported $(4,941,839) $ (276,881) $(5,838,742) $ (448,027)
Add back:
(Benefit) for income taxes (436,555) (192,408) (1,027,054) (311,340)
Interest Expense(net) 452,134 488,815 880,181 977,047
Depreciation & Amortization 1,409,142 1,583,150 2,809,111 3,097,486
----------- ----------- ----------- -----------
EBITDA $(3,517,118) $ 1,602,676 $(3,176,504) $ 3,315,166
=========== =========== =========== ===========
RESULTS OF OPERATIONS
Net sales for the three-month period ended December 31, 2004, increased by 11.5%
to $23,044,000, compared to $20,662,000 for the three-month period ended
December 31, 2003. For the six-month period ended December 31, 2004, sales also
increased by 11.5% to $46,709,000, compared to $41,891,000 for the six-month
period ended December 31, 2003. The increase in net sales reflects a 30.3%
growth in PET bottle sales for the three and six months ended December 31, 2004.
The Company continues to expand its market share for this line of business. Our
general line HDPE and PVC extrusion blow bottle sales volume during the three
and six months ended December 31, 2004, was comparable to the sales volume for
the three and six month period ended December 31, 2003. The Company's specialty
bottle group experienced a 16.2% sales increase during the three and six month
period ended December 31, 2004, compared to the same period a year ago due to
increased customer demands. Our plastic compounding segment experienced an
increase of 8.8% and 6.7% for the three and six months ended December 31, 2004,
respectively, in sales volume from the same periods last year due to increased
unit sales prices on substantially the same volume (9,500,000 lbs) of unit
sales.
Page 14
Cost of goods sold for the three months ended December 31, 2004, was
$19,500,000, or 84.6% of net sales, compared to $16,717,000, or 80.9% of net
sales, for the three months ended December 31, 2003. For the six months ended
December 31, 2004, cost of sales was $39,652,000, or 84.9% of net sales,
compared to $33,681,000, or 80.4% of sales for the six months ended December 31,
2003. The increases in cost of goods sold for the three and six month periods
were caused primarily by increased raw material and energy costs, along with
under-absorbed direct labor and factory overhead costs. Because raw material
costs are expected to continue increasing, we are increasing our focus on cost
containment, mitigating the cost increases with our strategic sourcing
initiative, reducing our manufacturing overhead, improving manufacturing yields,
and improving our ability to pass on material price increases to our customers.
Selling general and administrative ("SG&A") expenses increased by $448,000 for
the three-month period ended December 31, 2004, and by $1,226,000 for the
six-month period ended December 31, 2004, over the amounts recorded the same
periods a year ago. For the quarter ended December 31, 2004, SG&A expenses were
$2,774,000, or 12.0% of net sales, compared to $2,326,000, or 11.3% of net
sales, for the quarter ended December 31, 2003. For the six months ended
December 31, 2004, SG&A expenses were $5,989,000, or 12.8% of net sales,
compared to $4,763,000, or 11.3% of net sales, for the six months ended December
31, 2003. This increase for the three and six month periods is mainly
attributable to increased consulting fees related to operational improvements,
executive severance agreements and executive recruiting costs. We are evaluating
and implementing several potential initiatives designed to reduce our SG&A
expenses as a percentage of sales, one of which was the cause for the
restructuring charge discussed below.
Depreciation and amortization expenses decreased to $1,400,000 for the
three-month period ended December 31, 2004, compared to $1,580,000 for the three
months ended December 31, 2003. For the six-month period ended December 31,
2004, depreciation and amortization expense were $2,809,000, compared to
$3,097,000 for the six months ended December 31, 2003. The primary cause for
this decrease during the quarter and six months ended December 31, 2004, was
that certain manufacturing and computer assets became fully depreciated in the
current fiscal year.
During the second quarter of fiscal 2005, the Company's New York extrusion blow
molding facility experienced significant reductions in gross margin and declines
in revenue that were not anticipated due to the loss of several customer
contracts and the inability to successfully pass on rising resin prices to
customers. The second quarter loss exceeded expectations by the largest variance
to date. Management's forecast of future cash flows for the New York operation
was substantially lower than previous forecasts. Additionally, certain cost
containment and cost reduction initiatives at this facility did not have the
expected impact on operating performance. Accordingly, impairment indicators
were present, and therefore, the Company performed an interim test for goodwill
impairment using the discounted cash flow evaluation approach and determined
that the goodwill was impaired, necessitating a charge of $3.2 million for the
full carrying value of goodwill.
