Item 1.
Description of Business.
General
Founded in 1992 and based in Chesterfield, Missouri, we are one of the nation’s largest manufacturers of customized, high performance rigid plastic bottles and containers primarily made from polyethylene terephthalate (“PET”) and high density polyethylene (“HDPE”) resins. We market our products largely into the food, personal care, household products, healthcare and pharmaceutical end markets. We sell our products to a diversified customer base, ranging from Fortune 500 companies to smaller privately-owned businesses with a focus on customers with small-to-medium annual volume requirements. We currently operate 11 manufacturing facilities, nine in the United States and two in Canada, generating approximately 83% of net sales domestically and 17% from Canada in FY 2012.
Industry Overview
We compete in the rigid plastic container segment of the global container and packaging market. We operate in a sub segment of the rigid plastic container market that serves customers with small-to-medium annual volume requirements. Further, we target specific end markets (such as food, personal care, household products, healthcare and pharmaceutical end markets) that we believe are stable and recession resistant and we have grown our product design and manufacturing capabilities to meet the needs of those markets.
The plastic packaging market includes containers for beverages, food, household products, cosmetics, toiletries and pharmaceuticals, among others. End market demand for plastic bottles and containers includes the following: (i) beverage bottles and jars (including bottled water, sports drinks, soft drinks and teas); (ii) other bottles and jars (including food, household products, toiletries, cosmetics and pharmaceuticals); and (iii) other plastic containers (including pails, tubs, cups, bowls). PET is the most commonly used resin in food and beverage applications, while HDPE is primarily used in household products, beverages and pharmaceuticals.
Products
We design, manufacture and sell a broad range of customized, high performance bottles and containers, representing over 1.2 billion units across over 2,750 different SKUs in FY 2012. The majority of our products are manufactured for a specific customer on an exclusive basis. We use proprietary stock and custom molds and we own a majority of our tooling and molds. To supplement our core blow molding operations and to provide greater value to our customers, we offer an array of services and flexible manufacturing options designed to provide packaging solutions that we believe differentiate our customers’ products from their competition. In addition to manufacturing plastic bottles and containers, we offer our customers design and engineering services, decoration technologies (including in-mold labeling, pad printing, heat transfer and silk screen), product conceptualization (including CAD drawings, three dimensional designs, models and prototypes) and custom packaging configurations. This wide breadth of capabilities allows us to fulfill the needs of customers with small-to-medium annual volume requirements for differentiated products or supply services.
We focus on PET and HDPE products, but have capabilities in all major resin types. During FY 2012 we utilized over 108 million pounds of resin to manufacture our products with 60% of that resin volume comprised of PET, 33% comprised of HDPE and the remaining 7% comprised of a variety of other resin types. We use all major blow molding technologies in the manufacturing of plastic bottles and containers, including one and two-step stretch blow molding ("SBM"), extrusion blow-molding ("EBM"), and injection blow molding ("IBM"). We also utilize injection molding ("IM"), primarily for the manufacture of preforms, which are then used to manufacture bottles in the two-step SBM process.
PET
Our PET bottles and containers are used primarily for food and personal care products. PET products are generally characterized by a glass-like, high-gloss transparent appearance, making it the resin of choice to replace glass in a variety of packaging applications. Our custom PET products include salad dressing containers, peanut-butter jars, pickle jars, large wide-mouth containers for snack food (pretzels, nuts and candy), bottles for juices, sauces and jellies, liquor bottles and shampoo and hand soap containers. We believe our engineering, design and manufacturing capabilities create a competitive advantage for containers with very wide openings over 100 millimeters which require technical expertise and specific equipment to manufacture.
We also offer stock bottles to serve customers requiring lower purchase volumes, more standard designs and rapid delivery. We offer an “on-the-floor” stock bottle program that includes over 100 standard bottle types that are held in inventory and are available for immediate delivery.
We also operate injection molding assets primarily for the purpose of producing PET preforms for use in our two-step SBM process. Preforms are an injection molded part which appear very similar to a test tube, in various sizes. These preforms are used as the raw material in the second step of the two-step process and are subsequently blown into bottles on other production lines. We manufacture preforms at two sites and ship those preforms to other facilities (because of their compact size, preforms can be shipped much more cost effectively than bottles) closer to our customers, for final production into bottles. Our extensive library of over 100 preform types allows us to provide our customers with a wide range of options for new bottle design and enables a speedy time to market leveraging this established asset base.
HDPE
HDPE is used primarily to make containers and bottles for personal care, healthcare, beverage, household and industrial products. HDPE containers are designed to provide barrier properties for transportation, storage and handling of aggressive chemicals and personal care products. Our HDPE products are characterized by design flexibility and opaque or translucent aesthetics. Representative products include shampoo bottles, lotion bottles, household cleaner containers, medical device components and office equipment (ink cartridges). In addition, we manufacture highly specialized barrier enhanced HDPE products, which are used for the safe transportation, storage, and handling of aggressive chemicals, as well as prolonging the product shelf life. We believe we are one of the only companies with an in-line process for this barrier application. These enhanced properties allow for the packaging of more aggressive chemical products for agricultural chemicals, diagnostic chemicals and other products which require this higher level of packaging performance. Furthermore, many of our HDPE products require a high degree of design collaboration with customers as well as extensive testing, qualification and certification, making switching suppliers costly and time-consuming.
