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 consists of the manufacture and sale of a line of plastic bottles made from polyvinyl chloride ("PVC") compounds, high-density polyethylene ("HDPE") polyethylene terephthalate ("PET") resins. The Company sells these bottles through Novapak Corporation ("Novapak")which is a wholly owned subsidiary of the Company. Some of the HDPE bottles are fluorinated to improve the chemical resistance and barrier properties of the containers manufactured by the Company's wholly owned subsidiary known as Airopak Corporation ("Airopak"). All of these bottles ("plastic bottles") are used primarily for the packaging of cosmetics, toiletries, foods, household chemicals, lawn and garden and industrial chemical products.
PVC compounds are used by the Company or sold to other plastic bottle manufacturers for the production of plastic bottles, which compete with those, produced by the Company. These PVC compounds are produced and sold through the Company's wholly owned subsidiary, Novatec Plastics Corporation, Inc. ("Novatec"). During the last several years, the Company has made some progress in its efforts to diversify its PVC compound business. For example, the Company has developed and begun to sell several categories of specialty PVC compounds for non-bottle applications ("specialty compounds") including extruded profiles and accessories, furniture, molding and other indoor fixtures, and a variety of injection molded electrical and electronic housings (the "Company's targeted markets").
On March 30, 1998, the Company acquired the plastic bottle blow molding business of McKechnie Investments, Inc., which operates out of a 100,000 square foot facility located in Philmont, New York and is operated by Novapak. The annual revenues of this business are approximately $14,650,000. The business serves primarily the toiletries and cosmetics, specialty and household chemical markets.
On September 3, 1998 the Company acquired all of the issued and outstanding stock of Marpac Industries,Inc. which was founded in 1967 and has annual sales of approximately $7,782,000. Marpac Industries, Inc. produces custom blow molded products including plastic bottles, containers, cartridges, double-wall cases, flexible spouts and various dispensers. Marpac Industries, Inc. is known in the market for its technical capabilities, which allow it to manufacture uniquely configured products within specific tolerances. Its business is presently operated out of a facility located in Kingston, New York.
Sales. The Company's plastic bottles are sold primarily to manufacturers of toiletries and cosmetics, food, household chemicals, lawn and garden and industrial chemical products, private label manufacturers of similar products, and bottle distributors who sell to such manufacturers. PVC compounds are sold to the Company and to other manufacturers of plastic bottles, and a small but increasing amount of specialty compounds are sold to a diverse range of manufacturers of other products. A limited amount of the Company's total sales is made through commissioned sales representatives. During the fiscal year ended June 30, 2002, 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 to two hundred and twenty five ounces. The Company produces plastic bottles utilizing its own
molds, in proprietary designs ("stock bottles") which are of its own design and also produces on a contractual basis plastic bottles in molds owned by the customer, utilizing their designs and specifications ("custom bottles").
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 prohibit shipping plastic bottles long distances due to their bulky nature, except for specialty bottles of a unique design or fluorinated containers that are not available from local manufacturers. In contrast, the Company's PVC compounds which are sold in the form of plastic pellets and are denser than plastic bottles can be shipped throughout the continental United States and Canada, and tend to be less regional and 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 due to shutdowns of buyers' plants during those periods. Some of the markets the Company sells to are seasonal, such as lawn, garden and agricultural chemicals, which Airopak is dependent upon. These markets are characterized by high demand in the periods of December through June and low demand from July through November of each year.
Manufacturing Operations. The Company uses extrusion blow molding equipment to manufacture its PVC plastic bottles. The same equipment is also used to manufacture fluorinated and non-fluorinated plastic bottles from HDPE and can also be used with some modifications, to process bottles from other blow molding polymers, including polypropylene, glycol-modified polyethylene terephthalate ("PETG") and some new extrusion grade polyethylene terephthalate resins ("EPET") which are presently semi-commercial. The Company also manufactures and sells plastic bottles made from injection stretch blow molding grades of PET as well as PET preforms which can be converted into various sizes of plastic bottles and which can be economically shipped in their preform state prior to such conversion.
