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 and high-density polyethylene ("HDPE") resins. 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. 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 sold through the Company's wholly-owned subsidiary, Novatec Plastics & Chemicals Company, 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 recently developed and began to sell several categories of specialty PVC compounds for non-bottle applications ("specialty compounds") including extruded profiles for window frames and accessories, furniture, molding and other indoor fixtures, and a variety of injection molded electrical and electronic housings (the "Company's targeted markets'"). Sales of specialty compounds have been encouraging, although no assurance can be given as to their ultimate market acceptance.
The Company operates its business in one industry segment. Accordingly, no information is being furnished herein or in the accompanying financial statements relating to industry segments of the Company. The Company has not identified in its annual reports to shareholders revenue and income relating to lines of business because the Company believes it has been engaged since its inception in one dominant line of business consisting of the manufacture and sale of plastic containers and compounds used in the manufacture of containers.
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 commission sales representatives. During the fiscal year ended June 30, 1996, no one customer accounted for 10% or more of the Company's net sales.
Sales of the Company's plastic bottles and PVC bottle compounds have accounted for most of the Company's net income; sales of specialty compounds to non-bottle customers have accounted for the remainder of the Company's net income. Plastic bottles are offered in food grade and non-food grade materials, fluorinated or non-fluorinated, in clear and opaque colors and in a range of sizes from one ounce to two and one-half gallons. 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").
Sales of plastic bottles are generally a "regional" business. The majority of the Company's customers are within a 300 mile radius of the Company's respective plastic bottle 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.
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 terephathalate resins ("EPET") which are presently semi-commercial. The equipment is not suitable, however to the manufacture of bottles made from injection stretch blow molding grades of polyethylene terephthalate ("PET") which is becoming an increasing threat to the Company in high-volume bottle markets. In this connection during June 1996, the Company acquired technology to manufacture injection stretch blow molded PET bottles. The Company plans to utilize this PET capability as both a defensive as well as a growth strategy by seeking new packaging opportunities that require PET bottles. See "Competition and Marketing".
The Company operates facilities in Eatontown, New Jersey, Paris, Illinois and Manchester, Pennsylvania for the manufacturing of plastic bottles. In August 1989, the Company relocated its existing plastic bottle business from a leased facility in Eatontown, New Jersey to a newly constructed plant, also in Eatontown, New Jersey, owned by the Company. This new facility provided the Company with additional space needed to support manufacturing in efficiencies and capacity. 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 midwest bottle business. On August 4, 1994, the Company acquired from Air Products and Chemicals Inc., through its recently incorporated 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 manufacturing activities with respect to its continuing businesses are conducted at the seven facilities described in the following table:
1. The Eatontown bottle plant manufacturing facility is located at 401 Industrial Way West, Eatontown, New Jersey on 8.1 acres of real property owned by the Company. The Company's principal executive offices are also located at this location. The building is constructed from concrete panels, and was completed in June 1989. In connection with the construction and acquisition of certain equipment for this facility, the Company obtained financing through the NJEDA. During June 1996 the Company completed the construction of an additional 34,000 sq. foot warehouse and manufacturing space. This expansion was financed by the Company through its revolving credit facility at Fleet Bank N.A. as at June 30, 1996. On September 6, 1996 the Company obtained additional financing in the amount of $1,200,000. See Note 5 to the Notes to the Consolidated Financial Statements below.
2. During October 1991, the Company purchased an existing 22,500 square foot concrete building, located at 435 Industrial Way West, Eatontown, New Jersey, situated on 4.0 acres of land adjacent to the Company's plastic bottle facility. A portion of this building is being used as warehousing for the Company's plastic bottles and the remaining space is leased to an outside tenant. Financing for the acquisition of this property was obtained from Fleet Bank NA. On July 16, 1996 the Company sold this property for cash in the amount of $1,200,000. See Note 11 to the Notes to the Consolidated Financial Statements below.
