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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 1997
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
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
Securities registered pursuant to Section 12(g) of the Act: None
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 23,
1998.
The number of shares outstanding of the registrant's Common Stock ($1.00 par
value) as of March 23, 1998 is 100.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART NO. ITEM NO. Page No.
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<S> <C> <C>
I 1 Business 3
2 Properties 8
3 Legal Proceedings 9
4 Submission of Matters to a Vote
of Security Holders 9
II 5 Market for the Registrant's
Common Equity and Related
Stockholder Matters 9
6 Selected Financial Data 9
7 Management's Discussion and
Analysis of Financial Condition
and Results of Operations 9
8 Financial Statements and
Supplementary Data 13
9 Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure 13
III 10 Directors and Executive Officers
of the Registrant 13
11 Executive Compensation 14
12 Security Ownership of Certain
Beneficial Owners and Management 16
13 Certain Relationships and
Related Transactions 17
IV 14 Exhibits, Financial Statement
Schedules, and Reports on
Form 8-K 17
</TABLE>
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PART I
ITEM 1. BUSINESS (DOLLARS IN THOUSANDS)
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 (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 January 1998, Suiza Foods Corporation signed a definitive agreement to
acquire Continental Can for stock and assumption of debt in a purchase
transaction. The transaction is expected to be completed during the second
quarter of 1998.
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 1997, 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 $202.0 million, or 72%, of the Company's
fiscal 1997 dollar sales volume. All of these contracts provide for changes in
raw material prices to be passed through to the customer. Contracts representing
approximately 20% of the Company's 1997 dollar sales volume expire in 1998.
COMPETITIVE STRENGTHS
Management believes that the Company possesses several attributes that
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 develop and manufacture innovative products, and competitive pricing. The
Company's five largest customers (Procter & Gamble, The Minute Maid Company,
Mobil Oil, Pennzoil and Quaker State) have been customers of the Company for an
average of approximately 16 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 $55 million on research, development and engineering activities.
Examples of the Company's major product innovations include Conolene'tm'
fluorine treated barrier bottles
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(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 mounted 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). 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 14 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 an important competitive advantage 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. As a result of these
improvements, since 1992 the Company has achieved approximately a 22% increase
in productivity, as measured by pounds of resin processed per employee. The
Company has also focused on rigorous control of selling, general and
administrative expenses resulting in a reduction of such expenses to 9.9% of net
sales in the year ended December 31, 1997, from 14.5% in the year ended December
31, 1992.
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 provides 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 has since entered into similar arrangements with
other customers.
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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 1997, PCI's ten largest customers, who accounted for approximately 76%
of sales, were (in alphabetical order):
Clorox Pennzoil
Coastal Unilube Procter & Gamble
Colgate-Palmolive Quaker State
Lever Brothers Ross Laboratories
Mobil Oil The Minute Maid Company
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 14 contracts with the ten
customers listed above, of which eight contracts are with its three largest
customers, Procter & Gamble, The Minute Maid Company and Mobil Oil (which were
the only customers which accounted for 10% or more of PCI's revenues during
1997); the largest such contract accounted for $33.6 million in net sales in
1997 and expires in 1998.
PRODUCTS
PCI currently manufactures primarily HDPE containers or PP containers. In
1997, HDPE containers accounted for approximately 90% of the total number of
containers manufactured by PCI and PP containers accounted for approximately 9%
of such total. PCI also manufactures, at its plant in Puerto Rico, beverage
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
that include a barrier layer.
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 1997 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 .......................... $108.0 38.6%
Household chemicals ..................... 77.9 27.9
Automotive and motor oil ................ 63.7 22.8
Other ................................... 30.0 10.7
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Total ............................... $279.6 100.0%
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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 that include an oxygen
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resistant barrier layer to prevent spoiling or deterioration. PCI's food and
juice product containers are approximately 58% single layer non-barrier
containers and 42% 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
that 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.
MANUFACTURING AND PRODUCTION PROCESS
PCI serves its customers through a network of 14 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.
Four of the Company's plants are dedicated to single customers with whom
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 110 production lines operated by PCI, 81 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.
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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 1997, 1996 and 1995 were approximately $11.1 million, $21.2
million and $30.7 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 that 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 $8.8
million, $8.3 million and $9.0 million for 1997, 1996 and 1995, 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 that 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 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 15 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.
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EMPLOYEES
The Company employed approximately 1,700 persons at December 31, 1997. 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.
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 1997 and are not expected to be material in
1998. 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.
ITEM 2. PROPERTIES
PCI employs various owned and leased properties located throughout the
United States and Puerto Rico for its production facilities, corporate
headquarters, technical center and sales offices. Of the 22 properties owned or
leased as of December 31, 1997, 5 were owned and 17 were leased.
The following table sets forth the location and square footage of PCI's
production facilities:
<TABLE>
<CAPTION>
Size in
Plant Location Square Feet
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<S> <C>
Lakeland, Florida 218,000
Elk Grove, Illinois 183,000
Kansas City, Kansas 173,000
Baltimore, Maryland 151,000
Cincinnati, Ohio 130,000
Lima, Ohio 123,000
DuPage, Illinois 104,000
Santa Ana, California 103,000
Oil City, Pennsylvania 96,000
Atlanta, Georgia 85,000
Houston, Texas 80,000
West Memphis, Arkansas 67,000
Fairfield, California 66,000
Newell, West Virginia 50,000
Caguas, Puerto Rico 47,000
</TABLE>
PCI owns the facilities in Santa Ana, Fairfield, Oil City, Baltimore and
Puerto Rico; all others are leased. All of the facilities owned by PCI and
substantially all of the equipment owned by PCI (including equipment located at
leased facilities) has been pledged as security for the Company's senior secured
notes. PCI's New Market, New Jersey facility ceased production in March 1997.
The lease on this facility expires on June 30, 1999.
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PCI also leases its technical center in Elk Grove, Illinois (79,000 sq.
ft.), its corporate headquarters space in Norwalk, Connecticut (20,000 sq. ft.),
its accounting office space in Omaha, Nebraska (6,000 sq. ft.) and sales offices
in Cincinnati, Ohio (1,000 sq. ft.), Houston, Texas (1000 sq. ft.) and Ft.
Smith, Arkansas (150 sq. ft.).
ITEM 3. LEGAL PROCEEDINGS
PCI is a party to various litigation matters arising in the ordinary course
of its business. The ultimate legal and financial liability of PCI with respect
to such litigation cannot be estimated with certainty but management of PCI
believes, based on its examination of such matters, experience to date and
discussions with counsel, that such ultimate liability will not be material to
the financial statements of PCI.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PCI has outstanding an aggregate of 100 shares of Common Stock, of which 84
shares are owned by Continental Can Co., Inc., One Aerial Way, Syosset, New York
11791, and 16 shares are owned by Merrywood, Inc. ("Merrywood"), Suite 900, 505
Park Avenue, New York, New York 10022. There is no established public trading
market for the Common Stock.
No dividends were paid to the holders of Common Stock for the years 1997
and 1996.
ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
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1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Net sales $279,565 267,793 277,061 230,480 207,035
Gross profit 45,355 43,004 39,393 37,900 31,580
Plant rationalization and
realignment costs (credits) -- 6,500 (98) 855 (134)
Income (loss) before extraordinary
items and accounting changes 5,905 (3,599) 5 (1,783) (6,709)
Extraordinary loss -- (7,305) (230) (217) --
Effect of accounting change -- -- -- (525) --
Net income (loss) 5,905 (10,904) (225) (2,525) (6,709)
Working capital 29,905 25,302 244 24,184 23,768
Total assets 204,912 205,650 219,612 209,299 205,634
Long-term obligations 128,007 129,002 105,212 105,354 110,782
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS)
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
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Net Sales. Net sales in 1997 increased $11,772 (4.4%) to $279,565, compared
to 1996 net sales of $267,793. The increase in sales resulted from higher resin
prices that were passed-through to customers and from an increase in unit
volume. Higher resin prices accounted for increased sales of approximately
$14,200 in 1997 compared to 1996. Total unit volume for 1997 increased 1.6%
compared to 1996; however, the impact on sales of this increase was offset by
changes in product mix. The product mix in 1997 is comprised of a larger
percentage of lighter-weight, lower-priced containers compared to the prior
year.