The Company operates plastic bottle manufacturing and warehousing facilities in Hazleton, Pennsylvania; Paris, Illinois; Manchester, Pennsylvania; Walterboro, South Carolina; Philmont, New York; Kingston, New York for the manufacturing of plastic bottles. During September, 1998 the Company relocated its existing plastic bottle business from a facility in Eatontown, New Jersey owned by the Company to a newly constructed facility in Hazleton, Pennsylvania. This new facility provides the Company with additional space needed to support manufacturing on a more economical and efficient basis. The Eatontown facility was sold during December 1999. In April 1993, the Company commenced operations in a new facility, located in Paris, Illinois, which was added to support growth of the Company's mid-west bottle business. On August 4, 1994, the Company acquired from Air Products and Chemicals, Inc., through its wholly owned subsidiary known as Airopak Corporation, the assets of a specialty container business. The business is conducted from leased facilities located in Manchester, Pennsylvania, and relates to the manufacture and sale of AIROPAK(R) fluorinated HDPE containers. The assets of the business consist of equipment, machinery and inventory used in connection with the manufacturing of such containers. A description of the Company's plastic bottle facilities is set forth below in item 2
Item 2. Properties.
The Company's activities with respect to its continuing businesses are conducted at the nine facilities described in the following table:
1. As indicated above, under "Manufacturing Operations" and "Employees", the Company relocated during September 1998 its Eatontown, New Jersey manufacturing facilities to a new facility located in Hazleton, Pennsylvania on 10 acres of real property owned by the Company. The Hazleton facility is a solid concrete tilt-up facility, sprinklered throughout and consisting of 160,000 square feet of manufacturing and warehouse space. There are also 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, R&D, warehouse, and administrative offices and is constructed from steel and concrete panels.
3. As described in the section entitled "Manufacturing Operations" the Company acquired a business located in Manchester, Pennsylvania. 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 rental payable with respect to the manufacturing and warehouse space for the Airopak Corporation detailed above and in this Item 3
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.
Item 4. Submission of Matters to a Vote of Securityholders.
None
PART II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Securityholder Matters.
The Company's common stock trades on the over the counter market as reported on the Nasdaq Bulletin Board under the symbol OTC:PVCC. The last trade of the common stock on September 6, 2002 was at a price of $ 1.75 per share. The following is a summary of the high and low trade information during the fiscal years of the Company ended June 30, 2002 and June 30, 2001:
As at September 6, 2002, the number of holders of record of the issued and outstanding common stock of the Company was approximately 555.
Item 6.
Item 6. Selected Financial 2002 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 herein. The selected consolidated financial data set forth below as of June 30, 2002, 2001 and 2000 and for the years ended June 30, 2002, 2001 and 2000 have been derived from our audited financial statements included herein. The selected consolidated financial data set forth below as of June 30, 2000, 1999 and 1998 and for the years ended June 30, 1999 and 1998 have been derived from our audited financial statements that are not included herein or incorporated by reference herein. Our historical results are not necessarily indicative of the results that may be expected for any future period.
Years Ended June 30
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following information should be read in conjunction with the Company's consolidated financial statements and notes thereto included in this report.
Certain statements made herein are forward-looking and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties that may cause results to differ materially from those set forth in these statements. In particular, unanticipated changes in the economic, competitive, governmental, technological, marketing or other factors identified herein and in the Company's other filings with the Securities and Exchange Commission could affect such results.
GENERAL
The preparation of our financial statements requires the Company to 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, the Company reviews its estimates including those related to returns, bad debts, inventories and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates as conditions may vary.
Critical Accounting Policies
Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Bad Debt
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make mandatory payments. If the financial condition of the Company's customers were to erode, resulting in their inability to make payments, additional allowances may be required.
Inventory
Inventories are valued at the lower of cost or market, using the first-in, first-out method. The Company provides reserves for estimated obsolescence of its inventory equal to the difference between the cost of inventory and the estimated net realizable value based upon management's assessment about 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 pursuant to a purchase order. Sales are shown net of returns, discounts and sales incentives.