3. 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. In March 1994, the Company completed the construction of an additional 21,000 square feet of warehouse and refinanced the facility with a new term Note and mortgage from National Westminster Bank, NJ. See Note 5 to the Notes to the Consolidated Financial Statements below.
4. 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 in a steel building having a total of 69,140 square feet.
5. Airopak corporation also leases 25,000 square feet of separate warehouse space also in a steel building. The aggregate annual rental payable with respect to the manufacturing and warehouse space for the Airopak Corporation detailed above and in Item 4 is $320,136 plus real estate taxes, utilities and certain other charges payable under net leases which expire on April 30, 1998 with respect to the manufacturing facility and April 30, 1998 with respect to the warehouse facility. It is believed that these facilities are large enough to allow for future growth of the business conducted at these facilities.
6. The Company commenced operations during April, 1993 in a new 62,500 square foot concrete plastic bottle manufacturing facility located in Paris, Illinois. The Company owns this facility and twenty acres of land on which it is located. Financing for this facility was obtained from the Edgar County Bank, the City of Paris, Illinois and the Illinois Small Business Development Agency. See Note 5 to the Notes to the Consolidated Financial Statements below.
7. As indicated above under "Competition and Marketing", the Company is in the Process of the construction of a new plastic bottle located in Walterboro, South Carolina consisting initially of 61,430 square feet. It is anticipated that the facility will become operational during October 1996.
Item 3.
Item 3. Legal Proceedings.
There are no material pending legal proceedings which in the opinion of management will adversely affect the business or financial condition of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Securityholders.
No matters were submitted to a vote of securityholders of the Company during the fiscal year ended June 30, 1996.
PART II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Securityholder Matters.
The principal market in which the Company's common stock is traded is the over-the-counter market. The closing bid quotation on September 13, 1996 was $3.12. The shares of common stock currently are quoted on NASDAQ and bear the symbol "PVCC." The high bid and low asked quotations during the fiscal years ended June 30, 1996 and June 30, 1995 are as follows:
As at September 13, 1996, the number of holders of record of the issued and outstanding common stock of the Company was approximately 689.
The Company on December 20, 1991 paid to shareholders its first dividend of $.05 per share of common stock, and a second, third and fourth dividend in the same amount was paid on December 18, 1992 December 8, 1993 and January 18, 1995. The Company declared on January 29, 1996 a stock dividend in the amount of 3% per share and a total of 202,817 shares were paid on February 26, 1996 to shareholders in connection with this dividend. The Company declared on August 29, 1996 a cash dividend of $.05 per share payable on September 20, 1996 to shareholders of record as of the close of business on September 13, 1996.
Item 6.
Item 6. Selected Financial Data.
* Earnings per share calculations are based on the weighted average number of shares of common stock and common stock equivalents outstanding. Retroactively restated for the 3% stock dividend paid on February 26, 1996 to shareholders of records on February 9, 1996.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
The Company's net sales for the fiscal year ended June 30, 1996 reached a record level of $57,216,000, increasing by approximately 6.2% over the 1995 amount of $53,886,000. The increase in revenues was the result of improvements in all areas of the Company's business. Plastic bottle sales and PVC compound sales all showed some modest growth during the fiscal year.
Gross profit as a percentage of net sales was 21.6% for the fiscal year ended June 30, 1996, compared to 19.0% for the fiscal year ended June 30, 1995. The cost of goods sold increased approximately $1,218,000 to a level of $44,839,000, or 78.4% of net sales for the fiscal year as compared to $43,621,000, or 81.0% of net sales for the prior fiscal year. The major reasons for the improvement in the gross profit margin and decrease in cost of goods sold as a percentage of net sales was the fluctuating PVC and HDPE resin prices that saw a steep decline in the first six months of the fiscal year, and then a slow steady increase in the second half of the fiscal year, which were, however, offset with some product price increases that have raised margins to a healthier level than historically achieved in prior years. Additionally, the Company experienced higher operating capacity utilization during the fiscal year compared to the prior year, which also improved plant efficiency and operating margins.