Gross Profit. Gross profit for 1997 was $45,355, an increase of $2,351
(5.5%) over gross profit of $43,004 in 1996. The gross profit increase in 1997
was influenced by a number of factors. Gross profit was positively impacted by a
consolidation of production facilities whereby one facility was closed in
October 1996 and another facility was closed in March 1997. The net cost savings
from the consolidations amounted to approximately $4,000 for 1997 compared to
1996. In addition, a revision in the estimated useful lives of certain machinery
and equipment resulted in a reduction in depreciation expense of $1,696 for
1997. These savings, in addition to improved operating efficiencies, were
partially offset by additional costs related to a new production facility that
began full production in the fourth quarter of 1996 as well as increased
depreciation from capital additions in 1996 and 1997.
Gross profit as a percentage of net sales was 16.2% in 1997 compared to
16.1% in 1996. The gross profit percentage in 1997 reflects the increase in
gross profit dollars discussed above and the impact on sales of higher resin
prices. As discussed above, the increase in sales attributed to resin prices are
a direct pass-through of raw material cost increases and do not result in a
corresponding increase in gross profit dollars. Excluding the impact on sales of
higher resin prices, gross profit percentage for 1997 would have been 17.1%.
SG&A. Selling, general and administrative (SG&A) expense in 1997 decreased
$1,057 (3.7%) to $27,772, compared to $28,829 in 1996. The decrease in SG&A
expense in 1997 resulted primarily from a reduction in amortization expense
related to noncompete agreements that became fully amortized in the fourth
quarter of 1996. SG&A expense as a percentage of net sales was 9.9% in 1997,
compared to 10.8% in 1996. Excluding the impact of higher resin prices on sales,
SG&A as a percentage of net sales in 1997 would have been 10.5%.
Plant Rationalization and Realignment. Charges of $6,500 were recognized in
1996 in connection with the consolidation of certain manufacturing operations.
Other Expense. Other expense in 1997 was $12,639, a decrease of $511 (3.9%)
compared to $13,150 in 1996. This decrease resulted primarily from a decrease in
net interest expense.
Income Tax Benefit. Income tax benefit was $961 in 1997 compared to $1,876
in 1996. For further discussion of the Company's accounting for income taxes,
see "Utilization of Net Operating Loss Carryforwards".
Extraordinary Loss. The Company incurred an extraordinary loss of $7,305 in
the fourth quarter of 1996 related to the purchase and redemption of senior
secured notes.
Net Income. Net income in 1997 was $5,905, compared to a net loss of
$10,904 in 1996. 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. The increase in 1997 income is the
result of the improvement is gross profit dollars and the reduction in SG&A and
net interest expense, offset by the decrease in the net tax benefit.
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.
10
<PAGE>
<PAGE>
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
a consolidation of certain manufacturing operations. The Company closed one
plant in October 1996 and another plant in March 1997. Production from these
plants was transferred to other existing facilities. The components of the
$6,500 charge included 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.
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.
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
senior secured notes. The loss consisted 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.
CAPITAL REQUIREMENTS
PCI acquired $11,085 in capital assets in 1997, compared to $21,240 in 1996
and $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.
11
<PAGE>
<PAGE>
The capital requirements in 1997 were met with cash generated from
operations. It is anticipated that capital expenditures in 1998 will be funded
with cash generated from operations, from existing funds, or from borrowings
under existing credit facilities.
LIQUIDITY
The Company's primary sources of liquidity are provided through cash flow
from operations and a revolving credit facility of $50,000. At December 31, 1997
and 1996, the Company had no borrowings outstanding under the revolving credit
facility and had cash and investment securities of approximately $23,000 and
$13,000, respectively. The increase in cash and investment securities 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, 1997, the Company had undrawn availability under the
revolving credit facility of approximately $30,000.
The Company's working capital was $29,905 at December 31, 1997, compared to
$25,302 at December 31, 1996. The increase in working capital is primarily the
result of a reduction in capital spending levels. Cash provided by operating
activities was $21,342 in 1997, compared to $24,546 in 1996. The net decrease in
cash provided by operating activities is the result of improved earnings and
reduction in accounts receivable offset by increased payments related to
equipment leases and payments made in 1997 relative to plant rationalization and
realignment charges accrued in 1996.
Management believes the funding expected to be generated from operations
and provided by existing credit facilities will be sufficient to service its
indebtedness and meet the Company's working capital and capital investment needs
for the foreseeable future.
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, 1997, 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 became fully
amortized in 1996 and certain fixed assets will also become fully depreciated
within the next year. 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 $36,500 of the NOLs prior to their ultimate expiration in the
year 2010.
YEAR 2000
PCI has a plan in place to address the impact of Year 2000 issues on its
computer systems and applications and is in the process of converting its
computer systems to be Year 2000 compliant. The plan provides for the conversion
efforts to be completed by the end of 1998. The Year 2000 issues are the result
of computer programs being written using two digits rather than four to define
the applicable year. Expenditures in 1998 related to the completion of the
conversion are not expected to be significant. PCI is also dependent upon
customers and suppliers to have their computer systems Year 2000 compliant.
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
12
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<PAGE>
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company listed in the index
appearing under Item 14(a) (1) and (2) hereof are filed as part of this Annual
Report on Form 10-K and are incorporated by reference in this Item 8. See also
"Index to Financial Statements" on page 17 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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:
<TABLE>
<CAPTION>
Name and Age Office
- ------------ ------
<S> <C>
Donald J. Bainton (66) Chairman of the Board and Director of
PCI, CPC and Caribbean; President and
Chief Executive Officer of PCI.
Charles F. DiGiovanna (57) President and Chief Executive Officer of
CPC and Caribbean; Director of PCI, CPC
and Caribbean.
Abdo Yazgi (45) Secretary, Director and Vice President
of PCI, CPC and Caribbean; Treasurer of
PCI.
Jay W. Hereford (47) Vice President, Treasurer and Chief
Financial Officer of CPC and Caribbean;
Assistant Treasurer of PCI.
Samuel A. Nutile (64) Vice President-Manufacturing and
Engineering of CPC and Caribbean.
John S. Roesch (56) Vice President-Sales and Marketing of
CPC and Caribbean.
David M. Stulman (51) Vice President-Human Resources of CPC
and Caribbean.
J.A. Zubillaga (64) Vice President and General Manager of
Caribbean.
Jose Luis Zapata (38) Director of PCI, CPC and Caribbean.
</TABLE>
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 a business associate of Mr. Bainton of the common stock of
Continental Can. Without admitting or denying the Commission's allegations, 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
13
<PAGE>
<PAGE>
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 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.
ITEM 11. EXECUTIVE COMPENSATION
The table below shows the compensation paid or credited by the Company and
its subsidiaries during the last three fiscal years to the top five executive
officers of the Company whose cash compensation (paid or deferred) in 1997
exceeded $100,000 (the "named executive officers"):
14
<PAGE>
<PAGE>
Summary Compensation Table(1)
<TABLE>
<CAPTION>
Annual Compensation
--------------------- All Other
Salary Bonus Compensation
Name and Principal Position Year ($) ($) ($)(2)
- --------------------------- ---- ------- ------- --------
<S> <C> <C> <C> <C>
Charles F. DiGiovanna 1997 275,000 275,000 4,800
President and Chief Executive 1996 275,000 96,250 4,500
Officer of CPC and Caribbean 1995 275,000 -- 4,500
Jay W. Hereford 1997 160,000 112,000 4,800
Vice President, Treasurer and 1996 152,000 26,600 4,500
Chief Financial Officer of 1995 152,000 -- 4,500
CPC and Caribbean
Samuel A. Nutile 1997 140,000 98,000 4,721
Vice President-Manufacturing 1996 132,000 23,100 3,960
and Engineering of CPC and 1995 132,000 -- 4,500
Caribbean
John S. Roesch 1997 140,000 98,000 3,214
Vice President-Sales and 1996 123,500 23,100 3,375
Marketing of CPC and Caribbean 1995 115,000 -- 4,500
David M. Stulman 1997 127,000 88,900 3,805
Vice President-Human Resources 1996 110,000 41,000 3,450
of CPC and Caribbean since
February 1996
</TABLE>
(1) All of the compensation paid to or earned by the named executive officers
relates to performance for a single fiscal year. No long term compensation
was paid to any of the named executive officers for any of the past three
fiscal years.