Income Taxes
Our income tax policy records the estimated future tax effects of differences between the tax basis of assets and liabilities and amount reported in the accompanying consolidated balance sheets, as well as operating loss 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.
Results of Operations
FISCAL 2002 AS COMPARED TO FISCAL 2001
The Company's net sales for the fiscal year ended June 30, 2002 reached a level of $82,612,000, a decrease of approximately 6.1% from the 2001 level of $87,995,000. This decrease in revenue is mainly attributed to weakness in HDPE and PVC blow molded bottles offset by positive growth in our PET and technical molded bottles. The PET blow molded bottles continued to achieve double-digit growth and new capacity expansions are planned to support this growth.
Cost of goods sold decreased to 76.9% in 2002 from 78.6% in 2001. Margins in both the bottle and compound segments continued to improve, mainly attributable to continued emphasis on cost containment and further reductions in manufacturing overhead and decreases in raw material costs. Selling, general and administrative expenses (SG&A) were $9,934,000 or 12.0% of net sales for fiscal year ended June 30, 2002 as compared to $10,934,000 or 12.4% of net sales for the fiscal year ended June 30, 2001. SG&A expenses have decreased primarily due to improvements in our collection rates for customer accounts receivable, decreases in professional fees, outside warehouse requirements and the reorganization in our Marketing and Administrative function within the Company. Depreciation and amortization expense for fiscal 2002 decreased $334,000 as compared to fiscal 2001, primarily the effect of certain manufacturing assets becoming fully depreciated in the current fiscal year.
Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased from approximately $8,001,000 in fiscal 2001 to approximately $9,229,000 in fiscal 2002. Of the $1,228,000 increase in EBITDA, approximately $617,000 was the result of the performance improvements in the Company's plastic containers segment with the remaining $611,000 as the result of the performance of the Novatec Plastics division.
Income from operations for fiscal year ended June 30, 2002 increased to $2,726,000 or 3.3% of net sales as compared to $1,114,000 or 1.3% of net sales in fiscal 2001.
Net interest expense decreased $778,000 during fiscal year ended June 30, 2002 as compared to fiscal 2001. This net decrease is primarily due to lower interest rates and reduced borrowings for capital equipment and working capital needs.
Net income (loss) for the year ended June 30, 2002 increased to $261,000 or $.04 per diluted share as compared to $(1,141,000) or $(.16) per diluted share for fiscal 2001.
FISCAL 2001 AS COMPARED TO FISCAL 2000
The Company's net sales for the fiscal year ended June 30, 2001 reached a level of $87,995,000, a decrease of approximately 5% from the 2000 level of $92,620,000. This decrease in revenue as compared to the prior year is mainly attributed to weaker demand in both of the Company's plastic container and compound segments.
Cost of goods sold decreased to 78.6% in 2002 from 79.8% in fiscal 2000. Margins in both the bottle and compound segments were favorably affected by increased emphasis on cost containment and reductions in manufacturing overhead and a decrease in raw material costs. Novatec Plastic's margins were significantly affected by the steady reduction in plastic resin prices by approximately 21.8% during the current fiscal year. Selling, general and administrative expenses (SG&A) were $10,934,000 or 12.4% of net sales for the fiscal year ended June 30, 2001 as compared to $10,459,000 or 11.3% of net sales for the fiscal year ended June 30, 2000. SG&A expenses have increased primarily due to the increase in bad debt reserve based upon the current economic climate. Additionally, the Company has instituted various cost reduction programs to anticipate any further degradation of revenue. Depreciation and amortization expense of fiscal 2001 remained substantially the same as fiscal 2000.
Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased from approximately $7,751,000 in fiscal 2000 to approximately $8,001,000 in fiscal 2001. Of the $250,000 increase in EBITDA, approximately $485,00 was due to the performance in the Company's plastic container segment. Fiscal 2000 reflected a non-recurring asset impairment $400,000 charge relating to the closing of the Oklahoma manufacturing facility.
Income from operations for the fiscal year ended June 30, 2001 increased to $1,114,000 or 1.3% of net sales compared to $1,051,000 or 1.1% of net sales in fiscal 2000.