Selling, general and administrative expenses ("SG&A) was $4,505,000, or 7.9% of net sales for the fiscal year ended June 30, 1996 as compared to $3,996,000, or 7.4% of net sales for the fiscal year ended June 30, 1995, representing a 12.8% increase over the same period last year. The increase in SG&A was due in part to higher office incentive compensation, which is proportionate to higher pretax income, increased workers compensation insurance expense, due to a larger number of claims experience from prior years, as well as some additional consulting expenses related to the Company's reengineering of its operations and management information systems.
Income from operations for the fiscal year ended June 30, 1996 increased 39.2% to $4,950,000, or 8.7% of net sales as compared to $3,556,000, or 6.6% of net sales for fiscal 1995. Higher operating income was the result of increased sales volume across the entire Company's product mix, lower raw material costs, and higher operating utilization in the Company's manufacturing plants. The Company's share of the operating loss in the Edge Craft USA joint venture was $108,000.
Net interest expense decreased $101,000 during the fiscal year ended June 30, 1996, as compared to fiscal 1995. Lower interest expenses reflect lower interest payments on several capital lease arrangements which were completed during 1996, where payments of principal accounted for an increasing portion of the payment as opposed to interest. Additionally, the overall interest rates on the Company's financing from EDA loans decreased, reflecting lower bond yields in fiscal 1996 compared to fiscal 1995.
Net income for the year ended June 30, 1996 increased 58.5% or approximately $942,000 to $2,553,000, or $.37 per share as compared to $1,611,000 or $.23 per share for fiscal 1995. The increase is due to the higher gross profit from operations for fiscal 1996 compared to fiscal 1995.
FISCAL 1995 AS COMPARED TO FISCAL 1994
The Company's net sales for the fiscal year ended June 30, 1995 of $53,886,000 increased by approximately 40.5% over the 1994 amount of $38,353,000. The increase in sales was the result of a general increase in the demand for plastic bottles and compounds throughout the Company's lines of business, in addition to the added sales from the Company's newly acquired, wholly-owned subsidiary, Airopak Corporation.
The cost of goods sold increased approximately 39.9% to a level of $43,621,000, or 81.0% of net sales for the fiscal year ended June 30, 1995 as compared to $31,187,000, or 81.3% of net sales for the fiscal year ended June 30, 1994. The increase in cost of goods sold was primarily due to higher units sales volume and increased resin costs. Depreciation expense increased by approximately $276,000 for the year ended June 30, 1995, as compared to the prior period. The increase was primarily the result of the added depreciation associated with the Company's newly purchased Airopak Corporation, as well as new capital equipment employed at the Company's other manufacturing sites.
Selling, general and administrative expenses ("SG&A") was $3,996,000, or 7.4% of net sales for the fiscal year ended June 30, 1995 as compared to $3,193,000, or 8.3% of net sales for the fiscal year ended June 30, 1994, representing a 25.1% increase over the same period last year. The increase in SG&A was due to the associated higher marketing, selling and administrative expenditures associated with the increased level of sales volume, as well as the addition of Airopak.
Income from operations for the fiscal year ended June 30, 1995 was $3,556,000, or 6.6% of net sales as compared to $1,536,000, or 4.0% of net sales for fiscal 1994. Higher operating income was the result of increased sales volume across the entire Company's product mix, the Airopak acquisition, and higher operating utilization in the Company's manufacturing plants.
Net Interest expense increased $236,000 during the twelve month period ended June 30, 1995, as compared to the same period in 1994. Higher interest expenses primarily reflect the additional financing incurred with the acquisition of the Airopak Corporation and the warehouse addition at our compound facility.