Other Resins
To meet a wider variety of customer specifications, we also manufacture products using a variety of other resins. Our capabilities with these additional resins enable us to provide a broader offering to customers.
Research, Product Development & Design
Our design and manufacturing professionals collaborate throughout the process, from concept generation through production start-up. We partner with customers to solve issues concerning cost effectiveness, consumer appeal, brand equity, packaging impact and manufacturing efficiency. We balance all the aesthetic, functionality, quality and cost requirements of our customers’ packaging to develop a commercially successful container product. We have a PET design center in Hazleton, Pennsylvania staffed by design and engineering professionals to work on new bottle designs and innovative product design solutions with and for our customers.
Customers and End Markets
We have a diverse customer base. Customers include large multi-national companies, private label programs, and a variety of smaller privately-owned companies across our end market coverage. Our top ten customers represented approximately 38% of our FY 2012 net sales, with no single customer accounting for more than 5%.
We primarily target customers that require rapid commercialization of small-to-medium annual volume customized bottles and containers. The number of orders varies significantly by customer, but several of the largest customers typically receive multiple shipments per day. We have built a leading niche market position for small-to-medium annual volume requirements and generate strong customer loyalty by maintaining our competitive advantages of rapid speed-to-market, customization, sophisticated design, decorating capabilities and consistent performance and quality standards.
Key purchasing factors for our customer base include historical relationships, customized product offering, quality and performance characteristics, manufacturing flexibility, customer service, quick response times and cost. We typically serve as the sole or majority supplier of certain SKUs to our customers. We maintain long term supply agreements for products representing a majority of our FY 2012 revenues. These supply agreements typically include a customer commitment to purchase all or substantially all of a certain bottle or SKU from us.
Our diverse product range enables us to serve a wide variety of end markets, with the four major end markets being food and beverage, personal care products, household and industrial products and pharmaceuticals. The food and beverage sector (including cooking products, dry foods, condiments and sauces, pickles and peppers, syrups and other food products) continues to be the largest plastic packaging end market, and accounted for 39% of our revenues in FY 2012. For FY 2012, our revenues from other key sectors were as follows: 25% for household and industrial products (including cleaners, detergents and automobile products), 12% for personal care (including hair products, skin-care and soaps), 12% for pharmaceutical (including medical device components, instruments and pill bottles), and 12% for other end market product applications.
Sales and Marketing
We reach our customers through a centralized sales, marketing and customer service team of 29 dedicated professionals and the limited use of distributors. Our sales, production and support staff meet with customers to understand their needs and improve our product offerings and services. Manufacturing and engineering personnel also work closely with sales personnel and customer service representatives to satisfy our customers’ needs through the production of high-quality, value-added products and on-time deliveries. Our scale enables us to dedicate certain sales and marketing efforts to particular products, customers or geographic regions, when applicable.
Our marketing effort is aided by a dedicated Product Design and Development group, with professionals at several locations throughout North America and at our design center in Hazleton, Pennsylvania. These professionals provide product design and development, start up assistance and support as well as working closely with customer design and product launch teams. We provide our customers with modeling, 3D rendering of bottles as well as the design of packaging alternatives for shipping bottles to minimize logistics costs and provide environmental benefits in source reduction and reduced energy consumption. We have a technical sales team with significant knowledge of our products and processes, particularly in specialized products.
We supplement our direct sales efforts through our website, which allows potential customers to order samples and browse real-time inventory in addition to many other functions.
Manufacturing and Distribution
We manufacture rigid plastic packaging containers utilizing all major manufacturing processes and resin types. Our manufacturing processes include EBM, one and two-step SBM, IBM and IM. EBM is a widely used and versatile blow molding process. It is used for bottles of all sizes and places fewer limitations on bottle proportions and shapes. One and two-step SBM, which primarily uses PET resin, produces clear, glass-like containers that have strength, surface gloss and stiffness. The two-step process uses injection molded preforms to manufacture PET bottles. IBM primarily is used to manufacture smaller bottles and containers that require extremely accurate weight control, excellent neck-finishing detail and superior finish or texture. IM is used to manufacture closures and to mold preforms for the two-step PET manufacturing applications.
In the injection process, resin pellets are melted to a molten state and injected into a multi-cavity steel mold where the resin is allowed to solidify to take the final shape of the part. IBM involves the creation of a preform that is then inserted into a blow station where high-pressure air is used to mold the preform into the bottle. Molten plastic is extruded into a long tube and then high-pressure air is used to form the bottle. In SBM, the units are molded and then they are reheated and placed in aluminum dies where high pressure air is used to form the bottle. The final cured parts are transferred to corrugated containers for shipment to customers or for post-molding secondary operations. Our decorating processes include silk screening, in-mold labeling, heat transfer labeling, pressure sensitive labeling, pad printing, and offset printing.
We monitor raw materials and continuously test finished good shipments to ensure that both our inputs and outputs meet our quality specifications. Our quality control processes include extensive testing and quality checks throughout all stages of the production process. We monitor for quality assurance throughout the molding process, applying computerized statistical process control as well as manual sampling to optimize production efficiencies.