Net interest expense increased $199,731 during the fiscal year ended June 30, 2001 as compared to fiscal 2000. The net increase was primarily due to additional capital equipment financing.
Net loss for the year ended June 30, 2001 decreased to $(1,141,000) or $(.16) per share as compared to $(1,197,000) or $(.17) per share for fiscal 2000.
Liquidity and Capital Resources
Cash flow from operations during fiscal 2002 totaled $9,602,000, representing an increase of $5,600,000 from the prior year. Cash flow from operations was favorably impacted by improved inventory and accounts receivable management and the timing of income tax payments.
The Company received $577,000 in proceeds from long-term debt and $113,000 from the sale of various capital assets. These funds, combined with cash flow from operations, were used to acquire $2,729,000 in capital assets and reduce long-term debt by $7,400,000. As a result of the repayment of long-term debt, working capital decreased approximately $2,588,000 to $11,834,000 at June 30, 2002 from $14,422,000 at June 20, 2001. The current ratio decreased to 1.8 at June 30, 2002 from 2.0 at June 30, 2001.
Assets held for sale at June 30, 2002 totaled approximately $500,000. During fiscal 2002, the Company reduced the carrying value of such assets to reflect the estimated fair value less disposal costs. Management expects to sell this facility and receive proceeds, which will approximate fair value during fiscal 2003.
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 that the financial resources available to it, including internally generated funds and amount under its revolving credit facility would be sufficient to meet its foreseeable working capital requirements. As at June 30, 2002, the Company had unused sources of liquidity consisting of cash and cash equivalents of $657,000 and available unused credit under a revolving credit facility of $7,727,000.
Contractual Obligations and Commercial Commitments
The Company is party to notes payable as well as various operating leases at June 30, 2002. These contractual obligations are summarized below. The Company has no other contractual obligations or commercial commitments at June 30, 2002.
The contractual obligations relate to office and plant facilities, as well as vehicles and office equipment. It is expected in the normal course of business, the majority of the leases will be renewed or replaced by other leases.
Other Matters
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be reviewed for potential impairment annually or upon the occurrence of an impairment indicator. Other intangible assets will continue to be amortized over their useful lives.
Upon adoption in fiscal 2003, the Company anticipates that application of the non-amortization provisions of the Statement is expected to result in an increase in net income of approximately $176,000 ($.02 per share) per year. The Company does not anticipate the earnings and financial position to be impacted by the required impairment tests of goodwill.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is required to adopt this statement effective July 1, 2002. The Company does not expect that the adoption of SFAS no. 143 will have a material impact on its financial position, results of operations or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 establishes a single accounting model, based upon the framework established in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," for long-lived assets to be disposed of by sale and addresses significant implementation issues. The Company is required to adopt this statement effective July 1, 2002. The Company does not expect that the adoption of SFAS No. 144 will have a material impact on its financial position, results of operations or cash flows.
In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13 and Technical Corrections (FAS 145). For most companies, FAS 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under FAS 4. Extraordinary treatment will be required for certain extinguishments as provided in APB Opinion No. 30. The statement also amended FAS 13 for certain sales-leaseback and sublease accounting. The Company adopted the provisions of FAS 145 effective May 15, 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement supercedes the guidance provided by the EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Since this statement only affects the timing of the recognition of the liabilities to be incurred if an entity makes a decision to exit or dispose of a particular activity, the Company does not expect that the adoption of SFAS No. 146 will have a material impact on its financial position, results of operations or cash flows.
Item 7a.
Item 7a. 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.
Interest Rate Risk
Our interest rate risk management objective is to limit the impact of interest rate changes on our net income and cash flow and to lower our overall borrowing cost. We manage our exposure to interest rate fluctuations in our variable rate swap agreements. These agreements effectively convert interest rate exposure from variable rates to fixed rates of interest. We have entered into these agreements with banks under our senior secured credit facility. You should also read Notes 1 and 5 to our 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.
Item 8.
Item 8. Financial Statements and Supplementary Data.
See annexed financial statements.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
-None-
PART III
Item 10.
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 qualifies.