In the second fiscal quarter 2005, the Company recorded a $573,000 pre-tax
charge for restructuring to compensate for the escalating cost of raw materials
and its inability, for competitive reasons, to pass these increases to its
customers. The Company has begun a cost reduction initiative, which it expects
will reduce its payroll and benefits by nearly $1,700,000 annually. This
initiative is expected to improve operating efficiency and position the Company
to take advantage of new business opportunities.
We have begun to implement work force reductions and will continue to do so in
stages through April 30, 2005. The work force reductions will be accomplished
through both involuntary and voluntary terminations. The
Page 15
voluntary program was offered to all employees, but the Company retained the
right to reject offers to resign on a case-by-case basis.
Beginning in the second fiscal quarter 2005 and continuing through the fourth
fiscal quarter 2005, management estimates the Company will recognize total
charges of up to $600,000, including severance and related benefit costs
associated with work force reductions. We expect to eliminate 22 salaried
positions through the end of the fiscal year ending June 30, 2005. As of
December 31, 2004, 18 of these positions have been eliminated, and these
employees are no longer with the Company. All of the $573,000 charge was paid
as of December 31, 2004.
During the six months ended December 31, 2003, the Company incurred total
restructuring costs of $276,000, all of which was paid through December 31,
2003. Approximately $116,000 of that amount, including $43,000 for severance and
other personnel related costs for 38 employees and $73,000 for equipment
relocation and other transfer costs, was incurred and recognized during the
quarter ended September 30, 2003. During the quarter ended December 31, 2003,
the Company continued the restructuring and recorded $160,000 for the three
months ended December 31, 2003, all of which has been paid, including $130,000
for severance and other personnel costs and $30,000 for equipment relocation and
other transfer costs. These costs are reflected in the Plastic Container
segment. In addition, the Plastic Container segment experienced manufacturing
inefficiencies related to the transfer of operations from Kingston , New York to
Philmont, New York. These additional costs are reflected in cost of goods sold.
The Company has an asset held for sale in the amount of $700,000 (selling price
of $750,000 less disposal costs). During the second quarter of fiscal year
2005, the Company recorded a $450,000 pre-tax charge to operations for asset
impairment related to the expected loss on the sale of its Kingston, New York
manufacturing facility. Accordingly the Company has classified this facility in
net assets held for disposition at December 31, 2004 and is included in the
Plastic Container segment. In January, the Company entered into a contract to
sell the Kingston facility. The anticipated closing date is on or about March
15, 2005.
The effective income tax rate decreased from 41% during the three and six month
period ended December 31, 2003 to 15% during the three and six month period
ended December 31, 2004, due to the tax benefits received through the
utilization of net operating losses, offset by non-deductible permanent charges
for impairment of goodwill.
Net loss for the quarter ended December 31, 2004, was $4,942,000, or $.70 on a
diluted earnings per share basis, compared to a net loss of $277,000, or $.04 on
a diluted earnings per share basis, for the same period a year ago. For the six
months ended December 31, 2004, the net loss was $5,839,000, or $.83 on a
diluted earnings per share basis, compared to a net loss of $448,000, or $.06 on
a diluted earnings per share basis, for the six-month period ended December 31,
2003.
Page 16
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.
The Company's liquidity position and working capital remained adequate for the
six-month period ended December 31, 2004. Net working capital as of December 31,
2004, increased to $16,353,000 from $13,796,000 as at June 30, 2004. The current
ratio of assets to liabilities increased from 1.8 at June 30, 2004, to 2.0 at
December 31, 2004, and is primarily attributed to the net increase in
inventories and prepaid expenses, offset by lower accounts receivable.
During the six-month period ended December 31, 2004, the Company generated net
cash from operating activities of $84,000 and proceeds from our revolving credit
line and additional equipment financing of $2,747,000. These funds were
primarily used to acquire capital assets of $845,000 and to reduce debt by
$1,936,000.
Cash used for inventories, net of reserves, during the six-month period ended
December 31, 2004, was $2,542,000, a decrease of $487,000 from the corresponding
period of the prior year. We decreased production and spent more time reducing
inventories during the first half of fiscal 2005 by two means. Management has
initiated strategic initiatives to enhance scheduling and planning efficiencies
and addressed our purchasing procedures. These measures enabled the Company to
reduce inventory levels.
Cash used for capital assets during the six-month period ended December 31,
2004, decreased $2,159,000 over the same period a year ago. For the six-month
period ended December 31, 2003, capital assets were purchased to support growth
in 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 December 31,
2004, we had unused sources of liquidity consisting of cash and cash equivalents
of $438,000 and unused credit under a revolving credit facility of $6,684,000.
Our revolving credit facility includes financial and other covenants, including
a minimum equity covenant and a fixed charge coverage covenant. As of December
31, 2004, we were in compliance with all applicable covenants. 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. The total senior secured credit facility was
approximately $28,500,000 at December 31, 2004.