Our manufacturing capabilities and distribution network allow us to provide a high level of service to our customers throughout the United States and Canada. We have historically made, and intend to continue to make, significant capital investments in plant and equipment to improve productivity and maintain competitive advantages.
Our facilities are strategically located to address the needs of our customers across our core end markets. This distribution footprint is sometimes augmented by the use of third party warehousing. Our products are typically delivered by third party common carrier. In most cases our customers pay those carriers directly for the delivery of the product, but in some cases we will provide product on a delivered basis utilizing common carriers.
Our raw materials consist of various resins, colorants, and packaging materials. Resin is our largest raw material cost. We have historically purchased raw material from a large network of suppliers to ensure competitive pricing and access to product supply in all market conditions. Over the last few years we have increased efficiencies in resin purchasing by rationalizing our supplier base and focusing our efforts on a select number of large global resin manufacturers. We maintain strong relationships with key suppliers and expect that such relationships will continue in the foreseeable future. The resin market is a global market and we believe that we will be able to purchase adequate quantities of plastic resins at market prices.
Competition
Our market is comprised primarily of three types of manufacturers:
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Long-run suppliers: Typically produce over 150 million units annually per customer application; characterized by low material margin products and less production flexibility serving mass markets (e.g., bottled water and soft drinks).
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Medium/short-run suppliers: Typically produce between 5 million and 25 million units annually per customer application; characterized by medium to high material margin products, greater production flexibility, and custom design capabilities serving specialty and some mass markets.
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Short-run suppliers: Typically produce less than 5 million units annually per customer application; characterized by high material margin products, high production flexibility, and high design and customization capabilities serving niche and specialty markets.
We do not compete in the long-run supplier segment of the market, but compete on a product by product basis in each region where we have operations in the other two segments of the market. Our competitors include both small regional players and large national operators. Our business continues to be primarily local in nature and dependent on specific capabilities at each plant. As such, we believe there is no one firm who competes with us on all products in all geographies. Furthermore, given the constraints associated with shipping costs, foreign competition has a relatively limited presence in our markets. In addition to product type and location, the nature of competition changes as overall product run size increases. For smaller applications of approximately five million or less in annual customer volume requirements, we generally compete with small producers who often operate out of a single facility and do not possess the advantages of scale that we are able to achieve. For medium run sizes up to approximately 25 million in annual customer volume requirements, we compete on a limited basis with larger packaging companies as well as the small regional players.
Employees
As of September 30, 2012, we employed 984 employees in the United States and Canada. None of our domestic employees are unionized. Substantially all of our employees in Canada, representing approximately 16% of our total employees as of September 30, 2012, are represented by the National Union of Automobile, Aerospace, Transport and Other Workers of Canada, Union of Food and Commerce Workers, and Canadian Union Communication, Energy and Paperworkers. Our collective bargaining agreements with employees of our Pointe Claire, Quebec facility represented by the National Union of Automobile, Aerospace, Transport and Other Workers of Canada and Union Food and Commerce Workers expired in April 2009. Negotiations are ongoing to enter into new agreements. We believe our relations with employees are satisfactory.
Environmental Matters and Government Regulations
The production, distribution and sale of our products and our present ownership and operation of real property are subject to extensive and frequently changing federal, state, local and foreign environmental laws and regulations, including those pertaining to the discharge of materials into the environment, exposure to hazardous material, the handling and disposal of wastes and cleanup of contaminated soil and ground water, or otherwise relating to the protection of the environment. We believe that we are in material compliance with applicable environmental laws and regulations, and are not a party to any pending legal proceedings or claims for non-compliance with environmental laws and regulations.
In addition to environmental laws and regulations, we are subject to numerous other federal, state, local and foreign laws and regulations. A portion of our revenue comes from sales of plastic packaging sold into the food and healthcare end markets. Pursuant to the Federal Food, Drug and Cosmetic Act (“FDCA”), the U.S. Food and Drug Administration (“FDA”) regulates our products that are intended for drug packaging or food packaging purposes. Specifically, we are subject to FDA regulations that require that our drug and food packaging products are safe and suitable for their intended uses, including that they are manufactured in a manner that complies with the FDA’s applicable good manufacturing practices. The FDA requires that we ensure that each component part of our products and the final packaging product will not render the food or drug packaged inside our product to be adulterated or misbranded under the FDCA. Furthermore, some of our products are regulated by the Consumer Product Safety Commission (“CPSC”) pursuant to various federal laws, including the Consumer Product Safety Act and the Poison Prevention Packaging Act. We believe our drug and food packaging products comply with all applicable requirements.
Intellectual Property
We rely on a combination of patents, trademarks, unpatented proprietary know-how and trade secrets, copyrights and other intellectual property rights, confidentiality agreements with employees and consultants and other protective measures to protect our proprietary rights. We do not believe that any individual item of our intellectual property portfolio is material to our current business. We employ various methods, including confidentiality and non-disclosure agreements with third parties, employees and consultants, to protect our trade secrets and know-how. We have licensed, and may license in the future, patents, trademarks, trade secrets and similar proprietary rights to and from third parties.