PHILLIP L. FRIEDMAN was employed by Occidental Chemical Corporation (formerly Hooker Chemical Corporation), a leading manufacturer and supplier of PVC resins and compounds from 1969 until December 1981, when he joined the Company. During his last 5 years with Occidental, Mr. Friedman was 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 reducing to commercial practice various research and development projects within the plastics industry. He is a member of the Executive Committee of the Company.
JOEL FRANCIS ROBERTS, from 1984 to July 1986, was a plant manager for Technical Plastics Extruders, an extruder of sheet material. During July 1986 he joined the Company as a plant manager and became a Director of Operations during 1989. Mr. Roberts became a Senior Vice President of Operations during November 1989.
JEFFREY SHAPIRO was employed as the Chief Operating Officer of Universal Process Equipment, a worldwide manufacturer of process equipment, before joining PVCC in March 2000 as Chief Financial Officer. 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 joined the Company as Chief Financial Officer during its fiscal year ended June 30, 2000.
GEORGE R. BEGLEY is an independent investment advisor, a director of North Coast Energy and a member of the audit committee of the Company.
JOHN G. NESTOR has been a Managing Partner of Kirtland Capital Partners since March 1986.
MICHAEL SHERWIN is the Vice Chairman of Mid-West Forge Corporation and Chairman and Chief Executive Officer of Columbiana Boiler Company. Prior to joining Mid-West Forge
Corporation, Mr. Sherwin was the President of National City Venture Corporation and National City Capital Corporation, both subsidiaries of National City Corporation.
JOHN F. TURBEN is Chairman of Kirtland Capital Partners and is a KCP I and KCP II Advisory Board member and serves as Chairman of The Hickory Group, PVC Container Corporation and Harrington and Richardson 1871, Inc. He is also Chairman of the Executive Committee of Fairmount Minerals, Ltd. and Execution Services Inc. He is a director of NACCO Industries, Unifrax Corporation and TruSeal Technologies Inc. He is Chairman of the Board of the Company and a member of its Executive Committee.
MICHAEL LYNCH is the Senior Vice President of Oldcastle, Inc. the U.S. subsidiary of CRH pl. CRH is an international buildings materials company headquartered in Ireland. Mr. Lynch is also the Chief Executive Officer of Allied Buildings Products Corp., which is a subsidiary of Oldcastle, Inc. Mr. Lynch was elected as a Director on August 28, 2002 in order to fill the vacancy created by the resignation as a director of Jeffery C. Garvey who resigned as a director on that date.
Item 11.
Item 11. Executive Compensation.
Incorporated by reference from the Company's definitive information statement to be filed with the Commission.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference from the Company's definitive or information statement to be filed with the Commission.
Item 13.
Item 13. Certain Relationships and Related Transactions.
None.
PART IV
Item 14.
Item 14. 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, 2002 and 2001
Consolidated Statements of Operations for the years ended June 30, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the years ended June 30, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000
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, 2002
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits.
Exhibits filed herewith:
None.
(b) Reports on Form 8-K filed during last quarter of the year ended June 30, 2001:
None.
(c) Exhibits
None.
(d) Financial statement schedules
The financial statement schedules required by Regulation S-X are submitted as a separate section of this filing.
INDEX TO EXHIBITS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
PVC CONTAINER CORPORATION (Registrant)
By: /s/ Phillip L. Friedman -------------------------------------- Phillip L. Friedman President and Chief Executive Officer
Date: October 8, 2002
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.
PVC CONTAINER CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-K
JUNE 30, 2002
CONSOLIDATED FINANCIAL STATEMENTS PVC Container Corporation June 30, 2002, 2001 and 2000
PVC Container Corporation
Consolidated Financial Statements
June 30, 2002, 2001 and 2000
CONTENTS
Report of Independent Auditors
The Board of Directors and Stockholders PVC Container Corporation
We have audited the accompanying consolidated balance sheets of PVC Container Corporation as of June 30, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 2002. Our audit also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PVC Container Corporation as of June 30, 2002 and 2001 and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2002 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
MetroPark, New Jersey September 24, 2002
PVC Container Corporation
Consolidated Balance Sheets
See accompanying notes.
