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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______ to _______.
Commission File Number: 33-45897
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PLASTIC CONTAINERS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3632393
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
301 Merritt 7 Corporate Park, Norwalk, Connecticut 06856
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(Address of principal executive offices) (Zip Code)
(203) 750-5900
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
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Securities registered pursuant to Section 12 (g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
None of the registrant's voting stock was held by nonaffiliates as of March 24,
1997.
The number of shares outstanding of the registrant's Common Stock ($1.00 par
value) as of March 24, 1997 is 100.
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INTRODUCTORY NOTE
This Amendment No. 1 to the Annual Report on Form 10-K of Plastic Containers,
Inc. (the "Company") is being filed for the purposes of (i) adding to Item 8 the
separate financial statements of the Company's wholly-owned subsidiary
Continental Plastic Containers, Inc. as of December 31, 1996 and 1995 and for
each of the years in the three-year period ended December 31, 1996, and (ii)
making minor changes to the Form 10-K to conform it to the Company's
Registration Statement on Form S-4, Registration No. 333-19999, which was
declared effective by the Securities Exchange Commission on April 23, 1996.
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PART I
ITEM 1. BUSINESS (DOLLARS IN THOUSANDS)
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GENERAL DEVELOPMENT OF BUSINESS
Plastic Containers, Inc. (the "Company" or "PCI") was organized in October,
1991 for the purpose of acquiring Continental Plastic Containers, Inc. ("CPC")
and Continental Caribbean Containers, Inc. ("Caribbean") (collectively, the
"Continental Plastic Container Companies"). In November 1991, PCI purchased all
of the issued and outstanding capital stock of the Continental Plastic Container
Companies in a transaction involving total consideration of $150,450 (the
"Acquisition"). The Company is currently 84% owned by Continental Can Co.,
Inc.("Continental Can"), a publicly-held company which is principally engaged,
through its subsidiaries, in manufacturing materials and containers used in the
packaging industry.
In the last quarter of 1996, the Company engaged in a series of related
transactions (collectively, the "Refinancing") comprised of (i) the offer and
sale of $125,000 aggregate principal amount of 10% Senior Secured Notes due 2006
(the "10% Notes"), (ii) a cash tender offer (the "Tender Offer") to purchase any
and all of the Company's $104.7 million aggregate principal amount of
outstanding 10 3/4% Senior Secured Notes due 2001 (the "10 3/4% Notes"), (iii)
the discharge of all 10 3/4% Notes not purchased in the Tender Offer, (iv) a
sale/leaseback financing for approximately $40.6 million (the "Sale/Leaseback")
involving certain equipment and a mortgage on one facility, and (v) a $30.0
million loan (the "Continental Can Loan") by PCI to Continental Can, which prior
to the Refinancing owned a 50% equity interest in PCI and which used the
proceeds of the Continental Can Loan to acquire an additional 34% equity
interest in PCI, thereby increasing its ownership to 84%. See also Item 12 of
this report.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
All of the products manufactured by PCI are in the packaging segment.
Financial information regarding this segment is included in the financial
statements which comply with generally accepted accounting principles and may be
found in Item 8 of this report.
NARRATIVE DESCRIPTION OF BUSINESS
The Company is a leader in developing, manufacturing and marketing a wide
range of custom extrusion blow-molded plastic containers for food and juice,
household chemicals, automotive products and motor oil, industrial and
agricultural chemicals, and hair care products. The Company manufactures single
and multi-layer containers, primarily from high density polyethylene ("HDPE")
and polypropylene ("PP") resins, ranging in size from two ounces to two and one-
half gallons. Management believes that, based on revenues, the Company is among
the largest U.S. manufacturers of extrusion blow-molded plastic containers for
(i) food and juice, (ii) automotive motor oil and (iii) household chemical
products.
In 1996, PCI sold over 1.5 billion containers to national consumer product
companies. The Company often is the sole supplier of a customer's container
requirements for specific product categories or for particular container sizes.
The Company has long-standing relationships with most of its customers and has
long-term contractual agreements with remaining terms of up to five years with
customers who represent approximately $215.0 million, or 80%, of the Company's
fiscal 1996 dollar sales volume. All of these contracts provide for changes in
raw material prices to be passed through to the customer. Contracts
representing approximately 22% of the Company's 1996 dollar sales volume expire
in 1997.
COMPETITIVE STRENGTHS
Management believes that the Company possesses several attributes which
contribute to its position as a leading manufacturer of plastic containers for
food and juice, household chemicals, automotive products and other products,
including:
Strong Customer Relationships and Long-Term Production Contracts. Management
believes that the Company's strong and long-standing customer relationships are
due to its nationwide manufacturing facilities, proven ability to
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develop and manufacture innovative products, and competitive pricing. The
Company's five largest customers (Procter & Gamble, Coca-Cola Foods, Mobil Oil,
Pennzoil and Quaker State) have been customers of the Company for an average of
approximately 15 years.
Customer-Focused Product Development. PCI works closely with its customers
in all phases of product design and production and, since 1992, has spent
approximately $46.0 million on research, development and engineering activities.
Examples of the Company's major product innovations include Conolene/TM/
fluorine treated barrier bottles (for use in certain applications where the
contents would otherwise damage an untreated plastic container) and Lamicon/TM
/multi-layer oxygen barrier bottles (for use in certain applications where the
contents would be harmed by prolonged exposure to oxygen). Other PCI
innovations include the first plastic containers for numerous products, such as
motor oil, anti-freeze, maple syrup, edible oil, gasoline additives and
herbicides. These innovations were commercially developed at the Company's Elk
Grove, Illinois technical center, where approximately 80 employees are engaged
in research, development and engineering activities and which management
believes provides the Company with a competitive advantage.
State-of-the-Art Manufacturing Technologies. Management believes that PCI is
among the container industry's technology leaders and as such is able to improve
manufacturing efficiencies and lower unit costs. The Company was among the
first to develop and utilize a "wheel" manufacturing process employing container
molds radially on a wheel. Many of PCI's current wheels include proprietary
improvements which permit them to operate at higher speeds and to more
efficiently manufacture containers with special features such as multiple layers
and in-mold labeling (which allows a customer's label to be incorporated into
the bottle at its formation rather than be attached with adhesive at a later
stage of the manufacturing process, thereby enhancing the appearance of the
label). As a result of these improvements, since 1991 the Company has achieved
approximately a 28% increase in productivity, as measured by pounds of resin
processed per employee. In addition, major production advances commercially
developed by PCI include the dual parison blow-molding process, which allows up
to four bottles to be made in a single mold, automatic on-line testing
equipment, robotic product handling equipment, sonic welding (a proprietary
technology to place insulated handles on microwavable bottles), custom color
matching and advanced bottle trimming techniques.
Strategically Located Facilities. The Company serves its customers through a
network of 15 plants located in the continental United States and one plant
located in Puerto Rico. In many cases, the Company's facilities are located
adjacent to or in close proximity to its largest customers' manufacturing
operations, thereby creating production and distribution efficiencies.
Management believes that the Company's national network of manufacturing
facilities is important to its success because of (i) customer requirements for
nationwide production capabilities, (ii) the significance of transportation
costs, and (iii) the importance of frequent, timely product deliveries to its
customers, many of whom have implemented "just-in-time" inventory management
techniques.
BUSINESS STRATEGY
The Company's business strategy is to leverage its core competencies in the
development, manufacture and marketing of extrusion blow-molded containers
through: (i) continued cost reduction and increased productivity; (ii) new
product development focused on the industry trend towards the conversion to
plastic packaging from glass, metal and other materials; and (iii) the
development of strategic partnerships with customers.
Continue Cost Reduction and Increase Productivity. Management continually
seeks opportunities to reduce costs and maintains several technology driven
programs which are dedicated to productivity improvements. For example, the
Company is expected to realize significant cost savings through the closing of
two production facilities. One such facility was closed in October 1996, and the
other facility was closed in March 1997. The Company incurred a one-time plant
rationalization and realignment charge of $6.5 million in 1996, and although
there can be no assurance, management anticipates that the Company will realize
annual savings of approximately $5.0 million as a result of such plant
rationalization and realignment. Management further anticipates no material
loss in unit volume or net sales from these closings, as substantially all
related production volume is being transferred to other Company facilities. The
Company has also focused on rigorous control of selling, general and
administrative expenses resulting in a reduction of such expenses to 10.8% of
net sales in the year ended December 31, 1996, from 14.5% in the year ended
December 31, 1992.
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Capitalize on Conversion from Glass and Metal Containers. Management
believes that PCI can capitalize on the continuing trend towards the
substitution of plastic for glass and metal containers. This trend is primarily
a function of the greater satisfaction with plastic bottles due to their (i)
lighter weight, (ii) lower susceptibility to breakage in comparison to glass
containers, (iii) special spouts and built-in handles, which increase
"pourability" for larger bottles, and (iv) superior on-shelf product
presentation, which facilitates product differentiation. The Company has
developed a number of products aimed at sectors traditionally served by glass or
metal containers, including one gallon Lamicon/TM/ juice containers, plastic
replacements for large cans used in the food service industry, and juice
concentrate bottles used in dispensing machines.
Develop Customer Partnerships. In response to customers' increasing focus on
outsourcing non-core activities, management intends to expand customer
partnerships through vendor management programs. In 1995, the Company entered
into a five-year vendor management agreement with Mobil Oil under which the
Company supplies 100% of Mobil Oil's quart containers for motor oil and manages
related packaging materials. This program provided comprehensive packaging
services to Mobil Oil, including, in addition to bottle manufacture, the
purchase and inventory management of labels, closures and cartons. The Company
also provides technical support for all packaging components to insure a high
level of quality. The Company is in discussions with other customers regarding
similar alliances.
CUSTOMERS
Substantially all of PCI's sales are made to major consumer products
companies. PCI in many cases is the sole supplier of substantially all of its
customers' container requirements for specific products or particular container
sizes.
In 1996, PCI's ten largest customers, which accounted for approximately 74%
of sales, were (in alphabetical order):
Clorox Pace Foods
Coastal Unilube Pennzoil
Coca-Cola Foods Procter & Gamble
Colgate-Palmolive Quaker State
Mobil Oil Solaris/Ortho
PCI often has more than one contract with a particular customer. PCI may
have individual contracts for specific products or container sizes or, in
certain circumstances, separate contracts with one or more operating divisions
of a single customer. As a result, PCI currently has 15 contracts with the ten
customers listed above, of which nine contracts are with its three largest
customers, Procter & Gamble, Coca-Cola Foods and Mobil Oil (which were the only
customers which accounted for 10% or more of PCI's revenues during 1996); the
largest such contract accounted for $28.8 million in net sales in 1996 and
expires in 1998.
PRODUCTS
PCI currently manufactures primarily HDPE containers or PP containers. In
1996, HDPE containers accounted for approximately 89% of the total number of
containers manufactured by PCI and PP containers accounted for approximately 10%
of such total. PCI also manufactures at its plant in Puerto Rico a small
quantity of two-liter soda bottles made from polyethylene terephthalate ("PET").
HDPE containers are utilized for products such as laundry detergents,
dishwashing liquids, shampoo, automotive motor oil and some food products; they
may consist of a single layer of plastic or up to six layers for specialized
uses. Multi-layer containers may be required in order to include a layer with
barrier properties, to permit the inclusion of recycled materials or to reduce
cost by limiting the use of colorant to the single exterior layer. PCI's
Conolene/TM/ brand of HDPE container is a two-layer container; the inner layer
has been exposed to fluorine/nitrogen gas which makes the container suitable for
storing insecticides and chemicals which would otherwise cause a standard HDPE
container to disintegrate. PP containers are typically utilized for food
products, such as maple syrup, ketchup, salad dressing and salsa. PP containers
are usually either single layer non-barrier containers or multi-layer containers
which include a barrier layer.
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PCI's Lamicon/TM/ brand of HDPE and PP container consists of six layers,
including a barrier layer of ethyl vinyl alcohol which renders the container
oxygen-tight and makes it suitable for use for food products which are subject
to spoiling or deterioration if exposed to oxygen.
PRODUCT MARKETS
Plastic containers manufactured by PCI are utilized for four main product
categories. PCI's sales volume for 1996 in each of these product categories is
as follows:
<TABLE>
<CAPTION>
Sales Sales
volume volume
(in millions) percentage
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<S> <C> <C>
Food and juice............ $100.5 37.5%
Household chemicals....... 70.9 26.5
Automotive and motor oil.. 65.1 24.3
Other..................... 31.3 11.7
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Total................. $267.8 100.0%
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</TABLE>
FOOD AND JUICE
The food and juice products for which PCI manufactures containers include
ketchup, maple syrup, edible oil, salsa and fruit juices. Certain of these
products (such as ketchup and salsa) require containers which include an oxygen
resistant barrier layer to prevent spoiling or deterioration. PCI's food and
juice products containers are approximately 62% single layer non-barrier
containers and 38% multi-layer containers with a barrier layer. Because of the
technical requirements involved in barrier packaging for food and juice, this
market is generally characterized by fewer competitors and higher margins than
PCI's other principal product markets.
The packaged food industry has been slow to convert to plastic containers due
to technical requirements relating to product quality, shelf-life and product
handling, and plastic containers currently comprise only a small percentage of
the food container market. However, multi-layer plastic containers are
increasingly accepted for many food products, and management believes that the
food product market presents a substantial opportunity for future sales of
plastic containers. PCI's strategy for the food and juice market is to work
with customers to convert them to plastic containers for products which are now
packaged in glass, metal, paper or multi-material containers.
HOUSEHOLD CHEMICALS
The Company's containers for household chemicals consist almost entirely of
HDPE containers for laundry detergent, dishwashing liquid, bleach and fabric
softeners. PCI's strategy for the household chemicals market is to increase
market share by stressing technological advantages permitting the production of
more containers with custom features, and to lower production costs, thereby
allowing the Company to be price competitive. PCI markets specialized product
features such as in-mold labeling and "window stripe" bottles (with a see-
through stripe permitting visual measurement of the contents). In order to
reduce unit manufacturing costs, PCI employs dual parison production, a process
which allows up to four bottles to be made in a single mold, and automated
packing technology.