Available Information
Our annual report, quarterly reports, current reports and amendments to those reports are available without charge on our website, www.pretiumpkg.com, as soon as reasonably practicable after they are filed electronically with the Securities and Exchange Commission (“SEC”). We will also provide a free copy of any of our filed documents upon written request to: Pretium Packaging, L.L.C., 15450 South Outer Forty Drive, Suite 120, Chesterfield, Missouri 63017, Attention: Chief Financial Officer.
The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issues that file electronically with the SEC (http://www.sec.gov).
Item 1A.
Item 1A.
Risk Factors.
We have a substantial amount of indebtedness, which may adversely affect our cash flow, our ability to operate our business and our ability to satisfy our obligations under the Notes.
We have a significant amount of indebtedness. As of September 30, 2012, we had approximately $150.2 million of indebtedness outstanding, all of which is secured and, based on our borrowing base, we had approximately $28.4 million available for borrowings under the ABL Facility, subject to meeting customary borrowing conditions. Our substantial amount of indebtedness could have important consequences for us. For example, it could:
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increase our vulnerability to adverse economic, industry or competitive developments;
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result in an event of default if we fail to satisfy our obligations with respect to the Notes or other debt or fail to comply with the financial and other restrictive covenants contained in the ABL Facility and the indenture governing the Notes or agreements governing our other indebtedness, which event of default could result in all of our debt becoming immediately due and payable and could permit our lenders to foreclose on our assets securing such debt;
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require a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
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make it more difficult for us to satisfy our obligations with respect to the Notes;
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increase our cost of borrowing;
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restrict us from making strategic acquisitions or causing us to make non-strategic divestitures;
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limit our ability to service our indebtedness, including the Notes;
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limit our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes;
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limit our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate, placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who therefore may be able to take advantage of opportunities that our leverage prevents us from exploiting; and
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prevent us from raising the funds necessary to repurchase all Notes tendered to us upon the occurrence of certain changes of control, which failure to repurchase would constitute a default under the indenture governing the Notes.
The occurrence of any one of these events could have a material adverse effect on our business, financial condition, results of operations, prospects or ability to satisfy our obligations under the Notes.
Borrowings under the ABL Facility bear interest at variable rates. If we were to borrow funds under the ABL Facility and these rates were to increase significantly, our ability to borrow additional funds may be reduced and the risks related to our substantial indebtedness would intensify. While we may enter into agreements limiting our exposure to higher interest rates, any such agreements may not offer complete protection for this risk.
Despite our substantial indebtedness level, we and our subsidiaries will still be able to incur substantial additional amounts of debt, which could further exacerbate the risks associated with our indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future, including additional secured debt. Our ABL Facility provides for borrowings up to $30.0 million, and includes an uncommitted incremental facility that, if committed, would increase borrowing capacity, subject to borrowing base capacity. All of the borrowings under the ABL Facility are secured by liens that rank senior to the liens of the holders of the Notes on the collateral. Although the credit agreement governing the ABL Facility and the indenture governing the Notes contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. Moreover, if we incur any additional indebtedness secured by liens that rank equally with those securing the Notes, the holders of such indebtedness will be entitled to share ratably with you in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us and we cannot assure you any collateral would be sufficient to cover all obligations. In addition, the indenture governing the Notes and the agreement governing the ABL Facility do not prevent us from incurring obligations that do not constitute indebtedness thereunder. If new debt is added to our and our
subsidiaries’ existing debt levels, the risks associated with our substantial indebtedness described above, including our possible inability to secure our debt, will increase.
We may not be able to generate sufficient cash to service the Notes or our other indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on our indebtedness, including the Notes, and to fund our operations will depend on our ability to generate cash in the future. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on the Notes or our other indebtedness.
If our cash flows and capital resources are insufficient to meet our debt service obligations or to fund our other liquidity needs, we may need to refinance all or a portion of our debt, including the Notes, before maturity, seek additional equity capital, reduce or delay scheduled expansions and capital expenditures or sell material assets or operations. We cannot assure you that we would be able to refinance or restructure our indebtedness, obtain equity capital or sell assets or operations on commercially reasonable terms or at all. In addition, the terms of existing or future debt instruments, including the indenture governing the Notes, may limit or prevent us from taking any of these actions. Our inability to take these actions and to generate sufficient cash flow to satisfy our debt service and other obligations could have a material adverse effect on our business, results of operation and financial condition, as well as on our ability to satisfy our obligations in respect of the Notes.
If for any reason we are unable to meet our debt service obligations, we would be in default under the terms of the agreements governing such outstanding indebtedness. If such a default were to occur, the lenders under such indebtedness could elect to declare all amounts outstanding under it immediately due and payable, and in the case of the ABL Facility, the lenders would not be obligated to continue to advance funds under the ABL Facility. If the amounts outstanding under our debt were accelerated, it could cause an event of default under other indebtedness or allow other indebtedness to be accelerated. We cannot assure you that our assets will be sufficient to repay in full the money owed to the banks or to holders of Notes if any indebtedness were accelerated.
Increases in resin prices or a shortage of available resin could adversely affect our business and our financial performance.