PVC Container Corporation
Consolidated Statements of Operations
See accompanying notes.
PVC Container Corporation
Consolidated Statements of Stockholders' Equity
See accompanying notes.
PVC Container Corporation
Consolidated Statements of Cash Flows
See accompanying notes.
PVC Container Corporation
Notes to Consolidated Financial Statements
June 30, 2002, 2001 and 2000
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 activity primarily consists of the manufacture and sale of a line of plastic bottles made from polyvinyl chloride compounds, high density polyethylene resins and polyethylene terephthalate (PET). These bottles are used primarily for the packaging of cosmetics, toiletries, foods, household chemicals, lawn and garden, and industrial chemical products.
CONSOLIDATION
The accompanying financial statements include the accounts of PVC Container Corporation and its wholly-owned subsidiaries, Novatec Plastics Corporation, Novapak Corporation, Airopak Corporation, Marpac Industries Inc., Marpac Southwest Inc. and PVC Container International Sales Corporation, a foreign sales company incorporated in the U.S. Virgin Islands on March 1, 1993. All intercompany 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 for financial reporting purposes 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.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET ASSETS HELD FOR DISPOSITION
Certain facilities held for disposition included in prepaid expenses and other current assets, reflect management's intention to sell such assets. During 2002, the Company reduced the carrying value of such assets by $185,000 to $500,000 to reflect the estimated fair value less disposal costs. The net assets held for disposition at June 30, 2002 are included in the Plastic Containers segment and are expected to be sold or leased in fiscal 2003.
INTANGIBLES
The excess of purchase price over net assets of the businesses acquired is amortized on a straight-line basis over fifteen years. Amortization expense totaled approximately $293,000, $230,000 and $287,000 for the years ended June 30, 2002, 2001 and 2000, respectively.
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.
REVENUE RECOGNITION
Revenue is recognized upon shipment of the product.
SHIPPING COSTS
The Company's shipping and handling costs are included as an offset to sales for all periods presented.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to expense as incurred and amounted to $263,000, $272,000 and $238,000 in 2002, 2001 and 2000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in operations or expected to be disposed when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets.
STOCK-BASED COMPENSATION
As permitted by Financial Accounting Standards Board ("FASB") Statement No. 123, Accounting for Stock-Based Compensation (FASB 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, recognized over the vesting period.
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
As of July 1, 2000, the Company adopted FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires the Company to recognize all of its derivative instruments as either assets or liabilities in the balance sheets 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
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.
For a derivative instrument that is designated and qualifies as a cash flow hedge (i.e., hedging 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 the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change.
At June 30, 2002, the Company had interest-rate swap agreements, designated as cash flow hedges, that effectively convert a portion of its floating-rate debt to a fixed-rate basis through 2005 on approximately $9,288,000 of notional amount of indebtedness. The interest rate swap agreements hedge the floating interest rate associated with the debt by reducing the impact of interest rate charges on future interest expense. The fair value of the interest-rate swap at June 30, 2002 totaled approximately $457,000 and is included in the accompanying consolidated balance sheet. The reclassification of losses that are reported in accumulated other comprehensive loss, that are expected to be reclassified into earnings in the next twelve months, totals approximately $150,000 before taxes.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be reviewed for potential impairment annually or upon the occurrence of an impairment indicator. Other intangible assets will continue to be amortized over their useful lives.
Upon adoption in fiscal 2003 the Company anticipates that application of the nonamortization provisions of the Statement is expected to result in an increase in net income of approximately $176,000 ($.02 per share) per year. The Company does not anticipate the earnings and financial position to be impacted by the required impairment tests of goodwill.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is required to adopt this statement effective July 1, 2002. The Company does not expect that the adoption of SFAS No. 143 will have a material impact on its financial position, results of operations or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 establishes a single accounting model, based upon the framework established in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," for long-lived assets to be disposed of by sale and addresses significant implementation issues. The Company is required to adopt this statement effective July 1, 2002. The Company does not expect that the adoption of SFAS No. 144 will have a material impact on its financial position, results of operations or cash flows.