Net income for the year ended June 30, 1995 increased approximately $964,000 to $1,611,000, or $.24 per share as compared to $647,000, or $.10 per share for fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity position at June 30, 1996 improved from the prior year. Working capital increased approximately $1,025,000 to $6,975,000 at June 30, 1996 from $5,950,000 at June 30, 1995. The current ratio was 1.57 at June 30, 1996 and 1.56 at June 30, 1995.
Cash flow from operations during fiscal 1996 increased by approximately $1,603,000. The major reason for the increase is due in part of a $942,000 increase in net income, a $100,000 increase in depreciation, and a $1,713,000 increase in accounts payable and accrued expenses all of which were partially offset by a $1,929,000 increase in inventories and a $658,000 increase in accounts receivable.
Inventories as at June 30, 1996 increased approximately $1,929,000 to $8,364,000 as compared to $6,435,000 as at June 30, 1995, reflecting a decrease in inventory turnover. Approximately $1.2 million of the total increase in inventory was raw material, reflecting at year end the purchase and pre-buying of a substantial quantity of PVC and HDPE resins from its contract suppliers in anticipation of rising raw material prices. Offsetting inventory growth, accounts payable increased from $5,633,000 at June 30, 1995 to $6,865,000 as at June 30, 1996. Finished goods
inventory accounted for the balance of the increase in inventory, which reflects both a mix variance as well as several new items that have been added to inventory to support new sales growth. Management anticipates higher sales during the next fiscal year, as well as a decrease in raw material inventories which will improve, inventory turnover.
During the twelve month period ended June 30, 1996, the Company generated cash from operations of $4,850,000 and received $2,175,000 in proceeds from long term debt, which was utilized to acquire $4,377,000 in capital assets, invest $400,000 in the Edge Craft USA joint venture, and reduce long term debt by $2,361,000.
On April 7, 1995, the Company formed a 50/50 joint venture (called "Edge Craft USA Inc.") with Edge Craft, Ltd. of Ontario, Canada for the manufacture and sale of vinyl edgebanding manufactured with PVC compounds produced by the Company's wholly owned subsidiary, Novatec Plastics & Chemicals, Inc. The joint venture agreement provides for each party to contribute approximately $400,000 in capital to the venture. As at June 30, 1996, the Company has made an investment of approximately $400,000 to the joint venture.
The Company's short term liquidity and short term capital resources are projected to be adequate to allow the Company to continue to make timely payments to trade and other creditors. The Company believes that the financial resources available to it, including internally generated funds and amounts available under its revolving credit facility would be sufficient to meet its foreseeable working capital requirements. As of June 30, 1996, the Company had unused sources of liquidity consisting of cash and cash equivalents of $1,059,000 and available unused credit under a revolving credit facility of $825,000.
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.
JOHN C. D'AVELLA, from June 1973 to July 1974, was an employee of Cosmetics Unlimited, Bogota, New Jersey in the area of purchasing and inventory control. From July 1974 to September 1975 he was employed as the General Manager in charge of purchasing and sales at D'Avella's Pharmacy in Newark, New Jersey. Mr. D'Avella was employed from September 1975 to 1978 as Sales Manager of the Company. In 1978 he became Vice President in Charge of Sales and Secretary of the Company.
BERTRAM D. BERKOWITZ has been actively employed by the Company since May 1983. He became a Vice President of Finance and Treasurer during November 1989.
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. He became a Vice President for Operations during November 1989.
Item 11.
Item 11. Executive Compensation.
Incorporated by reference from the Company's definitive information statement to be filed with the Commission not later than 120 days following the end of the Company's fiscal year.
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 not later than 120 days following the end of the Company's fiscal year.
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, 1996 and 1995
Consolidated Statements of Income for the three years ended June 30, 1996
Consolidated Statements of Stockholders' Equity for the three years ended June 30, 1996
Consolidated Statements of Cash Flows for the three years ended June 30, 1996
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, 1996
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits.