AUTOMOTIVE AND MOTOR OIL
Motor oil containers produced by PCI consist primarily of one-quart HDPE
bottles. Virtually all containers for automotive motor oil currently sold at
retail are plastic. As with the household chemicals market, PCI's strategy for
the automotive and motor oil market is to continue to increase its market share
through unit-cost advantages and by emphasizing product features such as "window
stripes" and in-mold labeling.
OTHER PRODUCTS
Hair Care. The Company manufactures containers for shampoos and conditioners
for Procter & Gamble. Management believes that such containers represent an
attractive opportunity for the Company to utilize its advanced production
techniques, as hair care product manufacturers typically have demanding
container specifications.
Industrial and Agricultural. Containers manufactured for use by industrial
and agricultural manufacturers consist of containers for insect repellents and
high strength cleaners packaged for commercial and industrial use. PCI's
corrosion resistant Conolene/TM/ containers are a leading product for this
market and PCI's marketing efforts stress the quality of containers produced
with PCI's proprietary Conolene/TM /technology.
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MANUFACTURING AND PRODUCTION PROCESS
PCI serves its customers through a network of 15 plants located in the
continental United States and one plant located in Puerto Rico. See
"Properties" below. In many cases, the Company's facilities are located
adjacent to or in close proximity to its largest customers' manufacturing
operations, thereby creating production and distribution efficiencies. Most of
PCI's products are shipped by common carrier to customers within a 250-300 mile
radius of a given production site.
Five of the Company's plants are dedicated to single customers with which PCI
has long-standing relationships. The plants have between 2 and 13 production
lines, and individual production lines within a plant are frequently dedicated
to a single customer. Of the 124 production lines operated by PCI, 78 are
currently dedicated to a particular customer's products. The dedication of
production lines is an important factor in obtaining long-term contracts. PCI's
plants (but not every production line within a plant) generally operate 24 hours
a day five days a week.
In the extrusion blow-molding production process, resin pellets are blended
with colorants or other necessary additives and fed into an extrusion machine,
which uses heat and pressure to form the resin into a round hollow tube of
molten plastic called a parison. Bottle molds mounted radially on a wheel
capture the parisons as they leave the extruder. Once inside the mold, air
pressure is used to blow the parison into the bottle shape of the mold. Over
60% of PCI's production lines are set up so that multiple extruders each deposit
a separate parison into a single mold, thus producing a multi-layered bottle.
In addition, over 60% of the production lines include in-mold labeling
equipment. The Company was among the first to develop and utilize a "wheel"
manufacturing technology. While certain of PCI's competitors also use wheel
technology in their production lines, PCI has developed a number of proprietary
improvements which management believes permit the Company's wheels to operate at
higher speeds and to manufacture more efficiently containers with one or more
special features, such as multiple layers and in-mold labeling.
Management believes that capital investment to maintain and upgrade property,
plant and equipment is important to remain competitive. Total capital
expenditures for 1994, 1995 and 1996 were approximately $15.0 million, $30.7
million and $21.2 million, respectively. Capital expenditure levels in both
1996 and 1995 were higher than normal due to the addition of the Company's
Atlanta facility in 1996 and plant expansions in several locations in 1995.
Management estimates that the minimum annual capital expenditure which would be
required to maintain PCI's current facilities averages approximately $5.0
million.
SOURCES AND AVAILABILITY OF RAW MATERIALS
All of the raw materials PCI uses have historically been available in
adequate supply from multiple sources. PCI's principal raw materials are HDPE
and PP resins, which are delivered to PCI in pellet form. During periods of
tighter supply, PCI has been able to procure sufficient quantities of resins to
supply all of its customers' needs. PCI's dollar gross profit is substantially
unaffected by fluctuations in resin prices because industry practice and PCI's
contractual arrangements with its customers permit changes in resin prices to be
passed through to customers by means of corresponding changes in product
pricing.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering constitute an important part of PCI's
activities, both for development of new products and product enhancements and
for development of manufacturing technology. These efforts are undertaken by
approximately 80 Company employees principally at PCI's technical center located
in Elk Grove, Illinois. While PCI to a limited extent engages the services of
outside research and development consulting firms to assist on specific
projects, it develops the vast majority of its technical expertise internally.
Research, development and engineering expenditures were approximately $8.1
million, $8.8 million and $9.0 million for 1996, 1995 and 1994, respectively.
Management believes that continuing product and manufacturing innovations are of
major importance to meeting customers' needs and lowering unit costs, thereby
permitting the Company to remain competitive in the plastic container market.
PCI has a large number of patents which relate to a variety of products and
processes, has pending a number of patent applications, and is licensed under
several patents owned by others. Management does not consider any patent
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or group of patents relating to any particular product or process to be of
material importance to its business as a whole.
COMPETITION
PCI faces substantial competition throughout its product lines from a number
of well-established businesses operating nationally, and in certain limited
circumstances, from firms operating regionally. In most instances regional
competitors lack the technological capabilities to service national consumer
product companies. PCI's primary national competitors are Owens-Brockway (a
subsidiary of Owens-Illinois, Inc.), Graham Container Corporation, Plastipak,
Inc. and American National Can, Inc. Management believes that PCI's long-term
success is largely dependent on its ability to continue to develop product
innovations and improve its production technology and expertise through its
applied research and development capability. Other important competitive
factors are rapid delivery of products, production quality, and price.
MARKETING AND DISTRIBUTION
Substantially all of PCI's sales are made through the direct efforts of its
approximately 16 sales personnel. Sales activities are conducted from PCI's
corporate headquarters in Norwalk, Connecticut and from field sales offices
located in Houston, Texas; Cincinnati, Ohio; Elk Grove, Illinois; Santa Ana,
California; Fort Smith, Arkansas; Fairfield, California; and Lakeland, Florida.
PCI's products are typically delivered to its customers by truck, at the
expense of the customer. Deliveries are generally made on a daily basis to
comply with its customers' "just-in-time" delivery requirements.
EMPLOYEES
The Company employed approximately 1,800 persons at December 31, 1996. A
majority of these employees are hourly workers covered by collective bargaining
agreements. PCI has not had any material labor disputes in the past five years
and considers its employee relations to be good.
In the fall of 1996, the Company entered into negotiations with the union
representing certain of the employees at its Lakeland, Florida production
facility with respect to wages and benefits. In November 1996, the Company
experienced a three-day strike at this facility, which did not disrupt or delay
the shipment of containers to customers. The union agreed that there would be
no further strikes or work stoppages prior to January 17, 1997. On that date,
the Company entered into a new three-year agreement with the union.
ENVIRONMENTAL MATTERS
PCI's operations, in common with those of the industry generally, are subject
to numerous existing and proposed laws and governmental regulations designed to
protect the environment, particularly regarding plant wastes and emissions and
solid waste disposal. Although compliance with environmental laws and
regulations requires ongoing expenditures and remediation activities, capital
expenditures for property, plant and equipment for environmental control
activities and other expenditures for compliance with environmental laws and
regulations were not material in 1996 and are not expected to be material in
1997. Management believes that PCI is in material compliance with all federal,
state and local environmental laws and regulations and is currently not engaged
in any remediation activities required by governmental regulatory authorities.
A number of states and the federal government have considered or are expected
to consider legislation mandating certain rates of recycling and/or the use of
recycled materials. Some consumer products companies (including certain
customers of PCI), have responded to these governmental initiatives and to
perceived environmental concerns of consumers by using bottles made in whole or
in part of recycled plastic. Approximately 17% of the Company's resin needs for
HDPE containers are currently supplied from recycled containers.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
PCI has no foreign sales, operating income or identifiable assets. Financial
information relating to the Company's domestic sales, operating profit and
identifiable assets is included in Item 8 of this report.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS (DOLLARS IN THOUSANDS)
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RESULTS OF OPERATIONS
1996 COMPARED WITH 1995
Net Sales. Net sales in 1996 decreased $9,268 (3.3%) to $267,793, compared
to 1995 net sales of $277,061. The decrease in sales was the result of lower
raw material costs that were passed on to customers in the form of lower prices.
Lower resin prices accounted for lower sales of approximately $9,400 in 1996
compared to 1995. Total unit volume for 1996 increased 5.1% compared to 1995;
however, this increase did not have a significant impact on total sales due to
changes in product mix. The increase in total unit volume was the result of a
unit volume increase in automotive and motor oil containers of 26.4%, offset by
unit volume decreases in household chemical containers and food and juice
containers of 3.0% and 3.5%, respectively. Automotive and motor oil containers
are generally smaller and lower priced than household chemical or food and juice
containers.
Gross Profit. Gross profit in 1996 was $43,004, an increase of $3,611 (9.2%)
over gross profit of $39,393 in 1995. The increase in gross profit in 1996
resulted primarily from productivity improvements and increased efficiencies,
leading to a reduction in manufacturing costs. Higher than normal manufacturing
costs were incurred in 1995 due to start-up expenses and inefficiencies
associated with a large number of capital projects that took place during the
first nine months of 1995. These projects impacted performance at the majority
of PCI's manufacturing locations. PCI had been awarded contracts with a number
of its major customers that required new installations and changes to many of
its existing lines. These awards were a result of PCI's successful sales and
marketing efforts to increase volume, but unfortunately all occurred during a
relatively short period of time. Technical and engineering resources were not
available to simultaneously handle all of the installations. Abnormal levels of
installation-related expenses for hiring and training hundreds of new employees
and the resulting learning curve costs and general inefficiencies continued
through the last six months of 1995. The assimilation of the new product lines
was substantially completed by the end of 1995. This, coupled with a number of
other productivity enhancements implemented during 1996, resulted in the
significant year-to-year improvement.
Gross profit as a percentage of net sales was 16.1% in 1996 compared to 14.2%
in 1995. The increase in gross profit percentage was the result of the decrease
in sales associated with lower resin prices as well as the reduction in
manufacturing costs. Excluding the impact of lower resin prices on sales, gross
profit percentage in 1996 would have been 15.5%.
SG&A. Selling, general and administrative (SG&A) expense in 1996 decreased
$1,230 (4.1%) to $28,829, compared to $30,059 in 1995. The decrease reflects
higher levels of spending in 1995 to support an increase in new business as well
as the Company's efforts in 1996 to reduce SG&A expense in several areas. SG&A
expense as a percentage of net sales was 10.8% in both 1996 and 1995, reflecting
a decrease in sales resulting from lower material costs, offset by lower SG&A
expense in 1996. Excluding the impact of lower resin prices on sales, SG&A as a
percentage of net sales in 1996 would have been 10.4%.
Plant Rationalization and Realignment. During 1996, PCI recorded charges
amounting to $6,500 for plant rationalization and realignment in connection with
plans to consolidate certain manufacturing operations. The Company closed one
plant in 1996 and another plant in March 1997. Production from these plants is
being transferred to other existing facilities. The components of the $6,500
charge include approximately $1,400 for employee severance costs, approximately
$1,600 for an impairment loss related to fixed assets, and approximately $3,500
for noncancellable lease obligations and related facility closing costs. The
Company also expects to incur expenses of approximately $500 through the first
half of 1997 for employee relocation costs and other incremental costs of
transferring production to continuing plants. These costs will be expensed as
they occur. The consolidations are expected to result in higher equipment
utilization, improved productivity and lower operating costs.
Other Expense. Other expense in 1996 was $13,150, an increase of $1,218
(10.2%) compared to $11,932 in 1995. This increase resulted primarily from an
increase in interest expense due to additional short-term borrowings outstanding
during 1996.
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Income Tax Benefit. Income tax benefit was $1,876 in 1996 compared to $2,505
in 1995. For further discussion of the Company's accounting for income taxes,
see "Utilization of Net Operating Loss Carryforwards" below.
Extraordinary Loss. The Company incurred an extraordinary loss in the fourth
quarter of 1996 of $7,305 related to the purchase and redemption of the 10 3/4%
Notes. The loss consists of the premium paid to purchase the notes and the
write-off of the related unamortized deferred financing fees.
Net Loss. Net loss in 1996 was $10,904, compared to a net loss of $225 in
1995. The loss in 1996 was the result of the charges for plant rationalization
and realignment and the extraordinary loss, which combined to negatively impact
net income by $11,578.
1995 COMPARED WITH 1994
Net Sales. Net Sales in 1995 increased $46,581 (20.2%) to $277,061, compared
to 1994 net sales of $230,480. Sales growth was due in part to increases in
unit volume of 10.2% in 1995 compared to 1994. Increases in unit volumes were
experienced in most of the Company's markets, including a 10.3% increase in
household chemical containers, a 9.2% increase in food and juice containers, a
4.6% increase in automotive and motor oil containers, and a 93.1% increase in
hair care containers. Additional sales growth is due to increases in raw
material costs that are passed on to customers in the form of higher prices.
Higher resin prices accounted for approximately $23,000, or 10.0%, of sales
growth in 1995.
Gross Profit. Gross profit increased $1,493 (3.9%) to $39,393 in 1995,
compared to $37,900 in 1994. Gross profit as a percentage of sales was 14.2% in
1995 compared to 16.4% in 1994. The decrease in gross profit percentage was due
in part to increased revenues associated with higher resin prices. As discussed
above, additional revenues attributed to increases in resin prices are a direct
pass through of raw material cost increases to customers and do not result in a
corresponding increase in gross profit dollars. Excluding the impact of higher
resin prices, the gross profit percentage for 1995 would have been 15.5%.
Contributing to the lower gross profit percentage in 1995 was also an increase
in manufacturing costs. Manufacturing costs increased as a percentage of sales
in 1995 due to inefficiencies experienced in incorporating additional sales
volume in certain plants. The increased volume required installation of
additional lines at these plants, resulting in substantial amounts of
installation-related expenses. These expenses were incurred primarily in the
third quarter of 1995 and by the fourth quarter manufacturing expense as a
percentage of sales had returned to a level comparable to 1994.