In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13 and Technical Corrections (FAS 145). For most companies, FAS 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under FAS 4. Extraordinary treatment will be required for certain extinguishments as provided in APB Opinion No. 30. The statement also amended FAS 13 for certain sales-leaseback and sublease accounting. The Company adopted the provisions of FAS 145 effective May 15, 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement supersedes the guidance provided by the EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Since this statement only affects the timing of the recognition of the liabilities to be incurred if an entity makes a decision to exit or dispose of a particular activity, the Company does not expect that the adoption of SFAS No. 146 will have a material impact on its financial position, results of operations or cash flows.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates that affect the financial statements include, but are not limited to, recoverability of inventories, collectibility of accounts receivable, returns, useful lives and amortization periods and recoverability of long-lived assets.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year presentation.
2. INVENTORIES
Inventories consist of the following:
3. PROPERTIES, PLANT AND EQUIPMENT
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
4. ACCRUED EXPENSES
Accrued expenses at June 30 consists of:
5. LONG-TERM DEBT
Long-term debt at June 30 consists of the following:
Maturities of long-term debt are as follows: 2003 - $2,992,644; 2004 - $3,230,623; 2005 - $2,920,137; 2006 - $12,436,140; 2007 - $869,911 and 2008 to 2016 - $6,465,238. Interest paid amounted to $2,358,089, $3,027,737 and $2,756,980 in 2002, 2001 and 2000, respectively.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (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 $4,192,000 standby letter of credit and a $2,000,000 capital expenditure line. The credit facility contains annual minimum equity and fixed charge coverage covenants which the Company was in compliance with at June 30, 2002.
The Term Notes bear interest at LIBOR plus 300 basis points and the revolving line bears interest at LIBOR plus 250 basis points. The effective interest rate of the term loan and revolver was 5.29% and 4.77%, respectively, in fiscal 2002. 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 PNC Bank Agreement also includes a $2 million capital expenditure line of credit which bears interest at LIBOR plus 300 basis points. Borrowings against this line totaled approximately $1.4 million at June 30, 2002.
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 1.9% in 2002 and 3.9% in 2001.
The agreement contains certain provisions which require the funds to be held in trust (the "Trust") by a third-party financial institution until such time that equipment purchases are made. The funds are invested at rates of return comparable to the interest rate paid by the Company on the obligation. Equipment purchases in connection with this agreement are paid directly from the Trust.
S.C. EDA has issued tax exempt bonds to fund the debt. Should the tax exempt status of this bond issue be negated, the rate of interest of this note would be retroactively adjusted.
The Company has unused letters of credit amounting to approximately $3.7 million in conjunction with this note.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
NOTE PAYABLE - PENNSYLVANIA INDUSTRIAL DEVELOPMENT AUTHORITY-"PIDA"
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 at an interest rate of 3.75% with 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 collateralized by the property.
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., who is financing 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 on 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 collateralized by the property. The Company has unused letters of credit amounting to approximately $119,000 in conjunction with this note.
During fiscal year 1998, the City of Paris, Illinois approved $2,500,000 Series 1997C Industrial Development Revenue bonds. The Bonds were purchased and are held by GE Capital Public Finance, Inc., who is financing 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 5.45% through March 16, 2008. The loan may be prepaid in whole or in part subject to certain requirements stated in the loan agreement. The loan is collateralized by the property and the equipment.
During fiscal year 1997, the City of Paris, Illinois approved $1,200,000 Series 1997A and $2,300,000 Series 1997B Industrial Development Revenue Bonds. The Bonds were purchased and are held by GE Capital Public Finance, Inc., who is financing 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 on 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 collateralized by the property and the equipment. The Company has unused letters of credit amounting to approximately $1.2 million in conjunction with this loan.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
The agreements contain provisions which require the funds to be held in trust (the "Trust") by a third-party financial institution until such time that building, construction or equipment purchases are made. The funds are invested at rates of return comparable to the interest rate paid by the Company on the obligation. Purchases in connection with this agreement are paid directly from the Trust.