Production of our products requires a large amount of plastic resins. Plastic resins are subject to price fluctuations, including those arising from supply shortages and changes in the prices of natural gas, crude oil and other petrochemical intermediates from which resins are produced. Over the past several years, we have at times experienced rapidly increasing resin prices. We do not pay a fixed price for resins. We pass through 100% of changes in resin costs to all of our customers under current arrangements based on published price indexes, although our pass through mechanisms are typically subject to a one to four month timing delay. There is no assurance that we will be able to continue to pass through all future price fluctuations. If increases in resin prices continue, net sales and profitability may be materially and adversely affected, both in the short-term as we attempt to pass through changes in the price of resin to customers under current agreements and in the long-term as we negotiate new agreements or if our customers seek product substitution.
A sustained significant increase in resin prices relative to other packaging materials, to the extent that those costs are not passed on to the end-consumer, would make plastic containers less economical for our customers and could result in a slower pace of conversions to, or reductions in the use of, plastic containers.
We source plastic resin primarily from major industry suppliers. We have long-standing relationships with certain of these suppliers but have not entered into a firm supply contract with any of them. We may not be able to arrange for other sources of resin in quantities sufficient to meet all of our future obligations in the event of an industry-wide general shortage of resins used by us, or a shortage or discontinuation of certain types of grades of resin purchased from one or more of our suppliers. Any such shortage may materially negatively impact our competitive position versus companies that are able to better or more cheaply source resin.
We may not be able to successfully compete and our customers may not continue to purchase our products.
The plastic packaging industry is intensely competitive and we compete with multiple companies in the sale of each of our product lines. We compete on the basis of a number of factors, including service, quality, product characteristics, the ability to timely supply products to customers, the ability to minimize our customers’ freight expenses, and price. Additionally, we compete with manufacturers of other packaging materials such as metal, glass, paper and plastic packaging materials made with different manufacturing processes. Some of these products are not susceptible to fluctuations in the price of plastic resins, which consequently can have a negative effect on our competitive position compared to substitute products. Our competitors may have financial and other resources that are greater than ours and may be better able to react to market conditions and to withstand price competition. In addition, our customers may move container production in-house and shift their purchases from finished products to preforms or cease purchasing our products entirely. Furthermore, we may be unable to attract new
customers away from our competitors due to the significant costs associated with switching suppliers due to freight expenses if our facilities are located further away from the prospective customer than those of our competitors or if the prospective customer has a long-term supply arrangement with a competitor. Competition could result in our products losing market share or our having to reduce our prices, either of which would have a material adverse effect on our business, results of operations and financial condition.
Macroeconomic conditions may adversely impact our business.
Our industry has been affected by current economic factors, including the deterioration of national, regional and local economic conditions, declines in employment levels and shifts in consumer spending patterns. The recent disruptions in the overall economy and volatility in the financial markets have reduced, and may continue to reduce, consumer confidence in the economy, negatively affecting consumer spending, which could be harmful to our financial position and results of operations. As a result, decreased cash flow generated from our business may adversely affect our financial position and our ability to fund our operations.
We may pursue and complete acquisitions, which could adversely affect our business.
We continually seek to identify opportunities for the acquisition of other companies, assets and product lines that either complement or expand our existing business and create economic value. We continually evaluate potential acquisitions and may pursue such acquisitions that could be material in size and scope. There is no assurance that we will be able to consummate any such transactions. We may not be able to fund future acquisitions because of limitations under our indebtedness or otherwise, including due to the limited availability of funds if the financial markets are impaired. Acquisitions involve a number of special risks, including:
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diverting our limited management resources that would otherwise be available for our ongoing current business;
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the integration of acquired products into our existing product lines;
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the increasing demands on our operational systems; and
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possible adverse effects on our reported operating results, particularly during the first several reporting periods after such acquisitions are completed.
We may agree to assume liabilities or we may become responsible for unexpected liabilities that we failed or were unable to discover in the course of performing due diligence in connection with historical acquisitions and any future acquisitions. We may require sellers to indemnify us against undisclosed liabilities. However, we cannot assure you that indemnification rights we obtain will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the possible liabilities associated with the business or property acquired. Any of these liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.
Our intellectual property rights may be inadequate to protect our business.
We attempt to protect our intellectual property rights, both in the United States and in foreign countries, through a combination of patent, trademark and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements. Because of the differences in foreign trademark, patent and other laws concerning proprietary rights, our intellectual property rights may not receive the same degree of protection in foreign countries as they would in the United States. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition.
We may not be successful in protecting our intellectual property rights, including our unpatented proprietary know-how and trade secrets, or in avoiding claims that we infringed on the intellectual property rights of others.
In addition to relying on patent and trademark rights, we rely on unpatented proprietary know-how and trade secrets, and employ various methods, including confidentiality agreements with employees and consultants, to protect our know-how and trade secrets. We cannot assure you that these methods will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of an unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information, and there can be no assurance that others will not independently develop the same or similar technology or develop better production methods than us. Further, we may not be able to deter current and former employees, contractors and other parties from breaching confidentiality agreements and misappropriating proprietary information and it is possible that third parties may copy or otherwise obtain and use our information and proprietary technology without authorization or otherwise infringe on our intellectual property rights.