3.1 Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware (filed as Exhibit 3.1 to the Company's Form 10-K for the fiscal year ended June 30, 1988 (the "1988 10-K"), and incorporated herein by reference).
3.2 The Company's By-Laws (filed as Exhibit 3.2 to the 1988 10-K, and incorporated herein by reference).
10.1 Deferred Compensation Plan established June 4, 1986 and effective July 1, 1986 (filed as Exhibit 10.1 to the Company's Form 10-K for the fiscal year ended June 30, 1987 (the "1987 10-K"), and incorporated herein by reference).
10.2 Profit Sharing Savings Plan (Flexinvest 401(k) Plan) effective July 1, 1984 (filed as Exhibit 10.2 to the 1987 10-K, and incorporated herein by reference).
10.3 1981 Incentive Stock Option Plan filed as an Exhibit to the Company's Form 10-K for fiscal 1982 and incorporated herein by reference (filed as Exhibit 10.3 to the 1987 10-K, and incorporated herein by reference).
10.4 Employment Agreement between the Company and Phillip L. Friedman dated July 1, 1982 as amended on June 4, 1986 (filed as Exhibit 10.4 to the 1987 10-K, and incorporated herein by reference).
10.5 Lease for the Company's container manufacturing plant dated October 5, 1973 and amended July 2, 1974 between John Donato, Jr. and the Company (filed as Exhibit 10.5 to the 1987 10-K, and incorporated herein by reference).
10.7 Loan and Security Agreement among the Company, First Jersey National Bank and Novatec dated June 1, 1984 and modified March 31, 1986 (filed as Exhibit 10.7 to the 1987 10-K, and incorporated herein by reference).
10.8 Credit Agreement among the Company, New Jersey Economic Development Authority, United Jersey Bank and The First Jersey National Bank dated as of November 1, 1981 (filed as Exhibit 10.8 to the 1987 10-K, and incorporated herein by reference).
10.9 Bond Financing Agreement among the Company, New Jersey Economic Development Authority, United Jersey Bank and The First Jersey National Bank dated November 27, 1984 (filed as Exhibit 10.9 to the 1987 10-K, and incorporated herein by reference).
10.10 Collective Bargaining Agreement dated September 1, 1988 between the Company and Local 108, Retail, Wholesale and Department Store Union, AFL-CIO (filed as Exhibit 10.10 to the 1988 10-K, and incorporated herein by reference).
10.11 Third Amendment to Employment Agreement between Phillip L. Friedman and the Company dated November 29, 1989 (filed as Exhibit 10.11 to 1990 10-K and incorporated herein by reference).
10.12 Asset Purchase Agreement between Airopak Corporation and Air Products and Chemicals, Inc. dated 8/4/94 (filed as Exhibit 10 to the report on Form 8-K filed on August 8, 1994 and incorporated herein by reference).
16 Letter dated March 1, 1989 from Gassman, Rebhun & Co., P.C. regarding resignation as certifying accountant for the Company (filed as Exhibit 16 to the February 28, 1989 8-K, and incorporated herein by reference).
21 Subsidiaries of the Company (filed as Exhibit 22 to the 1987 10-K, and incorporated herein by reference).
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
99.1 Second Amendment to the PVC Container Corporation 1981 Incentive Stock Option Plan, dated July 6, 1989, with the unanimous written consent of Directors of the Company (filed as Exhibit 28.1 to 1990 10-K and incorporated herein by reference.
99.2 Letter dated September 22, 1989 from Phillip L. Friedman to Bidyuk AG regarding the termination of their Option Agreement dated December 14, 1987 (filed as Exhibit 28.2 to 1990 10-K and incorporated herein by reference).
Exhibits filed herewith:
None.
(b) Reports on Form 8-K filed during last quarter of the year ended June 30, 1996:
None.
(c) Exhibits
The exhibits required by Item 601 of Regulation S-K are submitted as a separate section of this filing.