The bonds issued by the City of Paris to fund the debt are tax-exempt bonds. Should the tax-exempt status of these bonds be negated, the rate of interest of this note would be retroactively adjusted.
OTHER
Other loans consist of notes payable to various banks for real estate improvements and development and expansion of the Company's manufacturing plants. The notes bear interest at rates ranging from 3% to 7.75% and are payable in monthly installments through 2008. The loans are collateralized by the Company's land and buildings.
The carrying amounts of the aforementioned debt agreements approximate fair value.
6. OPERATING LEASES
Minimum rental commitments under non-cancellable operating leases are payable as follows:
Rental expense for operating leases amounted to $1,134,309, $1,124,857 and $1,179,929 in 2002, 2001 and 2000, respectively.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
7. PENSION PLAN
On September 1, 1990, the Company instituted a non-contributory defined benefit pension plan (the 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, which provides the Plan with sufficient assets to meet future benefit payment requirements. The assets of the Plan are invested principally in short-term investments. The following table sets forth the Plan's funded status and the amount recognized in the Company's consolidated balance sheet:
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
7. PENSION PLAN (CONTINUED)
The Company maintains a voluntary salary reduction 40l(k) plan covering all non-union and union employees with more than one year of service. Eligible employees may elect to contribute up to 15% of their salaries on a pre-tax basis and an additional 10% of their salaries on an after-tax basis up to ERISA's maximum annual level. The Company contributes an amount equal to 25% on the first 6% of the non-union employee's pre-tax contribution and 10% on the first 6% of the union employee's pre-tax contribution and, at its discretion, may make additional contributions to the plan based on earnings. The Company contributed $136,340, $148,255 and $158,926 in 2002, 2001 and 2000, respectively.
8. COMMON STOCK
The Company's Board of Directors approved and ratified on January 16, 1997, an incentive stock option plan pursuant to which options to purchase an aggregate of 600,000 shares of the common stock of the Company may be granted, through the plan's expiration on January 16, 2007. Such plan conforms to the requirements of Rule 16B-3 of the Securities Exchange Act of 1934. The options granted are exercisable to the extent of 20-25% per year on a cumulative basis.
FASB 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 FASB 123. The fair value of these equity awards was estimated at the date of grant using a Black-Scholes option pricing model
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
8. COMMON STOCK (CONTINUED)
with the following weighted average assumptions for 2002, 2001 and 2000, respectively: risk-free interest rates of approximately 4.1%, 5.5% and 5.5%; expected volatility of 0.4, 0.3 and 0.3; expected option life equal to the vesting period, and an expected dividend yield of 0.0%.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options. All options have been granted at fair market value.
For purposes of pro forma disclosures, the estimated fair value of the equity awards is amortized to expense over the options vesting period. The Company's pro forma information is as follows:
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
8. COMMON STOCK (CONTINUED)
A summary of stock option activity follows:
Exercise prices for options outstanding as of June 30, 2002 ranged from $2.25 to $6.38 per share. The weighted-average remaining contractual life of these options is 7.95 years.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES
The provision (benefit) for income taxes consists of:
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:
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:
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
Income taxes paid amounted to $244,000, $163,000 and $153,000 in 2002, 2001 and 2000, 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, 2002, 2001 and 2000. 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, 2002, 2001 and 2000.
11. SEGMENTS
The Company identifies its segments based upon differences in the types of products it 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 and industrial chemical products. The Compound segment manufactures PVC compound for use by the Company as well as external customers. The external use of the PVC compound is for extruded profiles and accessories, furniture, molding and other indoor fixtures, and molded electrical and electronic housings. Both of the Company's segments sell products to customers located primarily in the United States.
The reportable segments are each managed separately due to the different manufacturing processes used and the different markets in which each segment operates. The Company evaluates each segment's performance based on profit or loss from operations before income taxes. The accounting policies for the reportable segments are the same as those
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
11. SEGMENTS (CONTINUED)
for the Company (described in Note 1). Intersegment sales and transfers are recorded at market prices. Information on segments and a reconciliation to consolidated total are as follows:
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, 2002 and 2001:
PVC Container Corporation
Schedule II - Valuation and Qualifying Accounts