We have licensed, and may license in the future, patents, trademarks, trade secrets, and similar proprietary rights to third parties. While we attempt to ensure that our intellectual property and similar proprietary rights are protected when entering into business relationships and licensing arrangements, third parties may take actions that could materially and adversely affect our rights or the value of our intellectual property, similar proprietary rights or reputation. However, we cannot assure you that we will have sufficient resources to enforce our intellectual property rights against third parties. In the future, we may also rely on litigation to enforce our intellectual property rights and contractual rights, and, if not successful, we may not be able to protect the value of our intellectual property. Any litigation could be protracted and costly and could have a material adverse effect on our business and results of operations regardless of its outcome.
If third parties claim that we infringe on their intellectual property rights, our operating profits could be adversely affected.
Our success depends in part on our ability to obtain, or license from third parties, patents, trademarks, trade secrets and similar proprietary rights without infringing on the proprietary rights of third parties. Although we believe our intellectual property rights and those of our customers are sufficient to allow us to conduct our business without incurring liability to third parties, we face the risk of claims that we have infringed on the intellectual property rights of such persons. Any such claims of patent or other intellectual property infringement, even those without merit, could cause us to cease making, licensing, or using products that incorporate the challenged intellectual property; require us to redesign or reengineer our products, if feasible; divert management’s attention and resources; or require us to pay damages, enter into royalty or licensing agreements (which may not be available on reasonable terms, or at all) in order to obtain the right to use a third party’s intellectual property. Any such litigation could be protracted and costly and could have a material adverse effect on our business and results of operations.
Compliance with current and future environmental regulations could affect our business operations.
Our products and operations are subject to extensive and frequently changing federal, state, local and foreign environmental laws and regulations, including laws and regulations that impose limits on the discharge, release, transport, handling, and use of, or regulate exposure to, hazardous materials, establish standards for the treatment, storage and disposal of solid and hazardous materials and require clean up of contaminated sites. Future laws and regulations, or future enforcement or interpretation of existing laws or regulations, could increase the cost of producing, or otherwise adversely affect the demand for, plastic products. Although past compliance has not required significant capital expenditures, we cannot predict with certainty our future capital expenditure requirements. Although we believe we are in substantial compliance with applicable environmental laws and regulations and are not a party to any pending legal proceedings or claims for non-compliance with environmental laws and regulations, failure to comply with environmental laws and regulations could result in severe fines and penalties by governments or courts of law. Furthermore, future or currently unknown violations, contamination of sites currently or formerly owned or operated by us (including contamination caused by prior owners and operators of such sites) or the off-site disposal of regulated materials could result in additional compliance or remediation costs or other liabilities, which could be material.
In addition, the plastic packaging industry, including us, is subject to federal, state, local and foreign laws and regulations designed to reduce solid wastes by requiring, among other things, plastics to be degradable in landfills, minimum levels of recycled content, various recycling requirements, disposal fees and limits on the use of plastic products. In particular, certain states have enacted laws or regulations requiring products packaged in plastic containers to comply with standards intended to encourage recycling and increased use of recycled materials. Future laws or regulations could further prohibit, tax or restrict the sale or use of certain types of plastic and other containers, and could impose stricter requirements, such as recycling or deposits for each container, that seek to divert containers and packaging materials from disposal as waste in landfills. Changes in laws or regulations regarding the use of disposable plastic products, including those relating to the recycling or reuse of plastic products, could increase the cost of our products. Such additional costs could make our products less competitive with products made from other materials. While container legislation has been adopted in a few jurisdictions, similar legislation has been defeated in public referenda in several states, local elections and state and local legislative sessions. Although we believe that the laws and regulations promulgated to date have not had a material adverse effect on us, there can be no assurance that future laws or regulations, or future enforcement or interpretation of existing laws or regulations, would not have a material adverse effect on us. In addition, various consumer and special interest groups have lobbied from time to time for the implementation of these and other similar measures. Furthermore, a decline in consumer preference for plastic products in general, or for certain types of plastic products in particular, due to environmental considerations could have a negative effect on our business.
Other government regulations could affect our business operations.
In addition to environmental laws and regulations, numerous other federal, state, local and foreign laws and regulations affect us. A substantial portion of our net sales comes from sales of plastic packaging sold into the food and healthcare end markets. Pursuant to the FDCA, the FDA regulates the material content of direct-contact food and drug packages we manufacture. Furthermore, some of our products are regulated by the CPSC pursuant to various federal laws, including the Consumer
Product Safety Act and the Poison Prevention Packaging Act. Both the FDA and the CPSC can require the manufacturer of defective products to repurchase or recall these products and may also impose fines or penalties on the manufacturer. Similar laws exist in some states, cities and other countries in which we sell products. Although we use FDA-approved resins and pigments in our products that directly contact food and drug products and we believe our products are in material compliance with all applicable requirements, we remain subject to the risk that our products could be found not to be in compliance with these and other requirements. A recall of any of our products or any fines and penalties imposed in connection with noncompliance could have a materially adverse effect on us.