(d) Financial statement schedules
The financial statement schedules required by Regulation S-X are submitted as a separate section of this filing.
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 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: September 13, 1996
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, 1996
CONSOLIDATED FINANCIAL STATEMENTS
PVC CONTAINER CORPORATION
June 30, 1996, 1995 and 1994 PVC Container Corporation
Consolidated Financial Statements
June 30, 1996, 1995 and 1994
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, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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, 1996 and 1995 and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1996 in conformity with generally accepted accounting principles.
Ernst & Young LLP
August 16, 1996
PVC Container Corporation
Consolidated Balance Sheets
See accompanying notes.
PVC Container Corporation
Consolidated Statements of Income
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, 1996, 1995 and 1994
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 and high density polyethylene resins. 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 & Chemicals Co., Inc., Airopak Corporation 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.
ACQUISITION
On August 4, 1994, the Company acquired certain assets from Air Products and Chemicals, Inc., for its recently incorporated wholly-owned subsidiary known as Airopak Corporation for $1.57 million.
The Company accounted for the acquisition as a purchase. Accordingly, the acquired assets have been recorded at their estimated fair values at the date of acquisition. The results of operations of the acquired business are included in the accompanying consolidated statement of income from the date of acquisition. The pro forma results of operations for the period July 1, 1994 to August 4, 1994 have not been presented as such amounts are not material.
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 LIFO cost or market value. Cost for substantially all of the inventories is determined under the LIFO method.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION
Depreciation is provided for financial reporting purposes on a straight-line or double declining balance 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.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards 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.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to expense as incurred and amounted to $252,000, $217,000 and $196,000 in 1996, 1995 and 1994, respectively.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares of common stock and common stock equivalents outstanding retroactively restated for the 3% stock dividend declared by the Board of Directors payable on February 26, 1996 to stockholders of record on February 9, 1996. No common stock dividend was paid in 1995 or 1994.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles 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.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain 1995 balances have been reclassified to conform to 1996 presentation.
2. INVENTORIES
Inventories consist of the following:
The excess of inventory valued on FIFO basis which approximates replacement cost over LIFO cost at June 30, 1996 was approximately $216,000. Replacement cost exceeded LIFO cost by approximately $648,000 at June 30, 1995.
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:
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows: 1997 - $1,800,400; 1998 - $4,961,254; 1999 - $2,221,874; 2000 - $599,302; 2001 - $616,685; and 2002 to 2016 - $7,766,114. Interest paid amounted to $749,327, $881,021 and $650,929 in 1996, 1995 and 1994, respectively.
NOTE PAYABLE - SOUTH CAROLINA ECONOMIC DEVELOPMENT AUTHORITY "S.C. EDA"
This note is due April 1, 2016 and is payable in increasing amounts on April 1 of each year through April 1, 2016. Prepayments may be made without penalty. This note is subject to prior mortgages in favor of the Fleet Bank of New Jersey. The effective interest rate on this obligation was 3.9% in 1996.
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.
NOTE PAYABLE - NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY "N.J. EDA"
SERIES D NOTE
This note is due October 31, 2006 and is payable as follows: $250,000 due on October 1, each year through October 1, 2006 and $900,000 due on October 31, 2006. Prepayments may be made without penalty. This note is subject to prior mortgages in favor of the Fleet Bank of New Jersey. The effective interest rate on this obligation was 3.7% and 3.8% in 1996 and 1995, respectively.
N.J. 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.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
435 INDUSTRIAL WAY MORTGAGE
During fiscal year 1992, the Company financed $900,000 for the purchase of a building adjacent to its property. The mortgage is payable in 59 monthly principal installments of $3,750 and a final lump sum payment for the remaining balance on July 31, 1997, plus interest at 8.53%. The mortgage is collateralized by the building.