(2) Comprised of contributions by the Company to the accounts of the named
executive officers under the Continental Can Savings Plan, a defined
contribution plan.
COMPENSATION OF DIRECTORS
No compensation is paid to directors of PCI for their services as such.
MANAGEMENT INCENTIVE COMPENSATION PLAN
The Continental Plastic Containers, Inc. Management Incentive Compensation
Plan (the "Incentive Plan") is a nonqualified bonus plan in which certain
management level employees are eligible to participate. At the beginning of each
calendar year, a target level is set for its sales and profits for that year and
at the end of that year, the Board determines whether or not the target has been
met. If the target has been met, participants will be paid such portion of their
salary as determined by their compensation class. Bonuses are paid in the year
following the year to which the bonus applies.
SALARIED PENSION PLAN
The Continental Plastic Containers, Inc. Salaried Pension Plan (the
"Pension Plan") is a defined-benefit pension plan available to all non-union
salaried employees of the Company. All contributions to the Pension Plan are
made by, and all costs of the Pension Plan are borne by, the Company.
Plan benefits are based on all years of continuous service and the
employee's average earnings during the highest five continuous years of the last
ten years of employment, minus a profit-sharing annuity. For fiscal years 1994,
1995 and 1996, the compensation amount used in the calculation is limited to
$150,000 per year. Beginning January 1, 1997, the compensation amount used in
the calculation is limited to $160,000 per year. The profit-sharing annuity is
based on the amount of profit-sharing contributions received for 1988 through
1992.
15
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<PAGE>
Payments of benefits under the Pension Plan commence on such date after a
terminating employee's 55th birthday as the employee shall elect, and are made
in the form of straight life or joint and survivor annuities.
The following table sets forth estimated annual formula benefits payable
upon retirement at age 65 to persons in specified earnings and years of service
classifications, who have elected to receive payments in the form of straight
life annuities. The amounts shown do not reflect reductions that would be made
to offset the profit sharing annuity.
<TABLE>
<CAPTION>
Highest Years of Continuous Service at Age 65(2)
average ----------------------------------------------------
earnings(1) 10 15 20 25 30 35 40
- ----------- ------- ------- ------- ------- ------- ------- -------
<C> <C> <C> <C> <C> <C> <C> <C>
$100,000 $15,230 $22,845 $30,460 $38,075 $45,690 $53,305 $60,920
125,000 19,405 29,108 38,810 48,513 58,215 67,918 77,620
150,000 23,580 35,370 47,160 58,950 70,740 82,530 94,320
152,000+ 23,914 35,871 47,828 59,785 71,742 83,699 95,656
</TABLE>
(1) Annual earnings are equal to the sum of salary and bonus shown in the
SUMMARY COMPENSATION TABLE above.
(2) Messrs. DiGiovanna, Hereford, Nutile, Roesch and Stulman were credited
with 5, 23, 32, 22 and 1 years of continuous service as of December 31,
1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PCI has outstanding an aggregate of 100 shares of Common Stock (the "PCI
Shares"); prior to December 1996, 50 PCI shares were owned by Continental Can
and 50 shares were owned by Merrywood. In December 1996, Continental Can
purchased an additional 34 PCI Shares from Merrywood and agreed to purchase
Merrywood's remaining 16 PCI Shares not later than December 31, 2000. Jose Luis
Zapata (a director of PCI), Cayo Zapata and Paulo Zapata are brothers and each
beneficially owns one-third of Merrywood.
The Company, Continental Can, Merrywood and Plaza Limited (the record
holder of all of the outstanding Merrywood Stock) entered into an agreement
dated September 10, 1992, which, among other matters, gave Merrywood the right
to require Continental Can to purchase Merrywood's 50 PCI shares for $30.0
million, plus interest from November 1991. On July 31, 1996, Merrywood exercised
this right to require such purchase on December 2, 1996, for $30.0 million plus
approximately $15.4 million of interest. Merrywood and Continental Can meanwhile
entered into a new agreement dated as of October 22, 1996 (the "Stock Purchase
Agreement"), pursuant to which, in lieu of the foregoing purchase, Continental
Can (i) purchased 34 PCI Shares from Merrywood for $30.0 million and (ii) agreed
to purchase Merrywood's remaining 16 PCI Shares on or before December 31, 2000,
for $15.4 million plus interest at a rate of 0.75% above the nominal rate of the
Senior Secured Notes (the "Remaining PCI Shares Purchase Price"). Pursuant to
the Stock Purchase Agreement, Continental Can also issued to Plaza Limited a
warrant to purchase, at any time prior to January 1, 2001, up to 150,000 shares
of common stock of Continental Can at a price per share equal to the lower of
$20 and the per share book value of Continental Can common stock as of December
31, 1996.
As security for the performance by Continental Can of its obligations under
the Stock Purchase Agreement, Continental Can granted Merrywood a security
interest in the 84 PCI Shares owned by Continental Can. Also, if Continental Can
fails to purchase Merrywood's remaining 16 PCI Shares on or before December 31,
2000, as an alternative to any other remedy available to it, Merrywood would
have the right to exchange those PCI Shares for the
16
<PAGE>
<PAGE>
number of shares of Continental Can common stock obtained by dividing (x) the
Remaining PCI Shares Purchase Price by (y) the lower of (i) $11.93 (the average
closing price of Continental Can common stock for the 20 business days preceding
October 22, 1996) and (ii) the average closing price of the Continental Can
common stock for the 20 business days preceding December 31, 2000. If
Continental Can fails to make such cash purchase, then, depending on the market
price of the Continental Can common stock at that time, and on the number of
shares of such stock then outstanding, the acquisition by Merrywood of these
shares of Continental Can common stock could result in Merrywood's becoming the
largest stockholder of Continental Can.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a)(1)FINANCIAL STATEMENTS
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - December 31, 1997 and 1996 ....................................... p. 18
Consolidated Statements of Operations - Three-year period ended December 31, 1997 .............. p. 19
Consolidated Statements of Stockholders' Equity - Three-year period ended December 31, 1997..... p. 20
Consolidated Statements of Cash Flows - Three-year period ended December 31, 1997 .............. p. 21
Notes to Consolidated Financial Statements - Three-year period ended December 31, 1997 ......... p. 22
Independent Auditors' Report of KPMG Peat Marwick LLP........................................... p. 37
CONTINENTAL PLASTIC CONTAINERS, INC. (A WHOLLY-OWNED SUBSIDIARY OF PLASTIC CONTAINERS, INC.)
Balance Sheets - December 31, 1997 and 1996..................................................... p. 38
Statements of Operations - Three-year period ended December 31, 1997............................ p. 39
Statements of Stockholder's Equity - Three-year period ended December 31, 1997.................. p. 40
Statements of Cash Flows - Three-year period ended December 31, 1997............................ p. 41
Notes to Financial Statements - Three-year period ended December 31, 1997....................... p. 42
Independent Auditors' Report of KPMG Peat Marwick LLP........................................... p. 57
(2)FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation & Qualifying Accounts................................................. p. 58
(3)EXHIBITS REQUIRED
<CAPTION>
Exhibit No. Description
---------- -----------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of PCI ............................. *
3.2 Amended and Restated By-Laws of PCI................................................... *
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.............................................................. *
10.1 Amended and Restated Financing Agreement dated December 17, 1996,
between The CIT Group/Business Credit, Inc. (as Lender) and PCI (as Borrower)......... *
10.2 Master Lease Agreement, dated as of May 20, 1994, between General Electric
Capital Corporation and CPC........................................................... *
10.3 Schedules A-1 through A-6, each dated December 17, 1996, to the Master
Lease Agreement....................................................................... *
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..................................................................... *
10.5 Stock Purchase Agreement dated as of October 22, 1996, by and among Continental
Can Company, Inc., PCI, Merrywood, Inc. and Plaza Limited............................. *
21 Subsidiaries of the Registrant........................................................ *
27 Financial Data Schedule (EDGAR filing only)
</TABLE>
*These documents have previously been filed with the Commission.
(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.