We also are subject to various laws and regulations concerning workplace safety, such as the Occupational Safety and Health Act, as well as numerous other federal, state, local and foreign government laws and regulations. Such regulations are subject to changes which can increase our cost of compliance and failure to comply with any such law or regulation could result in the imposition of severe fines or penalties. See Item 1 “Business-Environmental Matters and Government Regulation”.
Increased labor cost, competition for employees or labor disputes could disrupt our operations and have an adverse effect on our business.
As of September 30, 2012, we employed 984 employees in the United States and Canada. Substantially all of our employees in Canada, representing approximately 16% of our total employees as of September 30, 2012, are represented by The National Union of Automobile, Aerospace, Transport and Other Workers of Canada, Union of Food and Commerce Workers and Canadian Union Communication, Energy and Paperworkers. Our collective bargaining agreements with employees of our Pointe Claire, Quebec facility represented by the National Union of Automobile, Aerospace, Transport and Other Workers of Canada and Union Food and Commerce Workers expired in April 2009. Negotiations are ongoing to enter into new agreements. We may not be able to enter into new agreements on satisfactory terms or at all. We believe our relations with employees are satisfactory, although we cannot assure you that will continue to be the case.
We benefit from our established and experienced workforce and our future success depends, in part, on our ability to continue to attract, motivate and retain sufficient employees. If we are unable to attract new qualified employees and/ or motivate and retain our current employees, our business and operations could be adversely affected. Additionally, any increase in competition for labor could require us to pay higher wages, which would increase labor costs.
Additionally, new legal requirements, particularly with respect to health care reform, could increase the cost of our employee benefits. The health care reform legislation enacted by the U.S. Congress is intended to result in significant changes to the U.S. healthcare system. This legislation may lead to additional costs related to the implementation of the new healthcare regulations and may impair our ability to provide the same level of coverage, which could have a material adverse effect on our business and results of operations.
The catastrophic loss of any facility or critical equipment could adversely affect our business.
The catastrophic loss of any of our facilities or critical equipment due to unanticipated events, such as earthquakes, fires, an act of terrorism or violent weather, may increase our production costs or reduce our sales during the affected period. Additionally, the interruptions to our production capability may require us to make significant capital expenditures, which could have a material adverse effect on our operations and net sales.
If we are unable to develop product innovations and improve our production technology and expertise, we could lose customers or market share.
Our success will depend on our ability to adapt to technological changes in the plastic packaging industry. If we are unable to timely develop and introduce new products, or enhance existing products, in response to changing market conditions or customer requirements or demands, our competitiveness could be materially and adversely affected.
Loss of senior management team members could adversely affect our business operations.
A large part of our success depends on our experienced and committed senior management. Current management has extensive experience in the manufacturing, sales, finance and engineering sectors and the loss of any key member could adversely affect our operations and business objectives.
We are subject to the effects of fluctuations in foreign currency exchange rates.
As a result of our Canadian operations, a portion of our net sales, and some of our costs, assets and liabilities, are denominated in Canadian currency. Our Canadian operations represent approximately 17% of our net sales for FY 2012. As our reporting currency is U.S. dollars, we must translate Canadian currency financial results into U.S. dollars based on average exchange rates prevailing during a reporting period for the preparation of our consolidated financial statements. Consequently, any
changes in the currency exchange rates may unpredictably and adversely affect our consolidated operating results. For example, during times of a strengthening U.S. dollar, our reported Canadian net sales and earnings will be reduced because the Canadian currency will translate into fewer U.S. dollars. Conversely, a weakening U.S. dollar will effectively increase the dollar-equivalent of our expenses denominated in Canadian currencies.
A significant portion of our assets consists of goodwill and other intangible assets, the value of which may be reduced if we determine that those assets are impaired.
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and identifiable intangible assets acquired. In accordance with accounting principles generally accepted in the U.S. (“GAAP”), goodwill and indefinite-lived intangible assets are evaluated for impairment annually or more frequently if circumstances indicate impairment may have occurred. Impairment assessment under GAAP requires that we consider, among other factors, differences between the current book value and estimated fair value of our net assets. As of September 30, 2012, the net carrying value of goodwill and other intangible assets represented approximately $75.6 million, or 36%, of our total assets.
Based on our annual impairment testing conducted in FY 2012, and a review of any potential indicators of impairment, we concluded that the carrying value of goodwill and other intangible assets were not impaired. If goodwill or other assets are further impaired based on a future impairment test, we could be required to record additional non-cash impairment charges to our operating income. Such non-cash impairment charges, if significant, could materially and adversely affect our results of operations in the period recognized.
The interests of Castle Harlan, our sponsor, may be in conflict with the interests of debtholders.
A significant portion of the economic and voting power in respect of the membership interests of Pretium Holding is beneficially owned by Castle Harlan and its affiliates. As a result, Castle Harlan has significant control over our affairs, policies and operations, such as the appointment of management, future issuances of our securities, the payments of distributions by us, if any in respect of our membership interests, if any, on our membership interests, the incurrence of debt by us, and the entering into of extraordinary transactions, and their interests may not in all cases be aligned with the interests of debtholders. Additionally, Castle Harlan is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Castle Harlan may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long as investment funds associated with or designated by Castle Harlan continue to indirectly own a significant amount of the economic and voting power in respect of the membership interests of Pretium Holding, Castle Harlan will continue to be able to strongly influence or effectively control our decisions.