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, particularly in PET product lines, and for other permitted purposes.
Page 17
There were no material changes during the six months ended December 31, 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 other
than the PNC Agreement discussed above.
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.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
Certain statements in this report that are not reported financial results or
other historical information are "forward-looking statements" 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,
and involve a number of business risks and uncertainties, any one of which could
cause actual results to differ materially from those expressed in or implied by
the forward-looking statements.
Forward-looking statements 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 the Company's forward-looking statements. It is not
possible to predict or identify all risk factors, but unanticipated changes that
could cause such results to differ materially could include 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
capacity are realized 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 particularly 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 management believes its plans and assumptions are prudent.
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.
Page 18
The Company undertakes no obligation to publicly update forward-looking
statements, whether as a result of new information, future events, or otherwise.
Investors should consult any further disclosures the Company makes on related
subjects in its filings with the Securities and Exchange Commissions.
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 to avoid the
risk of dramatic rate fluctuations. We have entered into rate swap agreements
with banks under our senior secured credit facility.
As of December 31, 2004, the Company had total outstanding indebtedness of
$28,818,000. Of this amount, the total indebtedness subject to variable interest
rates was approximately $21,557,000. Based on the Company's December 31, 2004,
variable debt level, a 25 basis point increase or decrease in interest rates
would have had a $13,650 impact on interest expense for the quarter ended
December 31, 2004.
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including the
Company's principal executive officer and principal financial officer, the
Company has evaluated the effectiveness of its disclosure controls and
procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934. 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 to 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.
Page 19
PART II OTHER INFORMATION
Rider A
Item 1: Legal Proceedings
There are no actions or claims pending against the Company, which, in the
opinion of management, would adversely affect the financial position, results of
operations or cash flows of the Company.
Item 4: Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on December 8,
2004. The stockholders took the following actions:
(1) elected all Director nominees designated in the Information
Statement dated November 18, 2004; and
(2) approved the selection of the independent auditors of the Company
for the year ending June 30, 2005.
The Directors were elected pursuant to the following vote:
NOMINEE FOR WITHHELD BROKER NON-VOTE
Phillip L. Friedman 4,970,456 0 --
William J. Bergen 4,970,456 0 --
Michael Sherwin 4,970,456 0 --
John F. Turben 4,970,456 0 --
Michael Lynch 4,970,456 0 --
John G. Nestor 4,970,456 0 --
The approval of the selection of Ernst & Young LLP as independent
auditor to the Company for the year ending June 30, 2005 was approved by the
following vote.
FOR AGAINST ABSTAIN BROKER NON-VOTE
4,970,456 0 0 --
Item 5: Other Information
The Company and its subsidiaries entered into the Fourth Amendment, dated as of
November 15, 2004 (the "Fourth Amendment"), to the Revolving Credit, Term Loan
and Security Agreement, dated as of November 27, 2001 (as previously amended,
the "Credit Agreement"), with PNC Bank, National Association, as administrative
agent (the "Agent"). The Fourth Amendment, among other things, extended the
maturity of the Credit Agreement to 2007 and amended certain financial covenants
of the Company and its subsidiaries. The total borrowing capacity of the Credit
Agreement was also reduced to $28,532, 000, consisting of the following
components: a senior revolving credit facility of $18,000,000; a senior term
loan of $5,686,000; a standby letter of credit of $3,846,000; and a capital
expenditure line of $1,000,000.
The Company and its subsidiaries entered into the Fifth Amendment, dated as of
February 14, 2005 (the "Fifth Amendment"), to the Credit Agreement with the
Agent. The Fifth Amendment amended certain financial covenants of the Company
and its subsidiaries.
The Fourth Amendment and the Fifth Amendment are filed herewith as Exhibits 10.1
and 10.2, respectively. The foregoing descriptions of the Fourth Amendment and
the Fifth Amendment are qualified in their entirety by reference to the full
text of such documents, which are incorporated by reference herein.
Item 6: Exhibits
10.1 Fourth Amendment To Revolving Credit, Term Loan And Security Agreement
10.2 Fifth Amendment To Revolving Credit, Term Loan And Security Agreement
10.3 Summary of PVC Container Corporation Cash Bonus Incentive Plan
10.4 Summary of PVC Container Corporation Long-Term Management Incentive
Compensation Program
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
Page 20
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: February 14, 2005 PVC Container Corporation
/s/ William J. Bergen
William J. Bergen
President and Chief Executive Officer
Date: February 14, 2005 PVC Container Corporation
/s/ Jeffrey Shapiro
Jeffrey Shapiro
Chief Financial Officer
Page 21