17
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,479 12,178
Investment securities 20,385 1,210
Accounts receivable:
Trade 21,483 27,549
Other 205 1,691
-------- -------
21,688 29,240
Less allowance for doubtful accounts and accrued rebates 1,430 1,538
-------- -------
Net accounts receivable 20,258 27,702
-------- -------
Inventories 19,955 19,402
Deferred income taxes 2,260 3,515
Prepaid expenses 590 546
-------- -------
Total current assets 65,927 64,553
-------- -------
Property, plant and equipment:
Land, building and building improvements 22,828 22,634
Manufacturing machinery and equipment 142,687 142,107
Construction in progress 6,857 6,884
-------- -------
172,372 171,625
Less accumulated depreciation and amortization 72,281 69,380
-------- -------
Net property, plant and equipment 100,091 102,245
-------- -------
Goodwill and other intangible assets 25,591 27,078
Other assets 13,303 11,774
-------- -------
$204,912 205,650
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable - trade $ 18,285 19,267
Current portion of long-term obligations 996 980
Other current liabilities 16,741 19,004
-------- -------
Total current liabilities 36,022 39,251
Long-term obligations, excluding current portion 128,007 129,002
Other liabilities 20,764 23,183
Stockholders' equity:
Common stock, $l par value. Authorized 1,000
shares; 100 shares issued and outstanding - -
Additional paid-in capital 79,833 77,722
Deficit (27,529) (33,434)
-------- -------
52,304 44,288
Less note receivable from stockholder 32,185 30,074
-------- -------
Total stockholders' equity 20,119 14,214
-------- -------
$204,912 205,650
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
18
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<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $279,565 267,793 277,061
Cost of goods sold 234,210 224,789 237,668
-------- ------- -------
Gross profit 45,355 43,004 39,393
Selling, general and administrative expenses (27,772) (28,829) (30,059)
Plant rationalization and realignment - (6,500) 98
-------- ------- -------
Operating income 17,583 7,675 9,432
-------- ------- -------
Other income (expenses):
Interest income 1,451 102 221
Interest expense (13,535) (12,886) (11,807)
Loss on disposal of assets (555) (366) (346)
-------- ------- -------
(12,639) (13,150) (11,932)
-------- -------- --------
Income (loss) before income taxes
and extraordinary item 4,944 (5,475) (2,500)
Income tax benefit 961 1,876 2,505
-------- ------- -------
Income (loss) before extraordinary item 5,905 (3,599) 5
Extraordinary item - loss on early
extinguishment of debt - (7,305) (230)
-------- ------- -------
Net income (loss) $ 5,905 (10,904) (225)
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(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, 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 -- 17,648 -- -- 17,648
Loan to stockholder -- -- -- (30,000) (30,000)
Accrued interest on note receivable
from stockholder -- 74 -- (74) --
Net loss -- -- (10,904) -- (10,904)
------ ------ ------- ------- ------
Balances at December 31, 1996 -- 77,722 (33,434) (30,074) 14,214
Accrued interest on note receivable
from stockholder -- 2,111 -- (2,111) --
Net income -- -- 5,905 -- 5,905
------ ------ ------- ------- ------
Balances at December 31, 1997 $ -- 79,833 (27,529) (32,185) 20,119
====== ====== ======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,905 (10,904) (225)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 12,946 21,309 24,033
Loss on disposal of assets 555 366 346
Deferred income taxes (1,000) (1,896) (2,732)
Extraordinary item - loss on early
extinguishment of debt - 7,305 230
Changes in assets and liabilities:
Accounts receivable, net 7,444 5,366 1,114
Inventories (553) 585 3,474
Prepaid expenses (44) 258 667
Other assets 1,283 (725) (463)
Pension asset/liability (59) 182 (11,377)
Accounts payable (1,522) (3,725) (426)
Other current liabilities (2,263) 3,581 (1,678)
Other liabilities (1,350) 2,844 (468)
------- ------- ------
Net cash provided by operating activities 21,342 24,546 12,495
------- ------- ------
Cash flows from investing activities:
Proceeds from maturity of investment securities 25,834 75 7
Purchase of investment securities (45,009) (1,000) -
Proceeds from disposal of assets 565 41,654 341
Purchase of property, plant and equipment (11,085) (21,240) (30,693)
Loan to stockholder - (30,000) -
------- ------- ------
Net cash used in investing activities (29,695) (10,511) (30,345)
------- ------- ------
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 (979) (105,471) (130)
Premium on repurchase of bonds - (5,382) -
Financing fees paid (367) (5,514) (355)
------- ------- ------
Net cash provided by (used in) financing activities (1,346) (3,285) 16,533
------- ------- ------
Net increase (decrease) in cash and cash equivalents (9,699) 10,750 (1,317)
Cash and cash equivalents - beginning 12,178 1,428 2,745
------- ------- ------
Cash and cash equivalents - ending $ 2,479 12,178 1,428
======= ======= ======
Supplemental disclosures of cash flow information:
Interest paid $12,541 15,240 11,683
Income taxes paid 523 20 210
======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(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 senior secured notes (see note 7),
constitutes a substantial portion of the collateral for the 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 senior secured notes, does not constitute a
substantial portion of the collateral for the 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
senior secured 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, 1997 and 1996 consist of
available-for-sale U.S. government obligations, certificates of deposit,
Eurodollar deposits, and highly rated commercial paper, all of which are
due within one year. The fair value of investment securities approximates
their amortized cost.
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.
(Continued)
22
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1), Continued
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.
Effective January 1, 1997, the Company revised its estimates of the useful
lives of certain machinery and equipment. These changes were made to better
reflect the estimated periods during which these assets remain in service.
For the year ended December 31, 1997, the change had the effect of
decreasing depreciation expense by $1,696, and after adjusting for an
assumed tax rate of 35%, increasing net income by $1,102.
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, 1997, 1996
and 1995 were $1,784, $2,629 and $2,200, 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, 1997, 1996 and 1995 were
$8,825, $8,318 and $9,036, 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.
(Continued)
23
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1), Continued
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.
Beginning in 1997, the Company files a consolidated Federal income tax
return with Continental Can. Income taxes have been provided as if the
Company files a separate return.
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.
(2) Inventories
Major classes of inventories at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials $ 9,566 10,307
Finished goods 12,223 11,331
------- ------
21,789 21,638
LIFO reserve (3,578) (4,247)
------- ------
18,211 17,391
Continental Caribbean Containers, Inc. 554 675
Repair parts and supplies 1,190 1,336
------- ------
$19,955 19,402
======= ======
</TABLE>
(Continued)
24
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Goodwill and Other Intangible Assets
Goodwill and other intangible assets at December 31 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Goodwill $17,648 17,648
Customer contracts 7,630 7,630
Financing and acquisition costs 6,228 5,861
------- ------
31,506 31,139
Less accumulated amortization 5,915 4,061
------- ------
$25,591 27,078
======= ======
</TABLE>
(4) Other Assets
Other assets at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred income taxes $ 7,614 5,359
Prefunded pension asset 5,030 4,971
Other 659 1,444
------- ------
$13,303 11,774
======= ======
</TABLE>
(5) 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, 1997, 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, 1997, 1996 and 1995 were $167, $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,
1997, 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, 1997, letters of credit
amounting to $4,610 had been issued to guarantee obligations carried on the
consolidated balance sheet.
(Continued)
25
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Other Current Liabilities
Other current liabilities at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accrual for open credits $ 1,658 1,595
Employee compensation and benefits 6,994 6,711
Accrued real estate and
personal property taxes 1,493 1,532
Plant rationalization reserve 1,290 4,096
Other 5,306 5,070
------ ------
$16,741 19,004
====== ======
</TABLE>
(7) Long-term Obligations
Long-term obligations at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Senior Secured Notes, due 2006, interest
at 10%, 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 $125,000 125,000
Capital lease obligations 4,003 4,982
-------- -------
Total long-term obligations 129,003 129,982
Less current portion 996 980
-------- -------
Long-term obligations,
excluding current portion $128,007 129,002
======= =======
</TABLE>
The Senior Secured 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.
(Continued)
26
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7), Continued
In the event of a change of control as defined in the indenture, PCI is
obligated to offer to purchase all outstanding Senior Secured 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 Senior Secured 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,
1997, 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 $782 and $658 at December 31,
1997 and 1996, 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 $665 and $269 at December 31, 1997 and 1996, respectively.