SG&A. SG&A expenses increased $1,579 (5.5%) to $30,059 in 1995, compared to
$28,480 in 1994. Travel, hiring, and other related expenses increased in 1995
to support the additional sales volume and plant expansion activity. Expenses
for professional services also increased approximately $600 in 1995. SG&A
expense as a percent of sales was 10.8% in 1995 compared to 12.4% in 1994. The
decline in the percentage was due to the increase in sales and the relatively
fixed nature of a majority of these expenses.
Operating Income. Operating income increased $867 (10.1%) to $9,432 in 1995,
compared to $8,565 in 1994. This increase resulted from the excess of
additional gross profit dollars generated from the increased sales over the
increase in SG&A costs. Operating income as a percentage of sales was 3.4% in
1995 compared to 3.7% in 1994. Excluding the effect of higher resin prices on
sales, operating income as a percentage of sales would have been 3.7% in 1995.
Other Income/Expenses. Other income/expenses remained stable in 1995
compared to 1994. A decrease in interest expense related to the retirement of
$5,300 principal amount of the 10 3/4% Notes in 1994, was offset by an increase
in interest expense from a higher average outstanding balance on the Revolving
Credit Facility during 1995.
Income Taxes. Income tax benefit was $2,500 in 1995 compared to $1,631 in
1994. For further discussion of the Company's accounting for income taxes, see
"Utilization of Net Operating Loss Carryforwards" below.
Extraordinary Loss. PCI incurred an extraordinary loss in 1995 related to
the early extinguishment of a revolving credit facility. The loss resulted from
the write-off of remaining deferred financing fees associated with the facility.
10
<PAGE>
Net Loss. Net loss was $225 in 1995 compared to $2,525 in 1994. This
improvement resulted primarily from the increase in operating income and tax
benefit in 1995. Net loss in 1994 was also impacted by a charge of $525 related
to an accounting change.
CAPITAL REQUIREMENTS
PCI acquired $21,240 in capital assets in 1996, compared to $30,693 in 1995.
Substantially all of the assets acquired were packaging equipment for the
manufacture of plastic containers or related support equipment. Capital
expenditure levels in both 1996 and 1995 were higher than normal due to the
addition of the Company's Atlanta facility in 1996 and plant expansions in
several locations in 1995. In contrast, capital expenditures in 1994 were
$14,989. Capital expenditures in 1997 are expected to be at a level consistent
with 1994.
The capital requirements in 1996 were met with cash generated from
operations, from existing funds and from borrowings under existing credit
facilities. It is anticipated that capital expenditures in 1997 will be funded
in the same manner.
LIQUIDITY
The Company's primary sources of liquidity are provided through the Revolving
Credit Facility of $50,000 and cash flow from operations. At December 31, 1996
and March 17, 1997, the Company had no borrowings outstanding under the
Revolving Credit Facility and had invested cash and cash equivalents of
approximately $12,000 and $20,000, respectively. The increase in cash and cash
equivalents is the result of cash generated from operations and reduced levels
of capital spending.
The Revolving Credit Facility has a term of seven years expiring October 31,
2002. Interest is based on the bank's prime rate or LIBOR, at the Company's
option. At December 31, 1996 and March 17, 1997, the Company had undrawn
availability under the Revolving Credit Facility of approximately $30,600 and
$30,300, respectively.
During the fourth quarter of 1996, the Company engaged in the Refinancing. A
portion of the net proceeds from the Refinancing were used to make a $30,000
loan to Continental Can. The loan was used by Continental Can to purchase 34
of the 50 PCI shares owned by Merrywood, increasing Continental Can's ownership
of PCI shares to 84%. See Item 12 of this report. There is no obligation on
the part of PCI to loan any additional funds to Continental Can, including funds
necessary for Continental Can to purchase the remaining 16% interest in the
Company on or before December 31, 2000. In addition to providing funds to make
the Continental Can Loan, the Refinancing enabled the Company to reduce
borrowing costs and improve liquidity.
During the second quarter of 1996, tax-exempt industrial development revenue
bonds of $5,100 were issued on behalf of the Company to finance equipment
purchases in conjunction with the opening of a new manufacturing facility.
Under a capital lease arrangement, principal and interest at 5.80% is payable
monthly through April 2002.
The Company's working capital was $25,302 at December 31, 1996, compared to
$244 at December 31, 1995. The increase in working capital is the result of
improved cash flows from operations, a reduction in the level of capital
spending and net proceeds from the Refinancing. Cash generated by these
activities allowed the Company to eliminate borrowings under the Revolving
Credit Facility and provided excess cash that is available for working capital
and other purposes. Cash flows from operations in 1995 were negatively impacted
as a result of a one-time pension contribution of $10,000.
Management believes the funding expected to be generated from operations and
provided by existing credit facilities will be sufficient to service its
indebtedness (including the Senior Secured Notes) and meet the Company's working
capital and capital investment needs for the foreseeable future.
11
<PAGE>
UTILIZATION OF NET OPERATING LOSS CARRYFORWARDS
PCI accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires, among other things, recognition of future tax benefits, measured
by enacted tax rates, attributable to deductible temporary differences between
financial statement and income tax bases of assets and liabilities and to tax
net operating loss carryforwards ("NOLs"), to the extent that realization of
such benefits is more likely than not.
At December 31, 1996, PCI had NOLs totaling approximately $50,000, which
expire between 2007 and 2010. These NOLs were generated primarily from increased
depreciation, amortization and interest related to the Acquisition. Prior to the
Acquisition, the Continental Plastic Container Companies were consistently
profitable. Noncompete agreements related to the Acquisition with annual
amortization of approximately $3,000 became fully amortized in 1996. In
addition, certain fixed assets will also become fully depreciated within the
next two years. In assessing the utilization of the NOLs, management projects
future taxable income over the periods in which the NOLs can be utilized,
considers the scheduled reversal of deferred tax liabilities, and also considers
tax planning strategies that are available to the Company. Based upon this
assessment, management believes it is more likely than not the Company will
utilize at least $29,500 of the NOLs prior to their ultimate expiration in the
year 2010.
INFLATION AND CHANGING PRICES
PCI's sales and costs are subject to inflation and price fluctuations.
However, since changes in the cost of plastic resin, PCI's principal raw
material, are passed through to customers, such changes have equal and
offsetting effects on sales and cost of goods sold and therefore, have no
material effect on PCI's earnings and cash flow; such changes can have a
substantial impact on PCI's sales.
12
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,178 1,428
Investment securities 1,210 285
Accounts receivable (note 7):
Trade 27,549 30,463
Other 1,691 4,107
-------- --------
29,240 34,570
Less allowance for doubtful accounts and accrued rebates 1,538 1,502
-------- --------
Net accounts receivable 27,702 33,068
-------- --------
Inventories (notes 4 and 7) 19,402 19,987
Deferred income taxes (note 12) 3,515 2,152
Prepaid expenses 546 804
-------- --------
Total current assets 64,553 57,724
-------- --------
Property, plant and equipment (note 7):
Land, building and building improvements 22,634 20,430
Manufacturing machinery and equipment 142,107 186,398
Construction in progress 6,884 18,322
-------- --------
171,625 225,150
Less accumulated depreciation and amortization 69,380 83,936
-------- --------
Net property, plant and equipment 102,245 141,214
-------- --------
Goodwill and other intangible assets (note 5) 27,078 9,976
Other assets (note 6) 11,774 10,698
-------- --------
$205,650 219,612
======== ========
Liabilities and Stockholders' Equity
-----------------------------------
Current liabilities:
Notes payable to bank (note 7) - $ 17,018
Accounts payable - trade 19,267 24,898
Current portion of long-term obligations (note 9) 980 141
Other current liabilities (note 8) 19,004 15,423
-------- --------
Total current liabilities 39,251 57,480
Long-term obligations, excluding current portion (note 9) 129,002 105,212
Other liabilities (note 11) 23,183 19,450
Stockholders' equity:
Common stock, $l par value. Authorized 1,000
shares; 100 shares issued and outstanding - -
Additional paid-in capital 77,722 60,000
Deficit (33,434) (22,530)
-------- --------
44,288 37,470
Less note receivable from stockholder (note 2) 30,074 -
-------- --------
Total stockholders' equity 14,214 37,470
-------- --------
Commitments and contingencies (notes 7, 10, 13 and 17)
-------- --------
$205,650 219,612
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales (note 14) $267,793 277,061 230,480
Cost of goods sold 224,789 237,668 192,580
-------- ------- -------
Gross profit 43,004 39,393 37,900
Selling, general and administrative expenses (28,829) (30,059) (28,480)
Plant rationalization and realignment (note 3) (6,500) 98 (855)
-------- ------- -------
Operating income 7,675 9,432 8,565
-------- ------- -------
Other income (expenses):
Interest income 102 221 202
Interest expense (12,886) (11,807) (11,831)
Loss on disposal of assets (366) (346) (350)
-------- ------- -------
(13,150) (11,932) (11,979)
-------- ------- -------
Loss before income taxes, extraordinary item
and cumulative effect of accounting change (5,475) (2,500) (3,414)
Income tax benefit (note 12) 1,876 2,505 1,631
-------- ------- -------
Income (loss) before extraordinary item and
cumulative effect of accounting change (3,599) 5 (1,783)
Extraordinary item - loss on early
extinguishment of debt (notes 2 and 16) (7,305) (230) (217)
-------- ------- -------
Loss before cumulative effect of
accounting change (10,904) (225) (2,000)
Cumulative effect of accounting change (note 13) - - (525)
-------- ------- -------
Net loss $(10,904) (225) (2,525)
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE-YEAR PERIOD ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Plastic
Containers, Note
Inc. Additional receivable Total
common paid-in from stockholders'
stock capital Deficit stockholder equity
----- ------- ------- ----------- ------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 - $60,000 (19,780) - 40,220
Net loss - - (2,525) - (2,525)
----- ------- ------- ----------- -------
Balances at December 31, 1994 - 60,000 (22,305) - 37,695
Net loss - - (225) - (225)
----- ------- ------- ----------- -------
Balances at December 31, 1995 - 60,000 (22,530) - 37,470
Push-down accounting adjustment (note 2) - 17,648 - - 17,648
Loan to stockholder (note 2) - - - (30,000) (30,000)
Accrued interest on note receivable
from stockholder (note 2) - 74 - (74) -
Net loss - - (10,904) - (10,904)
----- ------- ------- ----------- -------
Balances at December 31, 1996 - $77,722 (33,434) (30,074) 14,214
===== ======= ======= =========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (10,904) (225) (2,525)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 21,309 24,033 25,057
Loss on disposal of assets 366 346 350
Deferred income taxes (1,896) (2,732) (1,764)
Extraordinary item - loss on early
extinguishment of debt 7,305 230 217
Changes in assets and liabilities:
Accounts receivable, net 5,366 1,114 (8,153)
Inventories 585 3,474 (6,228)
Prepaid expenses 258 667 (761)
Other assets (725) (463) (207)
Pension asset/liability 182 (11,377) (2,740)
Accounts payable (3,725) (426) 10,313
Other current liabilities 3,581 (1,678) 2,419
Other liabilities 2,844 (468) 1,614
--------- ------- -------
Net cash provided by operating activities 24,546 12,495 17,592
--------- ------- -------
Cash flows from investing activities:
Proceeds from maturity of investment securities 75 7 25
Purchase of investment securities (1,000) - -
Proceeds from disposal of assets 41,654 341 66
Purchase of property, plant and equipment (21,240) (30,693) (14,989)
Loan to stockholder (30,000) - -
--------- ------- -------
Net cash used in investing activities (10,511) (30,345) (14,898)
--------- ------- -------
Cash flows from financing activities:
Net borrowings (repayments) on notes payable to bank (17,018) 17,018 -
Proceeds from long-term obligations 130,100 - -
Repayment of long-term obligations (105,471) (130) (5,480)
Premium on repurchase of bonds (5,382) - -
Financing fees paid (5,514) (355) -
--------- ------- -------
Net cash provided by (used in) financing activities (3,285) 16,533 (5,480)
--------- ------- -------
Net increase (decrease) in cash and cash equivalents 10,750 (1,317) (2,786)
Cash and cash equivalents - beginning 1,428 2,745 5,531
--------- ------- -------
Cash and cash equivalents - ending $ 12,178 1,428 2,745
========= ======= =======
Supplemental disclosures of cash flow information:
Interest paid $ 15,240 11,683 11,977
Income taxes paid 20 210 36
========= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1996
(IN THOUSANDS)
(1) Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
ORGANIZATION AND BASIS OF PRESENTATION
The accompanying financial statements include Plastic Containers, Inc. and
its wholly-owned subsidiaries, Continental Plastic Containers, Inc. ("CPC")
and Continental Caribbean Containers, Inc. ("Caribbean"), on a consolidated
basis. All significant intercompany transactions have been eliminated in the
consolidated financial statements. The consolidated entities are referred to
as Plastic Containers, Inc. ("PCI" or "the Company") in the notes to
consolidated financial statements. References to the "Continental Plastic
Container Companies" refer jointly to the Company's subsidiaries.
Separate financial statements of CPC accompany these consolidated financial
statements, since the issued and outstanding stock of CPC, which is pledged
as security for the Company's 10% Notes (see note 9), constitutes a
substantial portion of the collateral for the 10% Notes. Separate financial
statements of Caribbean are not included herewith because (i) the issued and
outstanding stock of Caribbean, which is also pledged as security for the
Company's 10% Notes, does not constitute a substantial portion of the
collateral for the 10% Notes, and (ii) management has determined that
separate financial statements of Caribbean are not material to investors.
CPC and Caribbean constitute all of PCI's direct and indirect subsidiaries
and have fully and unconditionally guaranteed the 10% Notes on a joint and
several basis. PCI is a holding company with no assets, operations or cash
flow separate from its investments in CPC and Caribbean.
PCI develops, manufactures and markets a wide range of custom extrusion
blow-molded plastic containers for food and juice, automotive products and
motor oil, household chemicals, industrial and agricultural chemicals and
hair care products.
PCI is a subsidiary of Continental Can Company, Inc. ("Continental Can").