EQUIPMENT NOTES
During fiscal year 1995, the Company received a second draw down on its $2,300,000 equipment loan from Fleet Bank, amounting to $1,260,000. The note requires principal payments of $21,355 and interest at 9.31% on the first of every month through the note's maturity in March 1999, at which time the full unpaid principal and interest are due. The first draw down note provides for the monthly payment of interest at 7.82% through and including May 1, 1995. Principal payments of $10,000 and interest are due thereafter on the first of every month through the note's maturity in March 1999, at which time the full unpaid principal and interest are due. The borrower may prepay this note in whole or in part in accordance with the loan agreement. The notes are collateralized by the equipment.
During fiscal year 1995, the Company obtained a $950,000 equipment loan from Fleet Bank for its newly acquired Airopak division. The note is payable in eighty-four monthly payments of $11,310, plus interest at 9.19%. The note is collateralized by the equipment.
During fiscal year 1992, the Company purchased $750,000 of equipment which was financed by Fleet Bank. The notes are payable in sixty monthly payments of $12,501, plus interest at prime plus 1/2% (the effective rate is equal to 9.0% in 1996 and 7.75% in 1995). The notes are collateralized by the equipment.
TERM NOTES
During fiscal year 1994, the Company purchased $1,200,000 of property and equipment which was financed through a term note with Fleet Bank. The note provides for principal payments of $5,000 and interest due monthly through the note's maturity, March 1, 1999, when the full amount of unpaid principal and interest is due. The note may be prepaid in whole or in part subject to certain requirements stated in the loan agreement. The note is collateralized by the property and equipment purchased.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
During fiscal year 1993, the Company purchased $3,000,000 of equipment which was financed through three term notes with Fleet Bank. The notes, with original principal balances of $1,500,000, $900,000 and $600,000 are payable in sixty monthly payments of $50,000 plus interest at 7.29%, 6.8% and 6.69%, respectively. The notes are collateralized by the equipment.
REVOLVING NOTE
During fiscal year 1996, the Company purchased $2,175,000 of property and equipment which was financed through a revolving note with Fleet Bank. Borrowings under this revolving note bear interest at the prime rate (8.25% at June 30, 1996) and are payable in full on October 31, 1997. The note may be prepaid in whole or in part subject to certain requirements stated in the loan agreement. The note is collateralized by the property and equipment purchased.
EDGAR COUNTY BANK CONSTRUCTION LOAN
During fiscal year 1993, the Company financed $675,000 for real estate improvements for a manufacturing plant in Paris, Illinois. The loan is payable in sixty monthly principal payments of $2,813 and a final lump sum payment of $506,250 on April 30, 1998, plus interest at 6.75%. The loan is collateralized by a shared first lien interest for the land and building in Paris, Illinois in conjunction with an inter creditor agreement between the bank and the City of Paris.
COMMUNITY DEVELOPMENT ASSISTANCE LOAN
In fiscal year 1993, the Illinois Department of Commerce and Community Affairs approved a loan with the City of Paris for development of a manufacturing plant in Illinois for $500,000 which will be payable in 180 monthly installments of $3,453 including interest at 3%. The loan is collateralized by a shared first lien interest for the land and building in Paris, Illinois in conjunction with an inter creditor agreement between the City of Paris and Edgar County Bank.
REVOLVING LOAN FUND
The Illinois Department of Commerce and Community Affairs also approved a revolving loan fund from the City of Paris to assist in the development of the manufacturing plant in Illinois for $150,000 in fiscal year 1993. The loan is payable in 180 monthly
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
installments of $1,033 including interest at 3%. The loan is collateralized by a subordinate lien interest for the land and building in Paris, Illinois in conjunction with an inter creditor agreement between the City of Paris and Edgar County Bank.
ILLINOIS SMALL BUSINESS DEVELOPMENT LOAN
In fiscal year 1994, the Illinois Department of Commerce and Community Affairs approved a loan with the City of Paris for the expansion of the Company's manufacturing plant in Illinois for $350,000 which is payable in 180 monthly installments of $2,767 including interest at 5% and a final payment to satisfy the conditions of the loan. The loan can be prepaid in whole or in part without penalty. The loan is collateralized by the property and improvements thereafter as well as the rent issues and profits of the premises.