Future minimum lease payments under the capital leases are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
-----------
<S> <C>
1998 $1,220
1999 1,172
2000 919
2001 871
2002 and beyond 349
------
Total future minimum lease payments 4,531
Less portion representing interest 528
Net minimum lease payments $4,003
======
</TABLE>
(Continued)
27
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Leases
PCI rents certain property and equipment used in connection with its
operations. Rental expense under these operating leases was $13,773, $8,054
and $6,152 for the years ended December 31, 1997, 1996 and 1995,
respectively. 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.
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.
Future minimum lease payments under noncancellable operating leases are as
follows:
<TABLE>
<CAPTION>
Year ending
December 31,
-----------
<S> <C>
1998 $13,687
1999 13,137
2000 12,693
2001 11,860
2002 9,853
Thereafter 21,704
-------
Total future minimum lease payments $82,934
=======
</TABLE>
(9) Other Liabilities
Other liabilities at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Insurance reserves $ 8,896 9,638
Postretirement benefits accrued 6,346 6,298
Other 5,522 7,247
------- ------
$20,764 23,183
======= ======
</TABLE>
(Continued)
28
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Note Receivable from Stockholder
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 note 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.
(11) Income Taxes
Total income tax benefit (expense) for the years ended December 31, 1997,
1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- -------------------- ---------------------
Federal State Total Federal State Total Federal State Total
------- ----- ----- ------- ----- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current $ - (39) (39) - (20) (20) (145) (82) (227)
Deferred 900 100 1,000 1,746 150 1,896 2,569 163 2,732
---- --- ----- ----- --- ----- ----- --- -----
$900 61 961 1,746 130 1,876 2,424 81 2,505
==== === ===== ===== === ===== ===== === =====
</TABLE>
The income tax benefit for the years ended December 31, 1997, 1996 and 1995
differed from the "expected" income tax benefit (expense) computed by
applying the Federal income tax rate to income (loss) before income taxes
and extraordinary item as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" income tax benefit (expense) $(1,681) 1,862 850
Additional benefit (expense) resulting from:
Change in valuation allowance allocated to
continuing operations 2,745 (243) 1,303
State and local income taxes, net of
Federal income tax benefit 40 86 53
Other (143) 171 299
------- ------ ------
Income tax benefit $ 961 1,876 2,505
======= ===== =====
</TABLE>
(Continued)
29
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11), Continued
The significant components of deferred income tax benefit for the years
ended December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Deferred tax benefit (expense) (exclusive of
the effects of other components listed below) $(1,719) 9,065 (4,168)
Increase (decrease) in operating loss carry forward (164) (4,262) 5,087
Research and experimentation credits 138 (23) 365
Alternative minimum tax credit carry forward - (158) 145
Decrease (increase) in valuation allowance
for deferred tax assets 2,745 (2,726) 1,303
------- ----- -----
$ 1,000 1,896 2,732
======= ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards $18,811 18,975
Vacation and incentive pay reserves 934 1,016
Self-insurance reserves 3,730 4,012
Plant rationalization reserve 758 2,437
Postretirement benefit reserves 2,659 2,602
Other 3,005 2,555
------- ------
Total gross deferred tax assets 29,897 31,597
Less valuation allowance 5,049 7,794
------- ------
Net deferred tax assets 24,848 23,803
------- ------
Deferred tax liabilities:
Book over tax basis of principally fixed assets 13,067 13,045
Prefunded pension 1,907 1,884
------- ------
Total gross deferred tax liabilities 14,974 14,929
Net deferred tax assets $ 9,874 8,874
======= ======
</TABLE>
(Continued)
30
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11), Continued
Net deferred tax assets are classified in the accompanying consolidated
balance sheets as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current - deferred income taxes $2,260 3,515
Long-term - other assets 7,614 5,359
----- -----
$9,874 8,874
====== =====
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1996 was
$5,068. The net change in the total valuation allowance for the years ended
December 31, 1997 and 1996 was a decrease of $2,745 and an increase of
$2,726, 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, 1997.
At December 31, 1997, PCI has operating loss carry forwards for Federal
income tax purposes of approximately $50,000, which are available to offset
future Federal taxable income. The carry forward periods extend from 2007
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.
(12) Employee Benefits
PENSION PLANS
PCI maintains a defined benefit pension plan for substantially all salaried
employees hired prior to August 1, 1997. 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.
(Continued)
31
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12), Continued
PENSION PLANS, CONTINUED
PCI maintains a noncontributory defined benefit pension plan for
substantially all hourly workers hired prior to August 1, 1997 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.
The following table sets forth the plans' funded status at December 31,
1997 and 1996 based primarily on January 1, 1997 participant data and plan
assets:
<TABLE>
<CAPTION>
1997 1996
----------------------------- ------------------------------
Salaried Hourly Total Salaried Hourly Total
-------- ------ ----- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value of benefit
obligation, including vested benefits
of $32,167 and $22,612 in 1997 and
$30,280 and $20,372 in 1996 for the
salaried and hourly plans, respectively $(34,104) (24,988) (59,092) (31,903) (22,575) (54,478)
======== ======= ======= ======= ======= =======
Projected benefit obligation (PBO) (35,904) (25,017) (60,921) (33,988) (22,594) (56,582)
Plan assets, at fair value 36,436 26,351 62,787 34,285 24,613 58,898
Unrecognized net (gain) loss 3,236 238 3,474 3,056 (236) 2,820
Prior service cost not yet recognized
in net periodic pension cost (673) 363 (310) (489) 324 (165)
-------- ------- ------- ------- ------- -------
Prefunded pension asset $ 3,095 1,935 5,030 2,864 2,107 4,971
======== ======= ======= ======= ======= =======
</TABLE>
Net periodic pension costs included the following components for the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost $ 1,208 1,362 992
Interest cost 4,246 4,001 4,002
Return on plan assets (8,976) (8,505) (6,292)
Net amortization and deferral 3,919 3,897 2,922
------- ------ ------
Net periodic pension costs $ 397 755 1,624
======= ====== ======
</TABLE>
(Continued)
32
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12), Continued
PENSION PLANS, CONTINUED
PCI contributions to the plans for the years ended December 31, 1997, 1996
and 1995 were $456, $573 and $12,800, respectively.
Assumptions used in the accounting were:
<TABLE>
<CAPTION>
As of December 31,
---------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rates 7.35% 7.75% 7.50%
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>
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 $302, $303 and $292 for the years ended
December 31, 1997, 1996 and 1995, 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 $560, $553 and $518 for the years ended December
31, 1997, 1996 and 1995, respectively.
UNION BENEFIT PLANS
PCI contributes to various union pension plans pursuant to its labor
agreements. Union benefit plan expense was $1,013, $1,083 and $1,080 for
the years ended December 31, 1997, 1996 and 1995, respectively.
(Continued)
33
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12), Continued
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 as claims are
incurred. Summary information on PCI's plan at December 31, 1997 and 1996
is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $2,730 2,895
Fully eligible, active plan participants 816 740
Other active plan participants 1,713 1,472
----- -----
5,259 5,107
Unrecognized net gain from experience
and changes in assumptions 723 793
Prior service cost in net periodic postretirement benefit cost 364 398
------ -----
Accrued postretirement benefit obligation $6,346 6,298
====== =====
</TABLE>
The components of net periodic postretirement benefit cost for the years
ended December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost $ 83 87 52
Interest cost 380 447 480
Net amortization and deferral (53) (34) (34)
---- ---- ---
Net periodic postretirement benefit cost $410 500 498
==== === ===
</TABLE>
For measurement purposes, an 8.24% annual rate of increase in the per
capita cost of covered benefits (i.e., health care cost trend rate) was
assumed for 1997; 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, 1997 by $416 and the aggregate of the
service and interest cost components of net periodic postretirement benefit
cost for the year ended December 31, 1997 by $39.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.35%, 7.75% and 7.50% at December
31, 1997, 1996 and 1995, respectively.
(Continued)
34
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12), Continued
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. Additional costs charged to operations for
postemployment benefits in 1997, 1996 and 1995 were $57, $38 and $24,
respectively.
(13) Major Customers
Sales to one customer represented approximately 31%, 29% and 27% of net
sales for the years ended December 31, 1997, 1996 and 1995, respectively.