CASH EQUIVALENTS
Marketable securities that are highly liquid and have maturities of three
months or less at date of purchase are classified as cash equivalents.
INVESTMENT SECURITIES
Investment securities at December 31, 1996 consist of held-to-maturity
government agency securities and certificates of deposit. Investment
securities are stated at amortized cost, which approximates market value.
(Continued)
17
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1),Continued
INVENTORIES
CPC's manufacturing inventories are stated at cost using the last-in, first-
out (LIFO) method, which is not in excess of market. All repair parts,
supplies inventories and Caribbean's inventories are stated at the lower of
cost, applied on the first-in, first-out (FIFO) method, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed
principally on a straight-line basis over estimated useful lives of the
assets which range from three to thirty-five years. Plant and equipment held
under capital leases and leasehold improvements are amortized straight-line
over the shorter of the lease term or estimated useful life of the asset.
INSURANCE
PCI purchases commercial insurance policies, but remains self-insured in
certain states for the purposes of providing workers' compensation, general
liability and property and casualty insurance coverages up to varying
deductible amounts. Self-insurance liabilities are based on claims filed and
estimates for claims incurred but not reported and are included in other
liabilities on the consolidated balance sheets. Costs charged to operations
for self-insurance for the years ended December 31, 1996, 1995 and 1994 were
$2,629, $2,200 and $2,066, respectively.
RESEARCH, DEVELOPMENT AND ENGINEERING
Expenditures for research, development and engineering are expensed as
incurred. Costs charged to operations for research, development and
engineering for the years ended December 31, 1996, 1995 and 1994 were
$8,059, $8,777 and $9,013, respectively.
GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
Goodwill and other identifiable intangible assets are stated on the basis of
cost. Goodwill is being amortized on a straight-line basis over 40 years.
Customer contracts are being amortized on a straight-line basis over 10
years. Additionally, finance costs are being amortized using the effective
interest method over periods ranging from 6 to 10 years.
(Continued)
18
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1),Continued
IMPAIRMENT OF GOODWILL, LONG-LIVED ASSETS AND CERTAIN IDENTIFIABLE
INTANGIBLE ASSETS
PCI assesses the recoverability of goodwill by determining whether the
amortization of the balance over its remaining life can be recovered through
undiscounted future operating cash flows of the Company's operations.
Impairment of goodwill, if any, is measured based on projected discounted
future operating cash flow.
Long-lived assets and certain identifiable intangible assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Although these
estimates are based on management's knowledge of current events and actions
it may undertake in the future, they may ultimately differ from actual
results.
RECLASSIFICATIONS
Certain amounts have been reclassified to conform to the current year's
presentation.
(Continued)
19
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Refinancing
-----------
During the fourth quarter of 1996, the Company engaged in a series of
related transactions, comprised of (a) a new offering of Senior Secured
Notes, (b) the purchase and redemption of existing Senior Secured Notes, (c)
a sale/leaseback financing, and (d) a loan to Continental Can, as part of a
refinancing plan.
. NEW OFFERING OF SENIOR SECURED NOTES
On December 17, 1996, the Company completed an offering of 10% Senior
Secured Notes ("10% Notes") in an aggregate principal amount of
$125,000. The 10% Notes mature on December 15, 2006.
. PURCHASE AND REDEMPTION OF EXISTING SENIOR SECURED NOTES
On October 24, 1996, the Company commenced a tender offer to purchase
any or all, but not less than two-thirds in aggregate principal amount,
of its $104.7 million aggregate principal amount of outstanding 10.75%
Senior Secured Notes ("10.75% Notes"). The tender offer, which expired
on December 9, 1996, included the solicitation of consents to a proposed
amendment to the discharge provisions of the indenture relating to the
10.75% Notes. The Company received tenders and consents representing
$101.7 million of the aggregate principal amount of the outstanding
10.75% Notes.
Since the Company purchased less than 100% of the outstanding 10.75%
Notes pursuant to the tender offer, on December 17, 1996, the Company
effected a discharge of its obligations under the 10.75% Note indenture.
Concurrently with and as part of the discharge, the Company deposited
with the trustee under the 10.75% Note indenture cash sufficient to
effect the redemption, on April 1, 1997, of all the 10.75% Notes not
purchased pursuant to the tender offer, at a redemption price of 100% of
the principal amount, together with accrued and unpaid interest to such
date.
The purchase and redemption of existing Senior Secured Notes resulted in
an extraordinary loss of $7,305, representing the premium paid to
purchase the notes and the write-off of the related unamortized deferred
financing fees.
(Continued)
20
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2), Continued
. SALE/LEASEBACK FINANCING
On December 17, 1996, CPC completed a sale to General Electric Capital
Corporation and certain other financial institutions, and the
leaseback to CPC, of certain equipment located in five of its
facilities. The proceeds to the Company from the sale/leaseback were
$40,566, which approximated the book value of the equipment. The terms
of the leases range from 88 months to 109 months, subject to options
of CPC to repurchase the equipment after 78 months and 83 months at a
pre-established fair market value.
. LOAN TO CONTINENTAL CAN
On December 17, 1996, the Company loaned Continental Can $30,000. The
loan matures June 15, 2007 and accrues interest, payable at maturity,
at an annual rate of 6.9%, compounded semiannually. The loan
receivable and accrued interest thereon have been presented as a
reduction of stockholders' equity.
Proceeds from the loan were used by Continental Can to acquire an
additional 34 shares of the Company's common stock from another
stockholder. The acquisition increased Continental Can's ownership to
84% of the Company's outstanding common stock. The acquisition was
accounted for by Continental Can under the purchase method of
accounting. The acquisition of a controlling interest in PCI by
Continental Can resulted in the "push down" of goodwill and additional
paid-in capital of $17,648 in the accompanying consolidated financial
statements of PCI.
(3) Plant Rationalization and Realignment
-------------------------------------
In the third and fourth quarters of 1996, PCI recorded charges amounting to
$6,500 for plant rationalization and realignment in connection with a plan
to consolidate certain manufacturing operations. The Company closed one
plant in 1996 and will close another plant by the end of the first quarter
of 1997. Production from these plants will be transferred to other existing
facilities. The components of the $6,500 charge include approximately $1,400
for employee severance costs, approximately $1,600 for an impairment loss
related to fixed assets, and approximately $3,500 for noncancellable lease
obligations and related facility closing costs. Employee severance costs
relate to approximately 185 employees, including production, supervisory and
administrative personnel located at the closing plants. The impairment loss
relates primarily to the write-off of the remaining value of leasehold
improvements and capitalized equipment installation costs. The Company
remains obligated under noncancellable operating leases at one plant through
August 1997 and at the other plant through June 1999. As of December 31,
1996, approximately 90 employees' employment had been terminated and
severance benefits paid were approximately $590. In addition,
(Continued)
21
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3), Continued
payments of approximately $714 had been made against other accrued charges
as of December 31, 1996. Included in other current liabilities in 1996 is
$4,096 representing the unpaid portion of severance benefits and other
accrued charges.
For the years ended December 31, 1995 and 1994, the Company recorded a
credit of $98 and a charge of $855, respectively, related to prior plant
consolidations.
(4) Inventories
-----------
Major classes of inventories at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Raw materials $10,327 8,992
Finished goods 11,331 10,866
------- ------
21,658 19,858
LIFO reserve (4,247) (2,025)
------- ------
17,411 17,833
Continental Caribbean Containers, Inc. 655 670
Repair parts and supplies 1,336 1,484
------- ------
$19,402 19,987
======= ======
</TABLE>
During 1996 and 1995, LIFO inventory layers were reduced. This reduction
resulted in charging lower inventory costs prevailing in previous years to
cost of goods sold in 1996 and 1995, thus reducing cost of goods sold by
approximately $80 and $700, respectively, below the amount that would have
resulted from liquidating inventory recorded at December 31, 1995 and 1994
prices.
(Continued)
22
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Intangible Assets
-----------------
Intangible assets at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Goodwill $17,648 -
Noncompete agreements - 15,000
Customer contracts 7,630 7,630
Financing and acquisition costs 5,861 6,058
------- ------
31,139 28,688
Less accumulated amortization 4,061 18,712
------- ------
$ 27,078 9,976
======= ======
</TABLE>
(6) Other Assets
------------
Other assets at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred income taxes $ 5,359 4,826
Prefunded pension asset 4,971 5,153
Other 1,444 719
------- ------
$11,774 10,698
======= ======
</TABLE>
(7) Notes Payable to Bank
---------------------
PCI has a $50,000 revolving credit facility with a commercial bank with
interest on individual borrowings based on the bank's prime rate or LIBOR,
at the Company's option. Borrowings are secured by accounts receivable and
inventories. At December 31, 1996, there were no borrowings outstanding
under this facility. The Company is required to pay an annual commitment
fee of 1/4% on the unused facility up to $25,000 and 1/2% on the unused
amount in excess of $25,000. Commitment fees for the years ended December
31, 1996 and 1995 were $104 and $23, respectively.
The facility contains certain restrictive covenants, including the
maintenance of minimum levels of net worth, fixed charge coverage and
interest coverage, limitations on capital expenditures and additional
indebtedness, and restrictions on the payment of dividends. At December 31,
1996, the Company was in compliance with these covenants.
The facility also provides for the issuance of letters of credit by the
bank on the Company's behalf. At December 31, 1996, letters of credit
amounting to $3,586 had been issued to guarantee obligations carried on the
consolidated balance sheet.
(Continued)
23
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Other Current Liabilities
-------------------------
Other current liabilities at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accrual for open credits $ 1,595 1,311
Employee compensation and benefits 6,711 5,928
Accrued interest 593 2,947
Accrued real estate and
personal property taxes 1,532 1,313
Plant rationalization reserve 4,096 500
Other 4,477 3,424
-------- -------
$ 19,004 15,423
======== =======
</TABLE>
(9) Long-term Obligations
---------------------
Long-term obligations at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Senior Secured Notes, due 2006, interest at 10%
("10% Notes"), payable semiannually on June 15 and
December 15 secured by all the issued and outstanding
stock of Continental Plastic Container Companies and
substantially all of the assets and properties owned
by PCI other than inventories, accounts receivable and
certain equipment securing capital lease obligations $125,000 -
Senior Secured Notes, due 2001, interest at 10.75%,
payable semiannually on April 1 and October 1,
redeemed December 17, 1996 - 104,700
Capital lease obligations 4,982 653
-------- -------
Total long-term obligations 129,982 105,353
Less current portion 980 141
-------- -------
Long-term obligations,
excluding current portion $129,002 105,212
======== =======
</TABLE>
(Continued)
24
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9),Continued
The 10% Notes are not redeemable by PCI prior to December 15, 2001. On or
after that date the notes are redeemable, in whole or in part, at the option
of PCI at an initial price of 105% of par declining ratably per annum, to
par on December 15, 2004.
In the event of a change of control as defined in the indenture, PCI is
obligated to offer to purchase all outstanding 10% Notes at a redemption
price of 101% of the principal amount thereof plus accrued interest. In
addition, PCI is obligated in certain instances to offer to purchase 10%
Notes at a redemption price of 100% of the principal amount thereof plus
accrued interest with the net cash proceeds of certain sales or dispositions
of assets.
The indenture places certain restrictions on payment of dividends,
additional liens, disposition of the proceeds from asset sales, sale-
leaseback transactions and additional borrowings. At December 31, 1996, PCI
was in compliance with these restrictions.
The Company is obligated under capital leases for a manufacturing facility
and certain machinery and equipment. The manufacturing facility has a cost
of $1,152 and accumulated amortization of $658 and $535 at December 31, 1996
and 1995, respectively. The facility lease agreement expires on December 31,
1999 and has an interest rate of 9.364%.
The equipment lease arrangement commenced on April 1, 1996 in connection
with the issuance of tax-exempt industrial development revenue bonds bearing
interest at 5.8%. Principal and interest are payable monthly through April
2002. The equipment has a cost of $5,100 and has accumulated depreciation of
$630 at December 31, 1996. Future minimum lease payments under the capital
leases are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1997 $1,268
1998 1,220
1999 1,172
2000 919
2001 and beyond 1,220
------
Total future minimum lease payments 5,799
Less portion representing interest 817
------
Net minimum lease payments $4,982
======
</TABLE>
(Continued)
25
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Leases
------
PCI rents certain property and equipment used in connection with its
operations. Rental expense under these operating leases was $8,054, $6,152
and $4,802 for the years ended December 31, 1996, 1995 and 1994,
respectively. Substantially all operating leases require PCI to pay taxes,
maintenance, insurance and certain operating expenses applicable to the
lease. The Company plans to renew or replace many of these leases as they
expire. PCI subleases a warehouse facility for $144 annually through June
1999.