6. OPERATING LEASES
Minimum rental commitments under non-cancellable operating leases are payable as follows:
Rental expense for operating leases amounted to $118,594, $142,179 and $102,947 in 1996, 1995 and 1994, respectively.
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
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
7. PENSION PLAN (CONTINUED)
to meet future benefit payment requirements. The assets of the Plan are invested principally in short-term investments. Net pension cost consists of the following components:
The reconciliation of the funded status of the Plan to the amount on the Company's balance sheet is as follows:
The assumptions used in determining the funded status of the Plan are as follows: (i) discount rate - 7.5% in 1995 and 1994, and (ii) expected rate of return on assets of 8.5% for 1995 and 1994.
The Company maintains a voluntary salary reduction 401(k) plan covering all non-union employees with more than one year of service. Eligible employees may elect to contribute up to 6% of their salaries up to ERISA's maximum annual level. The Company contributes an amount equal to 25% of the employee's contribution and, at its discretion, may make additional contributions to the plan based on earnings. The Company contributed $520,123, $337,534 and $124,448 in 1996, 1995 and 1994, respectively.
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
8. EMPLOYEES' INCENTIVE STOCK OPTION PLAN
The Company maintains an Incentive Stock Option Plan. Under the plan, the Company may grant options for the purchase of up to an aggregate of 1,080,000 shares of its common stock. The options granted are exercisable to the extent of 20% per year on a cumulative basis through expiration. At June 30, 1996, 282,000 shares of common stock were reserved for issuance.
A summary of stock option activity relating to the Company's stock option plan is as follows:
9. INCOME TAXES
The provision for income taxes consists of:
PVC Container Corporation
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
The provision (benefit) for deferred income taxes arises from the differences between the financial statement and tax bases of the following:
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, 1996 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 $1,462,000, $871,000 and $432,000 in 1996, 1995 and 1994, respectively.
10. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURES
As more fully described in Note 1, the Company acquired certain assets from Air Products and Chemicals, Inc. on August 4, 1994. The purchase price was allocated to the assets based on their estimated market values as follows:
Excluded from the consolidated statements of cash flows in 1996 was the effect of certain noncash financing activities related to the $5.5 million South Carolina EDA loan obtained by the Company in April 1996. Capital expenditures in connection with this agreement totaled approximately $261,000 in 1996.
11. SUBSEQUENT EVENT
In July 1996, the Company sold its rental property located at 435 Industrial Way West, Eatontown, New Jersey for $1,200,000 in cash. The remaining principal on the mortgage totaling approximately $705,000 was repaid with a portion of the proceeds from the sale. The rental property consists of an office building with warehouse space and land with a net book value of approximately $1,100,000 at June 30, 1996. Rental revenues generated by this property amounted to approximately $144,000 and $126,000 in 1996 and 1995, respectively.
On September 6, 1996 the Company obtained a $1.2 million loan to finance the expansion of their New Jersey manufacturing facility.
REPORT OF INDEPENDENT AUDITORS ON CONSOLIDATED SCHEDULES
The Board of Directors and Stockholders PVC Container Corporation
In connection with our audits of the consolidated financial statements of PVC Container Corporation as of June 30, 1996 and 1995, and for each of the three years in the period ended June 30, 1996, we have also audited the consolidated schedules included in this annual report on Form 10-K as listed in Item 14(a)(2).
In our opinion, the consolidated schedules referred to above present fairly, in all material respects, the information required to be stated therein.
/s/ Ernst & Young LLP -------------------------- Ernst & Young LLP
MetroPark, New Jersey August 16, 1996
PVC Container Corporation
Schedule II -- Valuation and Qualifying Accounts
INDEX TO EXHIBITS