Included in accounts receivable are receivables from this customer of
$8,332 and $8,564 at December 31, 1997 and 1996, respectively. A second
customer represented approximately 15%, 13% and 11% of net sales for each
of the years ended December 31, 1997, 1996 and 1995, respectively, and
$1,131 and $4,339 of receivables from this customer are included in
accounts receivable at December 31, 1997 and 1996, respectively. A third
customer represented approximately 10% of net sales for the years ended
December 31, 1997 and 1996, and $860 and $906 of receivables from this
customer are included in accounts receivable at December 31, 1997 and
1996, respectively.
(14) Related Party Transactions
PCI is charged for certain services provided to it by Continental Can.
These costs amounted to $700, $600 and $600 for the years ended December
31, 1997, 1996 and 1995, respectively. At December 31, 1997, there was no
amount payable to Continental Can for these costs. At December 31, 1996,
there was $26 payable included in other current liabilities in the
accompanying consolidated balance sheets.
(15) Plant Rationalization and Realignment
In 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
another plant in 1997. Production from these plants was transferred to
other existing facilities. The components of the $6,500 charge included
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 remains obligated under a noncancellable operating lease at
one of the facilities through June 1999. Payments made in 1997 against the
accrued liability amounted to approximately $800 for severance benefits
and approximately $2,000 for other accrued charges.
For the year ended December 31, 1995, the Company recorded a credit of $98
related to prior plant consolidations.
(Continued)
35
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) Extraordinary Item
In 1996, PCI incurred an extraordinary loss of $7,305 related to the
purchase and redemption of senior secured notes. In 1995, PCI incurred an
extraordinary loss of $230 related to the early extinguishment of a
revolving credit facility.
(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.
(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, 1997 and 1996, 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,
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.
(19) Pending Sale of Continental Can
In January 1998, Suiza Foods Corporation signed a definitive agreement to
acquire Continental Can for stock and assumption of debt in a purchase
transaction. The transaction is expected to be completed during the second
quarter of 1998. The Company believes this transaction would represent a
change of control as described in note 7. The accompanying consolidated
financial statements of PCI do not include any adjustments that might
result from this transaction.
36
<PAGE>
<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, 1997 and 1996, 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, 1997. We
also have audited the consolidated financial statement Schedule for the
three-year period ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, 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.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
Omaha, Nebraska
February 6, 1998
37
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PLASTIC CONTAINERS, INC.)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,164 10,522
Investment securities 20,214 1,000
Accounts receivable:
Trade 20,713 26,882
Other 783 1,769
-------- -------
21,496 28,651
Less allowance for doubtful accounts and accrued rebates 1,416 1,536
-------- -------
Net accounts receivable 20,080 27,115
-------- -------
Inventories 19,401 18,727
Deferred income taxes 2,260 3,515
Prepaid expenses 590 546
-------- -------
Total current assets 63,709 61,425
-------- -------
Property, plant and equipment:
Land, building and building improvements 20,889 20,712
Manufacturing machinery and equipment 136,748 137,884
Construction in progress 6,792 6,780
-------- -------
164,429 165,376
Less accumulated depreciation and amortization 68,535 66,598
-------- -------
Net property, plant and equipment 95,894 98,778
-------- -------
Goodwill and other intangible assets 25,591 27,078
Other assets 13,303 11,774
-------- -------
$198,497 199,055
======== =======
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable - trade $ 17,852 19,045
Current portion of long-term obligations 996 980
Other current liabilities 16,484 18,813
-------- -------
Total current liabilities 35,332 38,838
Long-term obligations, excluding current portion 128,007 129,002
Other liabilities 20,741 23,155
Stockholder's equity:
Common stock, $l par value. Authorized 25,000
shares; 10,000 shares issued and outstanding 10 10
Additional paid-in capital 74,175 71,114
Deficit (27,583) (32,990)
-------- -------
46,602 38,134
Less note receivable from stockholder of parent 32,185 30,074
-------- -------
Total stockholder's equity 14,417 8,060
-------- -------
$198,497 199,055
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PLASTIC CONTAINERS, INC.)
STATEMENTS OF OPERATIONS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $273,189 262,200 271,088
Cost of goods sold 228,042 219,210 231,845
-------- ------- -------
Gross profit 45,147 42,990 39,243
Selling, general and administrative expenses (27,737) (28,794) (30,023)
Plant rationalization and realignment - (6,500) 98
-------- ------- -------
Operating income 17,410 7,696 9,318
-------- ------- -------
Other income (expenses):
Interest income 1,396 21 128
Interest expense (13,535) (12,886) (11,807)
Loss on disposal of assets (864) (366) (346)
-------- ------- -------
(13,003) (13,231) (12,025)
-------- ------- -------
Income (loss) before income taxes
and extraordinary item 4,407 (5,535) (2,707)
Income tax benefit 1,000 1,896 2,526
-------- ------- -------
Income (loss) before extraordinary item 5,407 (3,639) (181)
Extraordinary item - loss on early
extinguishment of debt - (7,305) (230)
-------- ------- -------
Net income (loss) $ 5,407 (10,944) (411)
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PLASTIC CONTAINERS, INC.)
STATEMENTS OF STOCKHOLDER'S EQUITY
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(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, 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 - 17,648 - - 17,648
Loan to stockholder of parent - - - (30,000) (30,000)
Accrued interest on note receivable
from stockholder of parent - 74 - (74) -
Net loss - - (10,944) - (10,944)
--- ------ ------- ------- ------
Balances at December 31, 1996 10 71,114 (32,990) (30,074) 8,060
Accrued interest on note receivable
from stockholder of parent - 2,111 - (2,111) -
Capital contributed by parent - 950 - - 950
Net income - - 5,407 - 5,407
--- ------ ------- ------- ------
Balances at December 31, 1997 $10 74,175 (27,583) (32,185) 14,417
=== ====== ======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PLASTIC CONTAINERS, INC.)
STATEMENTS OF CASH FLOWS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,407 (10,944) (411)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 12,481 20,950 23,566
Loss on disposal of assets 864 366 346
Deferred income taxes (1,000) (1,896) (2,732)
Extraordinary item - loss on early
extinguishment of debt - 7,305 230
Changes in assets and liabilities:
Accounts receivable, net 7,035 5,644 643
Inventories (674) 590 3,564
Prepaid expenses (44) 225 762
Other assets 1,283 (731) (463)
Pension asset/liability (59) 182 (11,377)
Accounts payable (1,737) (3,969) 61
Other current liabilities (2,329) 3,575 (1,684)
Other liabilities (1,345) 2,849 (468)
-------- ------- -------
Net cash provided by operating activities 19,882 24,146 12,037
-------- ------- -------
Cash flows from investing activities:
Proceeds from maturity of investment securities 25,795 - -
Purchase of investment securities (45,009) (1,000) -
Proceeds from disposal of assets 827 41,626 341
Purchase of property, plant and equipment (10,457) (20,965) (30,524)
Loan to stockholder of parent - (30,000) -
-------- ------- -------
Net cash used in investing activities (28,844) (10,339) (30,183)
-------- ------- -------
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 (979) (105,471) (130)
Capital contributed by parent 950 - -
Premium on repurchase of bonds - (5,382) -
Financing fees paid (367) (5,514) (355)
-------- ------- -------
Net cash provided by (used in) financing activities (396) (3,285) 16,533
-------- ------- -------
Net increase (decrease) in cash and cash equivalents (9,358) 10,522 (1,613)
Cash and cash equivalents - beginning 10,522 - 1,613
-------- ------- -------
Cash and cash equivalents - ending $ 1,164 10,522 -
======== ======= =======
Supplemental disclosures of cash flow information:
Interest paid $ 12,541 15,240 11,683
Income taxes paid 523 20 210
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PLASTIC CONTAINERS, INC.)
NOTES TO FINANCIAL STATEMENTS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(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 from
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, 1997 and 1996 consist of
available-for-sale U.S. government obligations, certificates of deposit,
Eurodollar deposits, and highly rated commercial paper, all of which are
due within one year. The fair value of investment securities approximates
their amortized cost.
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.
(Continued)
42
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(1), Continued
PROPERTY, PLANT AND EQUIPMENT, CONTINUED
Effective January 1, 1997, the Company revised its estimates of the useful
lives of certain machinery and equipment. These changes were made to better
reflect the estimated periods during which these assets remain in service.