Future minimum lease payments under noncancellable operating leases are as
follows:
Year ending
December 31,
------------
1997 $13,780
1998 12,189
1999 11,280
2000 10,798
2001 9,934
Thereafter 28,479
--------
Total future minimum lease payments $86,460
========
(11) Other Liabilities
-----------------
Other liabilities at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Insurance reserves $ 9,638 8,956
Postretirement benefits accrued 6,298 5,972
Other 7,247 4,522
------- --------
$23,183 19,450
======= ========
</TABLE>
(12) Income Taxes
------------
Total income tax benefit (expense) attributable to income from continuing
operations for the years ended December 31, 1996, 1995 and 1994 consists of
the following:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ------------------------ ------------------------
Federal State Total Federal State Total Federal State Total
------- ------ ------ -------- ------ ------ --------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current - $ (20) (20) (145) (82) (227) (145) 12 (133)
Deferred 1,746 150 1,896 2,569 163 2,732 1,559 205 1,764
------ ----- ----- ----- --- ----- --------- --- -----
$1,746 130 1,876 2,424 81 2,505 1,414 217 1,631
====== ===== ===== ===== === ===== ========= === =====
</TABLE>
(Continued)
26
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12), Continued
The income tax benefit for the years ended December 31, 1996, 1995 and
1994 differed from the "expected" income tax benefit computed by applying
the Federal income tax rate to loss before income taxes, extraordinary
item and cumulative effect of accounting changes as a result of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed "expected" income tax benefit $1,862 850 1,161
Increase (reduction) in benefit resulting from:
Change in valuation allowance allocated to
continuing operations (243) 1,303 (80)
State and local income taxes, net of
Federal income tax benefit 86 53 143
Other 171 299 407
------ ----- -----
Income tax benefit $1,876 2,505 1,631
====== ===== =====
</TABLE>
The significant components of deferred income tax benefit attributable to
loss from continuing operations for the years ended December 31, 1996,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Deferred tax benefit (expense) (exclusive of
the effects of other components listed below) $ 9,065 (4,168) 840
Increase (decrease) in operating loss carry forward (4,262) 5,087 859
Research and experimentation credits (23) 365 -
Alternative minimum tax credit carry forward (158) 145 145
Decrease (increase) in valuation allowance
for deferred tax assets (2,726) 1,303 (80)
----- ----- -----
$ 1,896 2,732 1,764
======= ====== =====
</TABLE>
(Continued)
27
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12), Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards $18,811 23,073
Vacation and incentive pay reserves 1,016 1,004
Self-insurance reserves 4,012 3,753
Plant rationalization reserve 2,437 463
Postretirement benefit reserves 2,602 2,472
Other 2,719 2,938
------- ------
Total gross deferred tax assets 31,597 33,703
Less valuation allowance 7,794 5,068
------- ------
Net deferred tax assets 23,803 28,635
------- ------
Deferred tax liabilities:
Book over tax basis of principally fixed assets 13,045 19,598
Prefunded pension 1,884 1,958
Other - 101
------- ------
Total gross deferred tax liabilities 14,929 21,657
------- ------
Net deferred tax assets $ 8,874 6,978
======= ======
Net deferred tax assets are classified in the accompanying consolidated balance sheets as fol lows:
1996 1995
------- ------
Current - deferred income taxes $ 3,515 2,152
Long-term - other assets 5,359 4,826
------- ------
$ 8,874 6,978
======= ======
</TABLE>
(Continued)
28
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12), Continued
The valuation allowance for deferred tax assets as of January 1, 1995 was
$6,371. The net change in the total valuation allowance for the years ended
December 31, 1996 and 1995 was an increase of $2,726 and a decrease of $1,303,
respectively. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers projected future taxable income, the
scheduled reversal of deferred tax liabilities and tax-planning strategies in
making this assessment. Based upon this assessment, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31, 1996.
At December 31, 1996, PCI has operating loss carry forwards for Federal income
tax purposes of approximately $50,000, which are available to offset future
Federal taxable income through 2010. In addition, the Company has alternative
minimum tax credit carry forwards of approximately $132 which are available to
reduce future Federal regular income taxes over an indefinite period and
research and experimentation credits of approximately $342 available to reduce
future Federal income taxes through 2010.
(13) Employee Benefits
-----------------
PENSION PLANS
PCI maintains a defined benefit pension plan for substantially all salaried
employees. Plan benefits are based on all years of continuous service and the
employee's compensation during the highest five continuous years of the last
ten years of employment, minus a profit-sharing annuity. The profit-sharing
annuity is based on the amount of profit-sharing contributions received for
1988 through 1992. Any employee who terminated employment prior to August 31,
1993 is governed by the terms of the plan in effect at the time the
termination occurred.
PCI maintains a noncontributory defined benefit pension plan for substantially
all hourly workers who have attained 21 years of age. Plan benefits are
variable by location/contract but are based primarily on years of service and
the employee's highest wage classification for twelve consecutive months in
the five years prior to retirement. "Normal" retirement is at age 65, with at
least five years of continuous service. However, employees may retire as
early as age 55 and receive reduced benefits.
Subject to the limitation on deductibility imposed by Federal income tax laws,
PCI's policy has been to contribute funds to the plans annually in amounts
required to maintain sufficient plan assets to provide for accrued benefits.
Plan assets are held in a master trust and are comprised primarily of common
stock, corporate bonds and U.S. Government and government agency obligations.
(Continued)
29
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13), Continued
PENSION PLANS, CONTINUED
The following table sets forth the plans' funded status at December 31, 1996
and 1995 based primarily on January 1, 1996 participant data and plan assets:
<TABLE>
<CAPTION>
1996 1995
------------------------------- ------------------
Salaried Hourly Total Salaried Hourly Total
---------- --------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value of benefit
obligation, including vested
benefits of $30,280 and $20,372
in 1996 and $29,078 and $18,644
in 1995 for the salaried and
hourly plans, respectively $(31,903) (22,595) (54,478) (30,921) (21,877) (52,798)
======== ======== ======= ======= ======= =======
Projected benefit obligation (PBO) (33,988) (22,594) (56,582) (33,110) (21,877) (54,987)
Plan assets, at fair value 34,285 24,613 58,898 31,082 22,068 53,150
Unrecognized net (gain) loss 3,056 (236) 2,820 5,206 1,926 7,132
Prior service cost not yet recognized
in net periodic pension cost (489) 324 (165) (556) 414 (142)
-------- -------- ------- ------- ------- -------
Prefunded pension asset $ 2,864 2,107 4,971 2,622 2,531 5,153
======== ======== ======= ======= ======= =======
Net periodic pension costs included the following components for
the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
------- ------- -------
Service cost $ 1,362 992 1,161
Interest cost 4,001 4,002 3,715
Return on plan assets (8,505) (6,292) 1,916
Net amortization and deferral 3,897 2,922 (5,613)
------- ------- -------
Net periodic pension costs $ 755 1,624 1,179
======= ======= =======
</TABLE>
PCI contributions to the plans for the years ended December 31, 1996, 1995 and
1994 were $573, $12,800 and $2,585, respectively.
Assumptions used in the accounting were:
<TABLE>
<CAPTION>
As of December 31,
---------------------
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Discount rates 7.75% 7.50% 9.00%
Rates of increase in compensation levels 5.00% 5.00% 5.00%
Expected long-term rate of return on assets 9.50% 9.50% 9.50%
</TABLE>
(Continued)
30
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13), Continued
RETIREMENT THRIFT PLAN
PCI maintains a defined contribution plan which covers substantially all
hourly employees who meet eligibility requirements. Provisions regarding
employee and employer contributions and the benefits provided under the plan
vary between PCI's manufacturing facilities. PCI's defined contribution
plan's expense was $303, $292 and $272 for the years ended December 31, 1996,
1995 and 1994, respectively.
SAVINGS PLAN
PCI maintains a contributory defined contribution 401(k) savings plan which
covers substantially all nonorganized salaried employees. Employees may
contribute up to 12% and 8% of pay on a pretax and after-tax basis,
respectively. However, the total employee contribution rate may not exceed
15% of pay. PCI matches up to 3% of employees' pretax contributions.
Employees vest in PCI's contributions at 25% per year, becoming fully vested
after four years of employment. Employees may make withdrawals from the plan
prior to attaining age 59-1/2, subject to certain penalties. PCI's savings
plan expense was $553, $518 and $450 for the years ended December 31, 1996,
1995 and 1994, respectively.
UNION BENEFIT PLANS
PCI contributes to various union pension plans pursuant to its labor
agreements. Union benefit plan expense was $1,083, $1,080 and $896 for the
years ended December 31, 1996, 1995 and 1994, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
PCI provides certain health care and life insurance benefits for retired PCI
employees. Certain of PCI's hourly and salaried employees became eligible for
these benefits when they became eligible for an immediate pension under a
formal company pension plan. In 1993, the plan was amended to eliminate
health care benefits for employees hired after January 1, 1993.
PCI's policy is to fund the cost of medical benefits in amounts determined at
the discretion of management. Summary information on PCI's plan at December
31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $2,895 3,449
Fully eligible, active plan participants 740 1,219
Other active plan participants 1,472 1,486
------ -----
5,107 6,154
Unrecognized net gain/(loss) from experience
and changes in assumptions 793 (614)
Prior service cost in net periodic postretirement benefit cost 398 432
------ -----
Accrued postretirement benefit obligation $6,298 5,972
====== =====
</TABLE>
(Continued)
31
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13), Continued
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, CONTINUED
The components of net periodic postretirement benefit cost at December 31,
1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ----- -----
<S> <C> <C> <C>
Service cost $ 87 52 73
Interest cost 447 480 431
Net amortization and deferral (34) (34) (57)
----- ---- ----
Net periodic postretirement benefit cost $ 500 498 447
===== ==== ====
</TABLE>
For measurement purposes, a 9.05% annual rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) was assumed for
1996; the rate was assumed to decrease gradually to 5.0% by the year 2001 and
remain at that level thereafter. The health care cost trend rate assumption
has a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year
would increase the accumulated postretirement benefit obligation as of
December 31, 1996 by $408 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the year ended
December 31, 1996 by $46.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% and 7.5% at December 31, 1996 and
1995, respectively.
POSTEMPLOYMENT BENEFITS
PCI provides certain postemployment benefits to former and inactive employees,
their beneficiaries and covered dependents. These benefits include disability
related benefits, continuation of health care benefits and life insurance
coverage.
In 1994, PCI adopted the provisions of the Financial Accounting Standards
Board's Statement No. 112, EMPLOYERS' ACCOUNTING FOR POSTEMPLOYMENT BENEFITS,
which requires employers to recognize the obligation to provide postemployment
benefits and an allocation of the cost of those benefits to the periods the
employees render service. The cumulative effect of this change in accounting
principle of $525 was determined as of January 1, 1994 and is reported
separately in the consolidated statement of operations for the year ended
December 31, 1994. Additional costs charged to operations for postemployment
benefits in 1996, 1995 and 1994 were $38, $24 and $29, respectively.
(Continued)
32
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Major Customers
---------------
Sales to one customer represented approximately 29%, 27% and 23% of net sales
for the years ended December 31, 1996, 1995 and 1994, respectively. Included
in accounts receivable are receivables from this customer of $8,564 and $6,947
at December 31, 1996 and 1995, respectively. A second customer represented
approximately 13%, 11% and 12% of net sales for each of the years ended
December 31, 1996, 1995 and 1994, respectively, and $4,339 and $4,293 of
receivables from this customer are included in accounts receivable at December
31, 1996 and 1995, respectively. A third customer represented approximately
10% of net sales for the year ended December 31, 1996 and $906 of receivables
from this customer are included in accounts receivable at December 31, 1996.
(15) Related Party Transactions
--------------------------
PCI is charged for certain services provided to it by Continental Can. These
costs amounted to $600, $600 and $490 for the years ended December 31, 1996,
1995 and 1994, respectively. At December 31, 1996 and 1995, the amount
payable to Continental Can for these costs was $26 and $352, respectively, and
is included in other current liabilities in the accompanying consolidated
balance sheets.
(16) Extraordinary Item
------------------
See note 2 for an explanation of the 1996 extraordinary item.
In 1995, PCI incurred an extraordinary loss of $230 related to the early
extinguishment of a revolving credit facility.
In 1994, PCI incurred an extraordinary loss of $217 related to the early
extinguishment of a portion of the 10.75% Notes.
(17) Contingencies
-------------
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management and legal counsel,
the ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial statements.
(Continued)
33
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Fair Value of Financial Instruments
-----------------------------------
Financial Accounting Standards Board's Statement No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, defines fair value of a financial instrument as
the amount at which the instrument could be exchanged in a current transaction
between willing parties. At December 31, 1996 and 1995, the carrying amount
approximates fair value for financial instruments included in the accompanying
consolidated balance sheets.
The carrying amounts of cash and cash equivalents, accounts receivable, notes
payable to bank, accounts payable - trade and other current liabilities
approximate fair value because of the short maturity of those instruments. The
fair value of investment securities are based on the quoted market prices at the
reporting date for those or similar investments. The fair value of long-term
debt is estimated based on rates currently offered to PCI for debt of the same
remaining maturities, as advised by PCI's bankers.
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
Plastic Containers, Inc.:
We have audited the accompanying consolidated balance sheets of Plastic
Containers, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
We also have audited the consolidated financial statement Schedule for the
three-year period ended December 31, 1996. These consolidated financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedule 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 financial position of Plastic Containers,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related consolidated financial statement
schedule, when considered in relation to the consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.
As discussed in Note 11 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 112, EMPLOYERS' ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS, in 1994.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
Omaha, Nebraska
February 7, 1997
35
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PLASTIC CONTAINERS, INC.)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
Assets 1996 1995
- ------------------------------------------------------------- ---------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,522 -
Investment securities 1,000 -
Accounts receivable (note 7):
Trade 26,882 30,078
Other 1,683 4,097
-------- --------
28,565 34,175
Less allowance for doubtful accounts and accrued rebates 1,536 1,502
-------- --------
Net accounts receivable 27,029 32,673
-------- --------
Inventories (notes 4 and 7) 18,727 19,317
Deferred income taxes (note 12) 3,515 2,152
Prepaid expenses 632 857
-------- --------
Total current assets 61,425 54,999
-------- --------
Property, plant and equipment (note 7):
Land, building and building improvements 20,712 18,508
Manufacturing machinery and equipment 137,884 182,426
Construction in progress 6,780 18,172
-------- --------
165,376 219,106
Less accumulated depreciation and amortization 66,598 81,469
-------- --------
Net property, plant and equipment 98,778 137,637
-------- --------
Goodwill and other intangible assets (note 5) 27,078 9,976
Other assets (note 6) 11,774 10,692
-------- --------
$199,055 213,304
======== ========
Liabilities and Stockholder's Equity
- -------------------------------------------------------------
Current liabilities:
Notes payable to bank (note 7) - $ 17,018
Accounts payable - trade 19,045 24,922
Current portion of long-term obligations (note 9) 980 141
Other current liabilities (note 8) 18,813 15,238
-------- --------
Total current liabilities 38,838 57,319
Long-term obligations, excluding current portion (note 9) 129,002 105,212
Other liabilities (note 11) 23,155 19,417
Stockholder's equity:
Common stock, $l par value. Authorized 25,000
shares; 10,000 shares issued and outstanding 10 10
Additional paid-in capital 71,114 53,392
Deficit (32,990) (22,046)
-------- --------
38,134 31,356
Less note receivable from stockholder of parent (note 2) 30,074 -
-------- --------
Total stockholder's equity 8,060 31,356
-------- --------
Commitments and contingencies (notes 7, 10, 13 and 17)
-------- --------
$199,055 213,304
======== ========
See accompanying notes to financial statements.
</TABLE>
36
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PLASTIC CONTAINERS, INC.)
STATEMENTS OF OPERATIONS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
----------- -------- --------
<S> <C> <C> <C>
Net sales (note 14) $262,200 271,088 222,980
Cost of goods sold 219,210 231,845 185,696
-------- ------- -------
Gross profit 42,990 39,243 37,284
Selling, general and administrative expenses (28,794) (30,023) (28,453)
Plant rationalization and realignment (note 3) (6,500) 98 (855)
-------- ------- -------
Operating income 7,696 9,318 7,976
-------- ------- -------
Other income (expenses):
Interest income 21 128 136
Interest expense (12,886) (11,807) (11,831)
Loss on disposal of assets (366) (346) (350)
-------- ------- -------
(13,231) (12,025) (12,045)
-------- ------- -------
Loss before income taxes, extraordinary item
and cumulative effect of accounting change (5,535) (2,707) (4,069)
Income tax benefit (note 12) 1,896 2,526 1,637
-------- ------- -------
Income (loss) before extraordinary item and
cumulative effect of accounting change (3,639) (181) (2,432)
Extraordinary item - loss on early
extinguishment of debt (notes 2 and 16) (7,305) (230) (217)
-------- ------- -------
Loss before cumulative effect of
accounting change (10,944) (411) (2,649)
Cumulative effect of accounting change (note 13) - - (475)
-------- ------- -------
Net loss $(10,944) (411) (3,124)
======== ======= =======
</TABLE>
See accompanying notes to financial statements.
37
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PLASTIC CONTAINERS, INC.)
STATEMENTS OF STOCKHOLDER'S EQUITY
THREE-YEAR PERIOD ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Continental
Plastic Note
Containers, receivable
Inc. Additional from Total
common paid-in stockholder stockholder's
stock capital Deficit of parent equity
----------- ---------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $10 53,392 (18,511) - 34,891
Net loss - - (3,124) - (3,124)
----------- ---------- ------- ----------- -------
Balances at December 31, 1994 10 53,392 (21,635) - 31,676
Net loss - - (411) - (411)
----------- ---------- ------- ----------- -------
Balances at December 31, 1995 10 53,392 (22,046) - 31,356
Push-down accounting adjustment (note 2) - 17,648 - - 17,648
Loan to stockholder of parent (note 2) - - - (30,000) (30,000)
Accrued interest on note receivable
from stockholder of parent (note 2) - 74 - (74) -
Net loss - - (10,944) - (10,944)
----------- ---------- -------- ----------- -------
Balances at December 31, 1996 $10 71,114 (32,990) (30,074) 8,060
=========== ========== ========== ========== =======
</TABLE>
See accompanying notes to financial statements.
38
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PLASTIC CONTAINERS, INC.)
STATEMENTS OF CASH FLOWS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (10,944) (411) (3,124)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 20,950 23,566 24,436
Loss on disposal of assets 366 346 350
Deferred income taxes (1,896) (2,732) (1,764)
Extraordinary item - loss on early
extinguishment of debt 7,305 230 217
Changes in assets and liabilities:
Accounts receivable, net 5,644 643 (8,110)
Inventories 590 3,564 (5,983)
Prepaid expenses 225 762 (303)
Other assets (731) (463) (207)
Pension asset/liability 182 (11,377) (2,740)
Accounts payable (3,969) 61 10,165
Other current liabilities 3,575 (1,684) 3,694
Other liabilities 2,849 (468) 1,614
--------- ------- -------
Net cash provided by operating activities 24,146 12,037 18,245
--------- ------- -------
Cash flows from investing activities:
Purchase of investment securities (1,000) - -
Proceeds from disposal of assets 41,626 341 66
Purchase of property, plant and equipment (20,965) (30,524) (14,979)
Loan to stockholder of parent (30,000) - -
--------- ------- -------
Net cash used in investing activities (10,339) (30,183) (14,913)
--------- ------- -------
Cash flows from financing activities:
Net borrowings (repayments) on notes payable to bank (17,018) 17,018 -
Proceeds from long-term obligations 130,100 - -
Repayment of long-term obligations (105,471) (130) (5,480)
Premium on repurchase of bonds (5,382) - -
Financing fees paid (5,514) (355) -
--------- ------- -------
Net cash provided by (used in) financing activities (3,285) 16,533 (5,480)
--------- ------- -------
Net increase (decrease) in cash and cash equivalents 10,522 (1,613) (2,148)
Cash and cash equivalents - beginning - 1,613 3,761
--------- ------- -------
Cash and cash equivalents - ending $ 10,522 - 1,613
========= ======= =======
Supplemental disclosures of cash flow information:
Interest paid $ 15,240 11,683 11,977
Income taxes paid 20 210 36
========= ======= =======
</TABLE>
See accompanying notes to financial statements.
39
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PLASTIC CONTAINERS, INC.)
NOTES TO FINANCIAL STATEMENTS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1996
(IN THOUSANDS)
(1) Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
ORGANIZATION AND BASIS OF PRESENTATION
Continental Plastic Containers, Inc. ("CPC" or "the Company") develops,
manufactures and markets a wide range of custom extrusion blow-molded plastic
containers for food and juice, automotive products and motor oil, household
chemicals, industrial and agricultural chemicals and hair care products.
CPC is a wholly-owned subsidiary of Plastic Containers, Inc. ("PCI"). PCI was
organized in October 1991 for the purpose of acquiring CPC and Continental
Caribbean Containers, Inc. ("Caribbean") (collectively, "the Continental
Plastic Container Companies"). PCI is a holding company with no assets,
operations and cash flow separate from its investment in the Continental
Plastic Container Companies and is dependent upon funding provided by CPC to
service its debt. Accordingly, the accompanying financial statements of CPC
reflect various "push down" accounting adjustments to reflect debt and other
purchase adjustments recorded by PCI in connection with the acquisition.
PCI is a subsidiary of Continental Can Company, Inc. ("Continental Can").
CASH EQUIVALENTS
Marketable securities that are highly liquid and have maturities of three
months or less at date of purchase are classified as cash equivalents.
INVESTMENT SECURITIES
Investment securities at December 31, 1996 consist of held-to-maturity
certificates of deposit. Investment securities are stated at amortized cost,
which approximates market value.
INVENTORIES
CPC's manufacturing inventories are stated at cost using the last-in, first-
out (LIFO) method, which is not in excess of market. All repair parts and
supplies inventories are stated at the lower of cost, applied on the first-in,
first-out (FIFO) method, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed
principally on a straight-line basis over estimated useful lives of the assets
which range from three to thirty-five years. Plant and equipment held under
capital leases and leasehold improvements are amortized straight-line over the
shorter of the lease term or estimated useful life of the asset.
(Continued)
40
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(1), Continued
INSURANCE
CPC purchases commercial insurance policies, but remains self-insured in
certain states for the purposes of providing workers' compensation, general
liability and property and casualty insurance coverages up to varying
deductible amounts. Self-insurance liabilities are based on claims filed and
estimates for claims incurred but not reported and are included in other
liabilities on the balance sheets. Costs charged to operations for self-
insurance for the years ended December 31, 1996, 1995 and 1994 were $2,629,
$2,200 and $2,066, respectively.
RESEARCH, DEVELOPMENT AND ENGINEERING
Expenditures for research, development and engineering are expensed as
incurred. Costs charged to operations for research, development and
engineering for the years ended December 31, 1996, 1995 and 1994 were $8,059,
$8,777 and $9,013, respectively.
GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
Goodwill and other identifiable intangible assets are stated on the basis of
cost. Goodwill is being amortized on a straight-line basis over 40 years.
Customer contracts are being amortized on a straight-line basis over 10 years.
Additionally, finance costs are being amortized using the effective interest
method over periods ranging from 6 to 10 years.
IMPAIRMENT OF GOODWILL, LONG-LIVED ASSETS AND CERTAIN IDENTIFIABLE INTANGIBLE
ASSETS
PCI assesses the recoverability of goodwill by determining whether the
amortization of the balance over its remaining life can be recovered through
undiscounted future operating cash flows of the Company's operations.
Impairment of goodwill, if any, is measured based on projected discounted
future operating cash flow.
Long-lived assets and certain identifiable intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
INCOME TAXES
The results of operations of the Company for income tax purposes are included
in the consolidated tax returns of PCI. Income tax expense with respect to
income tax returns is an allocation from PCI and is determined as if the
Company was a separate taxable entity.
(Continued)
41
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(1), Continued
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
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. Although these estimates are based on management's
knowledge of current events and actions it may undertake in the future,
they may ultimately differ from actual results.
(2) Refinancing
-----------
During the fourth quarter of 1996, the Company and PCI engaged in a series
of related transactions, comprised of (a) a new offering of Senior Secured
Notes, (b) the purchase and redemption of existing Senior Secured Notes,
(c) a sale/leaseback financing, and (d) a loan to Continental Can, as part
of a refinancing plan.
. NEW OFFERING OF SENIOR SECURED NOTES
On December 17, 1996, PCI completed an offering of 10% Senior Secured
Notes ("10% Notes") in an aggregate principal amount of $125,000. The
10% Notes mature on December 15, 2006.
. PURCHASE AND REDEMPTION OF EXISTING SENIOR SECURED NOTES
On October 24, 1996, PCI commenced a tender offer to purchase any or
all, but not less than two-thirds in aggregate principal amount, of
its $104.7 million aggregate principal amount of outstanding 10.75%
Senior Secured Notes ("10.75% Notes"). The tender offer, which expired
on December 9, 1996, included the solicitation of consents to a
proposed amendment to the discharge provisions of the indenture
relating to the 10.75% Notes. PCI received tenders and consents
representing $101.7 million of the aggregate principal amount of the
outstanding 10.75% Notes.
(Continued)
42
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(2), Continued
. PURCHASE AND REDEMPTION OF EXISTING SENIOR SECURED NOTES, CONTINUED
Since PCI purchased less than 100% of the outstanding 10.75% Notes pursuant
to the tender offer, on December 17, 1996, PCI and the Company effected a
discharge of their obligations under the 10.75% Note indenture.
Concurrently with and as part of the discharge, funds were deposited with
the trustee under the 10.75% Note indenture sufficient to effect the
redemption, on April 1, 1997, of all the 10.75% Notes not purchased
pursuant to the tender offer, at a redemption price of 100% of the
principal amount, together with accrued and unpaid interest to such date.
The purchase and redemption of existing Senior Secured Notes resulted in an
extraordinary loss of $7,305, representing the premium paid to purchase the
notes and the write-off of the related unamortized deferred financing fees.
. SALE/LEASEBACK FINANCING
On December 17, 1996, CPC completed a sale to General Electric Capital
Corporation and certain other financial institutions, and the leaseback to
CPC, of certain equipment located in five of its facilities. The proceeds
to the Company from the sale/leaseback were $40,566, which approximated the
book value of the equipment. The terms of the leases range from 88 months
to 109 months, subject to options of CPC to repurchase the equipment after
78 months and 83 months at a pre-established fair market value.
. LOAN TO CONTINENTAL CAN
On December 17, 1996, the Company through PCI, loaned Continental Can
$30,000. The loan matures June 15, 2007 and accrues interest, payable at
maturity, at an annual rate of 6.9%, compounded semiannually. The loan
receivable and accrued interest thereon have been presented as a reduction
of stockholder's equity.
Proceeds from the loan were used by Continental Can to acquire an
additional 34 shares of PCI's common stock from another stockholder. The
acquisition increased Continental Can's ownership to 84% of PCI's
outstanding common stock. The acquisition was accounted for by Continental
Can under the purchase method of accounting. The acquisition of a
controlling interest in PCI by Continental Can resulted in the "push down"
of goodwill and additional paid-in capital of $17,648 in the financial
statements of PCI and in the accompanying financial statements of CPC.
(Continued)
43
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(3) Plant Rationalization and Realignment
-------------------------------------
In the third and fourth quarters of 1996, CPC recorded charges amounting to
$6,500 for plant rationalization and realignment in connection with a plan
to consolidate certain manufacturing operations. The Company closed one
plant in 1996 and will close another plant by the end of the first quarter
of 1997. Production from these plants will be transferred to other existing
facilities. The components of the $6,500 charge include approximately $1,400
for employee severance costs, approximately $1,600 for an impairment loss
related to fixed assets, and approximately $3,500 for noncancellable lease
obligations and related facility closing costs. Employee severance costs
relate to approximately 185 employees, including production, supervisory and
administrative personnel located at the closing plants. The impairment loss
relates primarily to the write-off of the remaining value of leasehold
improvements and capitalized equipment installation costs. The Company
remains obligated under noncancellable operating leases at one plant through
August 1997 and at the other plant through June 1999. As of December 31,
1996, approximately 90 employees' employment had been terminated and
severance benefits paid were approximately $590. In addition, payments of
approximately $714 had been made against other accrued charges as of
December 31, 1996. Included in other current liabilities in 1996 is $4,096
representing the unpaid portion of severance benefits and other accrued
charges.
For the years ended December 31, 1995 and 1994, the Company recorded a
credit of $98 and a charge of $855, respectively, related to prior plant
consolidations.
(4) Inventories
-----------
Major classes of inventories at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Raw materials $10,307 8,992
Finished goods 11,331 10,866
------ ------
21,638 19,858
LIFO reserve (4,247) (2,025)
------ ------
17,391 17,833
Repair parts and supplies 1,336 1,484
------ ------
$18,727 19,317
====== ======
</TABLE>
During 1996 and 1995, LIFO inventory layers were reduced. This reduction
resulted in charging lower inventory costs prevailing in previous years to
cost of goods sold in 1996 and 1995, thus reducing cost of goods sold by
approximately $80 and $700, respectively, below the amount that would have
resulted from liquidating inventory recorded at December 31, 1995 and 1994
prices.