For the year ended December 31, 1997, the change had the effect of
decreasing depreciation expense by $1,696, and after adjusting for an
assumed tax rate of 35%, increasing net income by $1,102.
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 consolidated balance sheets. Costs charged to
operations for self-insurance for the years ended December 31, 1997, 1996
and 1995 were $1,784, $2,629 and $2,200, 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, 1997, 1996 and 1995 were
$8,825, $8,318 and $9,036, 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
CPC 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.
(Continued)
43
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(1), Continued
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.
The results of operations of the Company for income tax purposes are
included in the consolidated tax returns of PCI and Continental Can. Income
tax expense or benefit is an allocation from PCI and is determined as if
the Company was a separate taxable entity.
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 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.
(2) Inventories
Major classes of inventories at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials $ 9,566 10,307
Finished goods 12,223 11,331
------- ------
21,789 21,638
LIFO reserve (3,578) (4,247)
------- ------
18,211 17,391
Repair parts and supplies 1,190 1,336
------- ------
$19,401 18,727
======= ======
</TABLE>
(Continued)
44
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(3) Goodwill and Other Intangible Assets
Goodwill and other intangible assets at December 31 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Goodwill $17,648 17,648
Customer contracts 7,630 7,630
Financing and acquisition costs 6,228 5,861
------- ------
31,506 31,139
Less accumulated amortization 5,915 4,061
------- ------
$25,591 27,078
======= ======
</TABLE>
(4) Other Assets
Other assets at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred income taxes $ 7,614 5,359
Prefunded pension asset 5,030 4,971
Other 659 1,444
------- ------
$13,303 11,774
======= ======
</TABLE>
(5) 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, 1997, 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, 1997, 1996 and 1995 were $167, $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,
1997, 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, 1997, letters of credit
amounting to $4,610 had been issued to guarantee obligations carried on the
consolidated balance sheet.
(Continued)
45
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(6) Other Current Liabilities
Other current liabilities at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accrual for open credits $ 1,653 1,595
Employee compensation and benefits 6,877 6,590
Accrued real estate and
personal property taxes 1,458 1,489
Plant rationalization reserve 1,290 4,096
Other 5,206 5,043
------- ------
$16,484 18,813
======= ======
</TABLE>
(7) Long-term Obligations
Long-term obligations at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Senior Secured Notes of PCI, due 2006, interest
at 10%, 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 $125,000 125,000
Capital lease obligations 4,003 4,982
-------- -------
Total long-term obligations 129,003 129,982
Less current portion 996 980
-------- -------
Long-term obligations,
excluding current portion $128,007 129,002
======== =======
</TABLE>
The Senior Secured 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.
(Continued)
46
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(7), Continued
In the event of a change of control as defined in the indenture, PCI is
obligated to offer to purchase all outstanding Senior Secured 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 Senior Secured 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,
1997, 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 $782 and $658 at December 31,
1997 and 1996, 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 $665 and $269 at December 31, 1997 and 1996, respectively.
Future minimum lease payments under the capital leases are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
-------------
<S> <C>
1998 $1,220
1999 1,172
2000 919
2001 871
2002 and beyond 349
------
Total future minimum lease payments 4,531
Less portion representing interest 528
------
Net minimum lease payments $4,003
======
</TABLE>
(Continued)
47
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(8) Leases
CPC rents certain property and equipment used in connection with its
operations. Rental expense under these operating leases was $13,773, $8,054
and $6,152 for the years ended December 31, 1997, 1996 and 1995,
respectively. 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.
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.
Future minimum lease payments under noncancellable operating leases are as
follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1998 $13,687
1999 13,137
2000 12,693
2001 11,860
2002 9,853
Thereafter 21,704
-------
Total future minimum lease payments $82,934
=======
</TABLE>
(9) Other Liabilities
Other liabilities at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Insurance reserves $ 8,896 9,638
Postretirement benefits accrued 6,346 6,298
Other 5,499 7,219
------- ------
$20,741 23,155
======= ======
</TABLE>
(Continued)
48
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(10) Note Receivable from Stockholder of Parent
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 note
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.
(11) Income Taxes
Total income tax benefit (expense) for the years ended December 31, 1997,
1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- -------------------- ---------------------
Federal State Total Federal State Total Federal State Total
------- ----- ----- ------- ----- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current $ - - - - - - (145) (61) (206)
Deferred 900 100 1,000 1,746 150 1,896 2,569 163 2,732
---- --- ----- ----- --- ----- ----- --- -----
$900 100 1,000 1,746 150 1,896 2,424 102 2,526
==== === ===== ===== === ===== ===== === =====
</TABLE>
The income tax benefit for the years ended December 31, 1997, 1996 and 1995
differed from the "expected" income tax benefit (expense) computed by
applying the Federal income tax rate to income (loss) before income taxes
and extraordinary item as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" income tax benefit (expense) $(1,498) 1,882 920
Additional benefit (expense) resulting from:
Change in valuation allowance allocated to
continuing operations 2,745 (243) 1,303
State and local income taxes, net of
Federal income tax benefit 66 99 67
Other (313) 158 236
------- ----- -----
Income tax benefit $ 1,000 1,896 2,526
======= ===== =====
</TABLE>
(Continued)
49
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(11), Continued
The significant components of deferred income tax benefit for the years
ended December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Deferred tax benefit (expense) (exclusive of
the effects of other components listed below) $(1,719) 9,065 (4,168)
Increase (decrease) in operating loss carry forward (164) (4,262) 5,087
Research and experimentation credits 138 (23) 365
Alternative minimum tax credit carry forward - (158) 145
Decrease (increase) in valuation allowance
for deferred tax assets 2,745 (2,726) 1,303
------- ----- -----
$ 1,000 1,896 2,732
======= ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards $18,811 18,975
Vacation and incentive pay reserves 934 1,016
Self-insurance reserves 3,730 4,012
Plant rationalization reserve 758 2,437
Postretirement benefit reserves 2,659 2,602
Other 3,005 2,555
------- -------
Total gross deferred tax assets 29,897 31,597
Less valuation allowance 5,049 7,794
------- -------
Net deferred tax assets 24,848 23,803
------- ------
Deferred tax liabilities:
Book over tax basis of principally fixed assets 13,067 13,045
Prefunded pension 1,907 1,884
------- ------
Total gross deferred tax liabilities 14,974 14,929
------- ------
Net deferred tax assets $ 9,874 8,874
======= ======
</TABLE>
(Continued)
50
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(11), Continued
Net deferred tax assets are classified in the accompanying consolidated
balance sheets as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current - deferred income taxes $2,260 3,515
Long-term - other assets 7,614 5,359
------ -----
$9,874 8,874
====== =====
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1996 was
$5,068. The net change in the total valuation allowance for the years
ended December 31, 1997 and 1996 was a decrease of $2,745 and an increase
of $2,726, 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, 1997.
At December 31, 1997, CPC has operating loss carry forwards for Federal
income tax purposes of approximately $50,000, which are available to
offset future Federal taxable income. The carry forward periods extend
from 2007 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.
(12) Employee Benefits
PENSION PLANS
CPC maintains a defined benefit pension plan for substantially all
salaried employees hired prior to August 1, 1997. 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.
(Continued)
51
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(12), Continued
PENSION PLANS, CONTINUED
CPC maintains a noncontributory defined benefit pension plan for
substantially all hourly workers hired prior to August 1, 1997 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.
The following table sets forth the plans' funded status at December 31,
1997 and 1996 based primarily on January 1, 1997 participant data and plan
assets:
<TABLE>
<CAPTION>
1997 1996
----------------------------- ------------------------------
Salaried Hourly Total Salaried Hourly Total
-------- ------ ----- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value of benefit
obligation, including vested benefits
of $32,167 and $22,612 in 1997 and
$30,280 and $20,372 in 1996 for the
salaried and hourly plans,
respectively $(34,104) (24,988) (59,092) (31,903) (22,575) (54,478)
======== ======= ======== ======= ======= =======
Projected benefit obligation (PBO) (35,904) (25,017) (60,921) (33,988) (22,594) (56,582)
Plan assets, at fair value 36,436 26,351 62,787 34,285 24,613 58,898
Unrecognized net (gain) loss 3,236 238 3,474 3,056 (236) 2,820
Prior service cost not yet recognized
in net periodic pension cost (673) 363 (310) (489) 324 (165)
-------- ------- -------- ------- ------- -------
Prefunded pension asset $ 3,095 1,935 5,030 2,864 2,107 4,971
======== ======= ======== ======= ======= =======
</TABLE>
Net periodic pension costs included the following components for the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost $ 1,208 1,362 992
Interest cost 4,246 4,001 4,002
Return on plan assets (8,976) (8,505) (6,292)
Net amortization and deferral 3,919 3,897 2,922
------- ------ ------
Net periodic pension costs $ 397 755 1,624
======= ====== ======
</TABLE>
(Continued)
52
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(12), Continued
PENSION PLANS, CONTINUED
CPC contributions to the plans for the years ended December 31, 1997, 1996
and 1995 were $456, $573 and $12,800, respectively.