(Continued)
44
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(5) Intangible Assets
-----------------
Intangible assets at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Goodwill $17,648 -
Noncompete agreements - 15,000
Customer contracts 7,630 7,630
Financing and acquisition costs 5,861 6,058
------ ------
31,139 28,688
Less accumulated amortization 4,061 18,712
------ ------
$27,078 9,976
====== ======
</TABLE>
(6) Other Assets
------------
Other assets at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred income taxes $ 5,359 4,826
Prefunded pension asset 4,971 5,153
Other 1,444 713
------ ------
$11,774 10,692
====== ======
</TABLE>
(7) Notes Payable to Bank
---------------------
Through PCI, the Company has a $50,000 revolving credit facility with a
commercial bank with interest on individual borrowings based on the bank's
prime rate or LIBOR, at the Company's option. Borrowings are secured by
accounts receivable and inventories. At December 31, 1996, there were no
borrowings outstanding under this facility. The Company is required to pay
an annual commitment fee of 1/4% on the unused facility up to $25,000 and
1/2% on the unused amount in excess of $25,000. Commitment fees for the
years ended December 31, 1996 and 1995 were $104 and $23, respectively.
The facility contains certain restrictive covenants, including the
maintenance of minimum levels of net worth, fixed charge coverage and
interest coverage, limitations on capital expenditures and additional
indebtedness, and restrictions on the payment of dividends. At December 31,
1996, PCI was in compliance with these covenants.
The facility also provides for the issuance of letters of credit by the bank
on the Company's behalf. At December 31, 1996, letters of credit amounting
to $3,586 had been issued to guarantee obligations carried on the balance
sheet.
(Continued)
45
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(8) Other Current Liabilities
-------------------------
Other current liabilities at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accrual for open credits $ 1,595 1,311
Employee compensation and benefits 6,590 5,801
Accrued interest 593 2,947
Accrued real estate and
personal property taxes 1,489 1,284
Plant rationalization reserve 4,096 500
Other 4,450 3,395
-------- --------
$ 18,813 15,238
======== ========
</TABLE>
(9) Long-term Obligations
---------------------
Long-term obligations at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Senior Secured Notes of PCI, due 2006, interest at 10%
("10% Notes") payable semiannually on June 15 and
December 15 secured by all the issued and outstanding
stock of Continental Plastic Container Companies and
substantially all of the owned assets and properties
other than inventories, accounts receivable and
certain equipment securing capital lease obligations $125,000 -
Senior Secured Notes of PCI, due 2001, interest
at 10.75%, payable semiannually on April 1
and October 1, redeemed December 17, 1996 - 104,700
Capital lease obligations 4,982 653
-------- --------
Total long-term obligations 129,982 105,353
Less current portion 980 141
-------- --------
Long-term obligations,
excluding current portion $129,002 105,212
======== ========
</TABLE>
(Continued)
46
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(9), Continued
The 10% Notes are not redeemable by PCI prior to December 15, 2001. On or
after that date the notes are redeemable, in whole or in part, at the
option of PCI at an initial price of 105% of par declining ratably per
annum, to par on December 15, 2004.
In the event of a change of control as defined in the indenture, PCI is
obligated to offer to purchase all outstanding 10% Notes at a redemption
price of 101% of the principal amount thereof plus accrued interest. In
addition, PCI is obligated in certain instances to offer to purchase 10%
Notes at a redemption price of 100% of the principal amount thereof plus
accrued interest with the net cash proceeds of certain sales or
dispositions of assets.
The indenture places certain restrictions on payment of dividends,
additional liens, disposition of the proceeds from asset sales, sale-
leaseback transactions and additional borrowings. At December 31, 1996, PCI
was in compliance with these restrictions.
The Company is obligated under capital leases for a manufacturing facility
and certain machinery and equipment. The manufacturing facility has a cost
of $1,152 and accumulated amortization of $658 and $535 at December 31,
1996 and 1995, respectively. The facility lease agreement expires on
December 31, 1999 and has an interest rate of 9.364%.
The equipment lease arrangement commenced on April 1, 1996 in connection
with the issuance of tax-exempt industrial development revenue bonds
bearing interest at 5.8%. Principal and interest are payable monthly
through April 2002. The equipment has a cost of $5,100 and has accumulated
depreciation of $630 at December 31, 1996. Future minimum lease payments
under the capital leases are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1997 $1,268
1998 1,220
1999 1,172
2000 919
2001 and beyond 1,220
-----
Total future minimum lease payments 5,799
Less portion representing interest 817
-----
Net minimum lease payments $4,982
=====
</TABLE>
(Continued)
47
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(10) Leases
------
CPC rents certain property and equipment used in connection with its
operations. Rental expense under these operating leases was $8,054, $6,152
and $4,802 for the years ended December 31, 1996, 1995 and 1994,
respectively. Substantially all operating leases require CPC to pay taxes,
maintenance, insurance and certain operating expenses applicable to the
lease. The Company plans to renew or replace many of these leases as they
expire. CPC subleases a warehouse facility for $144 annually through June
1999.
Future minimum lease payments under noncancellable operating leases are as
follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1997 $13,780
1998 12,189
1999 11,280
2000 10,798
2001 9,934
Thereafter 28,479
------
Total future minimum lease payments $86,460
======
</TABLE>
(11) Other Liabilities
-----------------
Other liabilities at December 31 consist of the following:
1996 1995
---- ----
Insurance reserves $ 9,638 8,956
Postretirement benefits accrued 6,298 5,972
Other 7,219 4,489
------ ------
$23,155 19,417
====== ======
(12) Income Taxes
------------
Total income tax benefit (expense) attributable to income from continuing
operations for the years ended December 31, 1996, 1995 and 1994 consists of
the following:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- ----------------------- ----------------------
Federal State Total Federal State Total Federal State Total
------- ----- ----- ------- ----- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current $ - - - (145) (61) (206) (145) 18 (127)
Deferred 1,746 150 1,896 2,569 163 2,732 1,559 205 1,764
----- --- ----- ----- --- ----- ----- --- -----
$ 1,746 150 1,896 2,424 102 2,526 1,414 233 1,637
===== === ===== ===== === ===== ===== === =====
</TABLE>
(Continued)
48
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(12), Continued
The income tax benefit for the years ended December 31, 1996, 1995 and
1994 differed from the "expected" income tax benefit computed by applying
the Federal income tax rate to loss before income taxes, extraordinary
item and cumulative effect of accounting changes as a result of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed "expected" income tax benefit $1,882 920 1,383
Increase (reduction) in benefit resulting from:
Change in valuation allowance allocated to
continuing operations (243) 1,303 (80)
State and local income taxes, net of
Federal income tax benefit 99 67 154
Other 158 236 180
----- ----- -----
Income tax benefit $1,896 2,526 1,637
===== ===== =====
</TABLE>
The significant components of deferred income tax benefit attributable to loss
from continuing operations for the years ended December 31, 1996, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Deferred tax benefit (expense) (exclusive of
the effects of other components listed below) $ 9,065 (4,168) 840
Increase (decrease) in operating loss carry forward (4,262) 5,087 859
Research and experimentation credits (23) 365 -
Alternative minimum tax credit carry forward (158) 145 145
Decrease (increase) in valuation allowance
for deferred tax assets (2,726) 1,303 (80)
------ -----
$ 1,896 2,732 1,764
======= ====== =====
</TABLE>
(Continued)
49
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(12), Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
-------- ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards $18,811 23,073
Vacation and incentive pay reserves 1,016 1,004
Self-insurance reserves 4,012 3,753
Plant rationalization reserve 2,437 463
Postretirement benefit reserves 2,602 2,472
Other 2,719 2,938
------- ------
Total gross deferred tax assets 31,597 33,703
Less valuation allowance 7,794 5,068
------- ------
Net deferred tax assets 23,803 28,635
------- ------
Deferred tax liabilities:
Book over tax basis of principally fixed assets 13,045 19,598
Prefunded pension 1,884 1,958
Other - 101
------- ------
Total gross deferred tax liabilities 14,929 21,657
------- ------
Net deferred tax assets $ 8,874 6,978
======= ======
Net deferred tax assets are classified in the accompanying balance sheets as follows:
1996 1995
------- ------
Current - deferred income taxes $ 3,515 2,152
Long-term - other assets 5,359 4,826
------- ------
$ 8,874 6,978
======= ======
</TABLE>
(Continued)
50
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(12), Continued
The valuation allowance for deferred tax assets as of January 1, 1995 was
$6,371. The net change in the total valuation allowance for the years ended
December 31, 1996 and 1995 was an increase of $2,726 and a decrease of $1,303,
respectively. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers projected future taxable income, the
scheduled reversal of deferred tax liabilities and tax-planning strategies in
making this assessment. Based upon this assessment, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31, 1996.
At December 31, 1996, CPC has operating loss carry forwards for Federal income
tax purposes of approximately $50,000, which are available to offset future
Federal taxable income through 2010. In addition, the Company has alternative
minimum tax credit carry forwards of approximately $132 which are available to
reduce future Federal regular income taxes over an indefinite period and
research and experimentation credits of approximately $342 available to reduce
future Federal income taxes through 2010.
(13) Employee Benefits
-----------------
PENSION PLANS
CPC maintains a defined benefit pension plan for substantially all salaried
employees. Plan benefits are based on all years of continuous service and the
employee's compensation during the highest five continuous years of the last
ten years of employment, minus a profit-sharing annuity. The profit-sharing
annuity is based on the amount of profit-sharing contributions received for
1988 through 1992. Any employee who terminated employment prior to August 31,
1993 is governed by the terms of the plan in effect at the time the
termination occurred.
CPC maintains a noncontributory defined benefit pension plan for substantially
all hourly workers who have attained 21 years of age. Plan benefits are
variable by location/contract but are based primarily on years of service and
the employee's highest wage classification for twelve consecutive months in
the five years prior to retirement. "Normal" retirement is at age 65, with at
least five years of continuous service. However, employees may retire as
early as age 55 and receive reduced benefits.
Subject to the limitation on deductibility imposed by Federal income tax laws,
CPC's policy has been to contribute funds to the plans annually in amounts
required to maintain sufficient plan assets to provide for accrued benefits.
Plan assets are held in a master trust and are comprised primarily of common
stock, corporate bonds and U.S. Government and government agency obligations.
(Continued)
51
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(13), Continued
PENSION PLANS, CONTINUED
The following table sets forth the plans' funded status at December 31, 1996
and 1995 based primarily on January 1, 1996 participant data and plan assets:
<TABLE>
<CAPTION>
1996 1995
------------------------------- ------------------
Salaried Hourly Total Salaried Hourly Total
---------- --------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value of benefit
obligation, including vested
benefits of $30,280 and $20,372
in 1996 and $29,078 and $18,644
in 1995 for the salaried and
hourly plans, respectively $(31,903) (22,595) (54,478) (30,921) (21,877) (52,798)
======== ======== ======= ======= ======= =======
Projected benefit obligation (PBO) (33,988) (22,594) (56,582) (33,110) (21,877) (54,987)
Plan assets, at fair value 34,285 24,613 58,898 31,082 22,068 53,150
Unrecognized net (gain) loss 3,056 (236) 2,820 5,206 1,926 7,132
Prior service cost not yet recognized
in net periodic pension cost (489) 324 (165) (556) 414 (142)
-------- -------- ------- ------- ------- -------
Prefunded pension asset $ 2,864 2,107 4,971 2,622 2,531 5,153
======== ======== ======= ======= ======= =======
Net periodic pension costs included the following components for
the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
------- ------- -------
Service cost $ 1,362 992 1,161
Interest cost 4,001 4,002 3,715
Return on plan assets (8,505) (6,292) 1,916
Net amortization and deferral 3,897 2,922 (5,613)
------- ------- -------
Net periodic pension costs $ 755 1,624 1,179
======= ======= =======
</TABLE>
CPC contributions to the plans for the years ended December 31, 1996, 1995 and
1994 were $573, $12,800 and $2,585, respectively.
Assumptions used in the accounting were:
<TABLE>
<CAPTION>
As of December 31,
---------------------
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Discount rates 7.75% 7.50% 9.00%
Rates of increase in compensation levels 5.00% 5.00% 5.00%
Expected long-term rate of return on assets 9.50% 9.50% 9.50%
</TABLE>
(Continued)
52
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(13), Continued
RETIREMENT THRIFT PLAN
CPC maintains a defined contribution plan which covers substantially all
hourly employees who meet eligibility requirements. Provisions regarding
employee and employer contributions and the benefits provided under the plan
vary between CPC's manufacturing facilities. CPC's defined contribution plan's
expense was $303, $292 and $272 for the years ended December 31, 1996, 1995
and 1994, respectively.
SAVINGS PLAN
CPC maintains a contributory defined contribution 401(k) savings plan which
covers substantially all nonorganized salaried employees. Employees may
contribute up to 12% and 8% of pay on a pretax and after-tax basis,
respectively. However, the total employee contribution rate may not exceed
15% of pay. CPC matches up to 3% of employees' pretax contributions.
Employees vest in CPC's contributions at 25% per year, becoming fully vested
after four years of employment. Employees may make withdrawals from the plan
prior to attaining age 59-1/2, subject to certain penalties. CPC's savings
plan expense was $533, $505 and $450 for the years ended December 31, 1996,
1995 and 1994, respectively.
UNION BENEFIT PLANS
CPC contributes to various union pension plans pursuant to its labor
agreements. Union benefit plan expense was $1,083, $1,080 and $896 for the
years ended December 31, 1996, 1995 and 1994, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
CPC provides certain health care and life insurance benefits for retired CPC
employees. Certain of CPC's hourly and salaried employees became eligible for
these benefits when they became eligible for an immediate pension under a
formal company pension plan. In 1993, the plan was amended to eliminate
health care benefits for employees hired after January 1, 1993.