Assumptions used in the accounting were:
<TABLE>
<CAPTION>
As of December 31,
---------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rates 7.35% 7.75% 7.50%
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>
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 $302, $303 and $292 for the years ended
December 31, 1997, 1996 and 1995, 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 $560, $553 and $518 for the years ended
December 31, 1997, 1996 and 1995, respectively.
UNION BENEFIT PLANS
CPC contributes to various union pension plans pursuant to its labor
agreements. Union benefit plan expense was $1,013, $1,083 and $1,080 for
the years ended December 31, 1997, 1996 and 1995, respectively.
(Continued)
53
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(12), Continued
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 as claims are
incurred. Summary information on CPC's plan at December 31, 1997 and 1996
is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $2,730 2,895
Fully eligible, active plan participants 816 740
Other active plan participants 1,713 1,472
------ -----
5,259 5,107
Unrecognized net gain from experience
and changes in assumptions 723 793
Prior service cost in net periodic postretirement benefit cost 364 398
------ -----
Accrued postretirement benefit obligation $6,346 6,298
====== =====
</TABLE>
The components of net periodic postretirement benefit cost for the years
ended December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost $ 83 87 52
Interest cost 380 447 480
Net amortization and deferral (53) (34) (34)
--- --- ---
Net periodic postretirement benefit cost $410 500 498
==== === ===
</TABLE>
For measurement purposes, an 8.24% annual rate of increase in the per
capita cost of covered benefits (i.e., health care cost trend rate) was
assumed for 1997; 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, 1997 by $416 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year ended December 31, 1997 by $39.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.35%, 7.75% and 7.50% at December
31, 1997, 1996 and 1995, respectively.
(Continued)
54
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(12), Continued
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. Additional costs charged to operations for
postemployment benefits in 1997, 1996 and 1995 were $57, $38 and $24,
respectively.
(13) Major Customers
Sales to one customer represented approximately 31%, 30% and 28% of net
sales for the years ended December 31, 1997, 1996 and 1995, respectively.
Included in accounts receivable are receivables from this customer of
$8,332 and $8,564 at December 31, 1997 and 1996, respectively. A second
customer represented approximately 15%, 13% and 11% of net sales for each
of the years ended December 31, 1997, 1996 and 1995, respectively, and
$1,131 and $4,339 of receivables from this customer are included in
accounts receivable at December 31, 1997 and 1996, respectively. A third
customer represented approximately 10% of net sales for the years ended
December 31, 1997 and 1996, and $860 and $906 of receivables from this
customer are included in accounts receivable at December 31, 1997 and
1996, respectively.
(14) Related Party Transactions
The Company is charged for certain services provided to it by Continental
Can. These costs amounted to $700, $600 and $600 for the years ended
December 31, 1997, 1996 and 1995, respectively. At December 31, 1997,
there was no amount payable to Continental Can for these costs. At
December 31, 1996, there was $26 payable included in other current
liabilities in the accompanying consolidated balance sheets.
(15) Plant Rationalization and Realignment
In 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
another plant in 1997. Production from these plants was transferred to
other existing facilities. The components of the $6,500 charge included
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 remains obligated under a noncancellable operating lease at
one of the facilities through June 1999. Payments made in 1997 against the
accrued liability amounted to approximately $800 for severance benefits
and approximately $2,000 for other accrued charges.
For the year ended December 31, 1995, the Company recorded a credit of $98
related to prior plant consolidations.
(Continued)
55
<PAGE>
<PAGE>
CONTINENTAL PLASTIC CONTAINERS, INC.
NOTES TO FINANCIAL STATEMENTS
(16) Extraordinary Item
In 1996, CPC incurred an extraordinary loss of $7,305 related to the
purchase and redemption of senior secured notes. In 1995, CPC incurred an
extraordinary loss of $230 related to the early extinguishment of a
revolving credit facility.
(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.
(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, 1997 and 1996, 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,
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.
(19) Pending Sale of Continental Can
In January 1998, Suiza Foods Corporation signed a definitive agreement to
acquire Continental Can for stock and assumption of debt in a purchase
transaction. The transaction is expected to be completed during the second
quarter of 1998. The Company believes this transaction would represent a
change of control as described in note 7. The accompanying financial
statements of CPC do not include any adjustments that might result from
this transaction.
56
<PAGE>
<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. as of December 31, 1997 and 1996, 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, 1997. 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. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
Omaha, Nebraska
February 6, 1998
57
<PAGE>
<PAGE>
PLASTIC CONTAINERS, INC. AND SUBSIDIARIES
SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
(000'S OMITTED)
<TABLE>
<CAPTION>
Balance at Balance
beginning at end
Description of period Additions Deductions of period
----------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1995:
704(1)
LIFO reserve $3,924 - 1,195(2) 2,025
====== ===== ===== =====
Allowance for doubtful accounts 771(3)
and accrued rebates $2,288 213(5) 228(4) 1,502
====== ===== ===== =====
December 31, 1996:
LIFO reserve $2,025 2,298(2) 76(1) 4,247
====== ===== ===== =====
Allowance for doubtful accounts 725(3)
and accrued rebates $1,502 1,664(5) 903(4) 1,538
====== ===== ===== =====
December 31, 1997:
LIFO reserve $4,247 - 669(2) 3,578
====== ===== ===== =====
Allowance for doubtful accounts 990(3)
and accrued rebates $1,538 945(5) 63(4) 1,430
====== ===== ===== =====
</TABLE>
- ------------------------------------------------------------
(1) Credited to cost of sales - reduction in inventory quantities.
(2) Charged/credited to costs - inventory repricing.
(3) Payments to customers.
(4) Specific write-off of receivable or recovery of previously doubtful
receivable.
(5) Charged to expense - accruals for customer rebates and doubtful receivables.
58
<PAGE>
<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 report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PLASTIC CONTAINERS, INC.
By /s/ Abdo Yazgi Date: March 23, 1998
-------------------------------- -----------------
Abdo Yazgi, Vice President, Secretary
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Donald J. Bainton Date: March 23, 1998
- ------------------------------------- -----------------
Donald J. Bainton, Chairman of the
Board of Directors and Chief Executive
Officer (Principal Executive Officer)
and Director
/s/ Charles F. DiGiovanna Date: March 23, 1998
- ------------------------------------- -----------------
Charles F. DiGiovanna, Director
/s/ Abdo Yazgi Date: March 23, 1998
- ------------------------------------- -----------------
Abdo Yazgi, Vice President, Secretary
and Treasurer (Principal Financial and
Accounting Officer) and Director
Date:
- ------------------------------------- -----------------
Jose Luis Zapata, Director
59
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as........................'tm'
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,479
<SECURITIES> 20,385
<RECEIVABLES> 21,688
<ALLOWANCES> 1,430
<INVENTORY> 19,955
<CURRENT-ASSETS> 65,927
<PP&E> 172,372
<DEPRECIATION> 72,281
<TOTAL-ASSETS> 204,912
<CURRENT-LIABILITIES> 36,022
<BONDS> 128,007
<COMMON> 0
0
0
<OTHER-SE> 20,119
<TOTAL-LIABILITY-AND-EQUITY> 204,912
<SALES> 279,565
<TOTAL-REVENUES> 279,565
<CGS> 234,210
<TOTAL-COSTS> 261,982
<OTHER-EXPENSES> 12,639
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,535
<INCOME-PRETAX> 4,944
<INCOME-TAX> 961
<INCOME-CONTINUING> 5,905
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,905
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