CPC's policy is to fund the cost of medical benefits in amounts determined at
the discretion of management. Summary information on CPC's plan at December
31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $2,895 3,449
Fully eligible, active plan participants 740 1,219
Other active plan participants 1,472 1,486
------ -----
5,107 6,154
Unrecognized net gain/(loss) from experience
and changes in assumptions 793 (614)
Prior service cost in net periodic postretirement benefit cost 398 432
------ -----
Accrued postretirement benefit obligation $6,298 5,972
====== =====
(Continued)
</TABLE>
53
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(13), Continued
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, CONTINUED
The components of net periodic postretirement benefit cost at December 31,
1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ----- -----
<S> <C> <C> <C>
Service cost $ 87 52 73
Interest cost 447 480 431
Net amortization and deferral (34) (34) (57)
----- ---- ----
Net periodic postretirement benefit cost $ 500 498 447
===== ==== ====
</TABLE>
For measurement purposes, a 9.05% annual rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) was assumed for
1996; the rate was assumed to decrease gradually to 5.0% by the year 2001 and
remain at that level thereafter. The health care cost trend rate assumption
has a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year
would increase the accumulated postretirement benefit obligation as of
December 31, 1996 by $408 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the year ended
December 31, 1996 by $46.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% and 7.5% at December 31, 1996 and
1995, respectively.
POSTEMPLOYMENT BENEFITS
CPC provides certain postemployment benefits to former and inactive employees,
their beneficiaries and covered dependents. These benefits include disability
related benefits, continuation of health care benefits and life insurance
coverage.
In 1994, CPC adopted the provisions of the Financial Accounting Standards
Board's Statement No. 112, EMPLOYERS' ACCOUNTING FOR POSTEMPLOYMENT BENEFITS,
which requires employers to recognize the obligation to provide postemployment
benefits and an allocation of the cost of those benefits to the periods the
employees render service. The cumulative effect of this change in accounting
principle of $475 was determined as of January 1, 1994 and is reported
separately in the statement of operations for the year ended December 31,
1994. Additional costs charged to operations for postemployment benefits in
1996, 1995 and 1994 were $31, $21 and $26, respectively.
(Continued)
54
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(14) Major Customers
---------------
Sales to one customer represented approximately 30%, 28% and 24% of net sales
for the years ended December 31, 1996, 1995 and 1994, respectively. Included
in accounts receivable are receivables from this customer of $8,564 and $6,947
at December 31, 1996 and 1995, respectively. A second customer represented
approximately 13%, 11% and 12% of net sales for each of the years ended
December 31, 1996, 1995 and 1994, respectively, and $4,339 and $4,293 of
receivables from this customer are included in accounts receivable at December
31, 1996 and 1995, respectively. A third customer represented approximately
10% of net sales for the year ended December 31, 1996 and $906 of receivables
from this customer are included in accounts receivable at December 31, 1996.
(15) Related Party Transactions
--------------------------
The Company is charged for certain services provided to it by Continental Can.
These costs amounted to $600, $600 and $490 for the years ended December 31,
1996, 1995 and 1994, respectively. At December 31, 1996 and 1995, the amount
payable to Continental Can for these costs was $26 and $352, respectively, and
is included in other current liabilities in the accompanying balance sheets.
(16) Extraordinary Item
------------------
See note 2 for an explanation of the 1996 extraordinary item.
In 1995, CPC incurred an extraordinary loss of $230 related to the early
extinguishment of a revolving credit facility.
In 1994, CPC incurred an extraordinary loss of $217 related to the early
extinguishment of a portion of the 10.75% Notes.
(17) Contingencies
-------------
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management and legal counsel,
the ultimate disposition of these matters will not have a material adverse
effect on the Company's financial statements.
(Continued)
55
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(18) Fair Value of Financial Instruments
-----------------------------------
Financial Accounting Standards Board's Statement No. 107, DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS, defines fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. At December 31, 1996 and 1995,
the carrying amount approximates fair value for financial instruments included
in the accompanying balance sheets.
The carrying amounts of cash and cash equivalents, accounts receivable, notes
payable to bank, accounts payable - trade and other current liabilities
approximate fair value because of the short maturity of those instruments.
The fair value of investment securities are based on the quoted market prices
at the reporting date for those or similar investments. The fair value of
long-term debt is estimated based on rates currently offered to CPC for debt
of the same remaining maturities, as advised by CPC's bankers.
56
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholder
Continental Plastic Containers, Inc.:
We have audited the accompanying balance sheets of Continental Plastic
Containers, Inc. (a wholly-owned subsidiary of Plastic Containers, Inc.) as of
December 31, 1996 and 1995, and the related statements of operations,
stockholder's equity and cash flows for each of the years in the three-year
period ended December 31, 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 financial statements referred to above present fairly, in
all material respects, the financial position of Continental Plastic Containers,
Inc. (a wholly-owned subsidiary of Plastic Containers, Inc.) as of December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note 13 to the financial statements, the Company adopted the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 112, EMPLOYERS' ACCOUNTING FOR POSTEMPLOYMENT BENEFITS,
in 1994.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
Omaha, Nebraska
February 7, 1997
57
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Set forth below are the names, ages and positions of the directors and
executive officers of PCI, CPC and Caribbean:
Name and Age Office
- ------------ ------
Donald J. Bainton (65) Chairman of the Board and Director of PCI, CPC and
Caribbean; President and Chief Executive Officer of
PCI.
Charles F. DiGiovanna (56) President and Chief Executive Officer of CPC and
Caribbean; Director of PCI, CPC and Caribbean.
Abdo Yazgi (44) Secretary, Director and Vice President of PCI, CPC
and Caribbean; Treasurer of PCI.
Jay W. Hereford (46) Vice President, Treasurer and Chief Financial Officer
of CPC and Caribbean; Assistant Treasurer of PCI.
Samuel A. Nutile (63) Vice President-Manufacturing and Engineering of CPC
and Caribbean.
David M. Stulman (50) Vice President-Human Resources of CPC and Caribbean.
John S. Roesch (55) Vice President-Sales and Marketing of CPC and
Caribbean.
J.A. Zubillaga (63) Vice President and General Manager of Caribbean.
Jose Luis Zapata (37) Director of PCI, CPC and Caribbean.
Donald J. Bainton has served since November 1991 as Chairman of the Board and
a Director of PCI, CPC and Caribbean, and as Chief Executive Officer of PCI.
Since July 1983, he has been principally employed as Chairman of the Board and
Chief Executive Officer of Continental Can. Prior thereto, Mr. Bainton was
Executive Vice President and a director of The Continental Group, Inc. and
President of Continental Packaging Co. Mr. Bainton devotes a majority of his
time to the affairs of Continental Can.
On November 15, 1995, Mr. Bainton settled a civil enforcement proceeding
commenced by the Securities and Exchange Commission in the United States
District Court of the Southern District of New York. This proceeding arose out
of the sale by John R. Curtin, a friend and business associate of Mr. Bainton,
of the common stock of Continental Can. Without admitting or denying the
Commission's allegations that he communicated to Mr. Curtin certain material
nonpublic information relating to Continental Can, Mr. Bainton agreed to pay a
civil penalty of $30,000 and consented to the entry of a final judgment
permanently enjoining him from violating the federal securities laws.
Charles F. DiGiovanna was appointed President and Chief Executive Officer of
CPC and Caribbean in March 1992 and was elected a director of PCI, CPC and
Caribbean in May 1994. Mr. DiGiovanna served as Chairman of the Board and Chief
Executive Officer of Darome Inc., an international telecommunications company,
from 1985 through 1990, when he became an independent consultant. Commencing in
June, 1991 he rendered consulting services to Continental Can in connection with
the Acquisition. Mr. DiGiovanna is also a Director of Continental Can and Home
Port Bancorp, Inc.
Abdo Yazgi has served as Secretary and a director of PCI, CPC and Caribbean,
and as Treasurer of PCI since 1991, and as Vice President of PCI, CPC and
Caribbean since February, 1992. He has been principally employed as Executive
Vice President of Continental Can since May 1991, as a director of Continental
Can since August 1991, and as its Secretary and General Counsel since 1979. Mr.
Yazgi devotes a majority of his time to the affairs of Continental Can.
Jay W. Hereford has served as Treasurer of CPC and Caribbean since November
1991, and, since May 1992, also as Vice President and Chief Financial Officer of
CPC and Caribbean and Assistant Treasurer of PCI. Mr. Hereford has been
employed by the Company and its predecessors since 1974.
Samuel A. Nutile served as General Manager-Manufacturing of CPC and Caribbean
from September 1993 until his appointment as Vice President-Manufacturing in
January 1994. He was appointed Vice President-Manufacturing
58
<PAGE>
and Engineering in November 1994. He originally worked for CPC in numerous
manufacturing positions during the period from April 1956 through March 1984.
From March 1984 to September 1993, he served as President and Chief Operating
Officer of Four M Manufacturing Corporation (a manufacturer of corrugate
products) and as an independent consultant.
David M. Stulman has served as Vice President-Human Resources of CPC and
Caribbean since February 1996. He originally worked for Continental Can in
various human resources positions from 1973-1987. Prior to joining the Company,
he served as Corporate Director of Human Resources of Amphenol Corporation (a
manufacturer of electronic connectors and coaxial cables for the cable
television, commercial and military/aerospace markets) from 1988 to June 1993,
and as Vice President-Human Resources of Pirelli Armstrong Tire Corporation from
June 1993 to February 1996.
John S. Roesch has served as General Manager-Sales of CPC and Caribbean from
May 1992 until June 1993, as Vice President-Sales from June 1993 until July
1996, and thereafter as Vice President-Sales and Marketing. Prior to May 1992,
he served in numerous sales positions since joining CPC in 1975.
J.A. Zubillaga has served as Vice President and General Manager of Caribbean
since October 1981.
Jose Luis Zapata has served as a director of PCI since October 1991 and as a
director of CPC and Caribbean since November 1991. He served as President of
PCI from October 1991 through October 22, 1996. He has also served since 1989
as Director of Corporate Finance of Taenza, S.A. de C.V., a holding company
which owns real estate and manufactures and sells plastic bottles, aluminum
cans, bottle caps, plastic closures and metal drums. Mr. Zapata is also a
Director of Continental Can. See also Item 12 of this report.
All directors of PCI hold office until the next annual meeting of
stockholders of PCI and until their successors are duly elected and qualified,
and all executive officers of PCI, CPC and Caribbean hold office at the pleasure
of the respective boards of directors.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- --------------------------------------------------------------------------
(a) (1) Financial Statements
--------------------
PLASTIC CONTAINERS, INC.
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31,
1996, 1995, and 1994
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements for the years ended December
31, 1996, 1995 and 1994
Independent Auditors' Report
CONTINENTAL PLASTIC CONTAINERS, INC. (A WHOLLY-OWNED SUBSIDIARY OF
PLASTIC CONTAINERS, INC.)
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations for the years ended December 31, 1996, 1995, and
1994
Statements of Stockholders' Equity for the years ended December 31, 1996,
1995 and 1994
Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994
Notes to Financial Statements for the years ended December 31, 1996, 1995
and 1994
Independent Auditors' Report
The above financial statements are included in Item 8 of Part II of this
report.
(2) Financial Statement Schedules:
II Valuation & Qualifying Accounts
59
<PAGE>
(3) Exhibits Required:
-----------------
3.1 Amended and Restated Certificate of Incorporation of PCI, filed as
Exhibit 3.1 to the Registrant's Registration Statement on Form S-1,
Registration No. 33-45879 (the "S-1 Registration Statement"), and
incorporated herein by reference.
3.2 Amended and Restated By-Laws of PCI, filed as Exhibit 3.2 to the S-1
Registration Statement and incorporated herein by reference.
4.1 Indenture dated as of December 17, 1996, among PCI, as Issuer, CPC and
Caribbean, as Guarantors, and United States Trust Company of New York,
as Trustee, providing for 10% Senior Secured Notes due 2006, Series A
and B, filed as Exhibit 4.1 to the Registrant's Registration Statement
on Form S-4, Registration No. 333-19999 (the "S-4 Registration
Statement"), and incorporated herein by reference.
4.2 Registration Rights Agreement dated as of December 17, 1996, by and
among PCI, CPC and Caribbean, and Donaldson, Lufkin & Jenrette
Securities Corporation, Lehman Brothers Inc. and Societe Generale
Securities Corporation, filed as Exhibit 4.2 to the S-4 Registration
Statement and incorporated herein by reference.
Note: The Registrant hereby agrees to provide the Commission, upon
request, copies of such instruments defining the rights of holders of
long-term debt of the Registrant and its subsidiaries as are specified
in Item 601(b)(4)(iii)(A) of Regulation S-K.
10.1 Amended and Restated Financing Agreement dated December 17, 1996,
between The CIT Group/Business Credit, Inc. (as Lender) and PCI (as
Borrower), filed as Exhibit 10.1 to the S-4 Registration Statement and
incorporated herein by reference.
10.2 Master Lease Agreement, dated as of May 20, 1994, between General
Electric Capital Corporation and CPC, filed as Exhibit 10.2 to the S-4
Registration Statement and incorporated herein by reference.
10.3 Schedules A-1 through A-6, each dated December 17, 1996, to the Master
Lease Agreement (Exhibit 10.2), filed as Exhibit 10.3 to the S-4
Registration Statement and incorporated herein by reference.
10.4 Corporate Guaranty dated May 20, 1994, from PCI to General Electric
Capital Corporation, and Amendments Nos. 1 and 2 thereto, both made as
of December 17, 1996, filed as Exhibit 10.4 to the S-4 Registration
Statement and incorporated herein by reference.
10.5 Stock Purchase Agreement dated as of October 22, 1996, by and among
Continental Can Company, Inc., PCI, Merrywood, Inc. and Plaza Limited,
filed as Exhibit 10.5 to the S-4 Registration Statement and
incorporated herein by reference.
21 Subsidiaries of the Registrant, filed as Exhibit 21 to the S-4
Registration Statement and incorporated herein by reference.
23.1 Independent Auditors Report
27 Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the last quarter of the period
covered by this Report.
60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
PLASTIC CONTAINERS, INC.
By /s/ Abdo Yazgi Date: May 19, 1997
-------------------------------- ---------------
Abdo Yazgi, Vice President, Secretary
and Treasurer
61