Item 2.
Item 2.
Properties.
We conduct our business from our 10,000 square foot, leased corporate headquarters in Chesterfield, Missouri (St. Louis metropolitan area). We operate nine manufacturing plants in the United States and two in Canada. Of our 11 manufacturing facilities, we own six facilities and lease the remaining five. Our network of facilities is located to service major markets across the United States and Canada, providing high levels of customer service, short delivery times, and low freight costs. All of our facilities are located in areas that have convenient access to major transportation routes and skilled labor pools.
The following table sets forth our principal manufacturing facilities:
(a)
We have two owned manufacturing facilities, Muscatine, Iowa and Nashua, New Hampshire, that were closed subsequent to the Acquisition and are currently for sale.
In addition to the facilities above, we own a 160,000 square foot warehouse near our Hazleton manufacturing facility and maintain warehouse space, as needed, in close proximity to certain other manufacturing facilities.
Item 3.
Item 3.
Legal Proceedings.
We are a party to various legal proceedings in the ordinary course of business. Although our legal and financial liability with respect to such proceedings cannot be estimated with certainty, we do not believe that these proceedings, either individually or in the aggregate, are likely to have a material adverse effect on our financial position, results of operations or cash flows.
Item 4.
Item 4.
Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
As of November 30, 2012, the Company was the sole holder of the shares of Pretium Finance’s common stock and Pretium Intermediate was the sole holder of record of the Company’s equity, which, in turn is directly wholly-owned by Pretium Holding. There is no public trading market for our equity. We have never paid or declared a cash dividend. Our debt agreements restrict our ability and the ability of our subsidiaries to pay dividends.
Item 6.
Item 6.
Selected Financial Data.
The following tables sets forth certain selected historical consolidated financial data as of and for the periods indicated. We have derived this data from our audited consolidated financial statements. The following tables should be read in conjunction with Item 7
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis is intended to assist you in understanding our consolidated financial condition and results of operations for the periods presented and should be read in conjunction with, and is qualified in its entirety by reference to our historical financial statements, including the related notes appearing elsewhere in this annual report.
Overview
We are one of the nation’s largest manufacturers of customized, high performance rigid plastic bottles and containers. The principal resins used in our production processes are PET and HDPE, although we use other resins based on customer requirements. We market our products largely into the food, personal care, household products, healthcare and pharmaceutical end markets. We currently operate 11 manufacturing facilities.
Selected Factors Affecting Our Results
Our net sales are derived from the manufacture and sale of plastic containers to our customers. We operate manufacturing facilities which are typically located in close proximity to our customers. Our profitability is driven by several factors including, but not limited to, (i) the number of units produced, (ii) the amount of resin consumed, (iii) the efficiency of our manufacturing operations, (iv) the level of customization of our products, and (v) the product mix of the book of business in any given period. The number of units produced is driven by both packaging market trends, such as the long term trend of conversion towards plastic packaging, as well as customer specific demand.
Our product mix is reasonably stable with most products providing a similar material margin (defined as net sales minus raw material costs) and contribution margin (defined as sales price minus variable costs), though smaller units have lower transaction costs. The only significant exception is with regard to preforms sold. While we utilize most of the preforms we manufacture internally to produce bottles for customers, we also sell preforms to customers who then manufacture their own bottles. This enables us to utilize already established capital assets. Sold preforms are manufactured by the injection molding process and generally have the lowest material margin of any product we sell.
Our raw materials consist of resins, colorants and packaging materials. Over the past several years there have been significant fluctuations in the price of resin, which is our largest component of cost of goods sold. Various factors including changes in the prices of natural gas, crude oil and other petrochemical intermediates from which resins are produced have contributed to these price fluctuations. Primary resins used in our products are PET and HDPE. Our other manufacturing costs consist of labor, utilities and facilities maintenance.
Based on certain resin industry indices, the following table summarizes average market prices per pound of PET and HDPE resins in the United States during the quarterly and annual periods indicated:
Source: ChemData
Our raw material costs and product unit sales prices fluctuate with changes in the prices of the resins utilized in production. When resin prices increase, our raw materials costs increase, and when resin prices decrease, our raw materials costs decline. We pass through 100% of the changes in resin costs by means of corresponding changes in product pricing, in accordance with our customer contracts and agreements with these customers and industry practice. These pass through mechanisms are typically subject to a one to four month timing delay.
As a result of this timing delay, there can be a lag between changes in market prices and when that price change is passed through to customers. For example, in periods of rising resin prices, increases in unit sales pricing lag the increases in raw material costs. Therefore the analysis of trends in our net sales and raw material costs must take this effect into consideration. We believe that material margin, which ultimately is reflected within gross profit, is a key measure of profitability, as it is reflective of our ability to pass-through resin costs. In addition, our net sales will fluctuate as we pass along increased resin costs to customers with often limited effects to gross profit.
Selling, general and administrative costs consist primarily of management and clerical salaries, legal, accounting and other professional fees, insurance, commissions, travel and various other costs.
We have a disciplined capital expenditures policy, investing in new projects and equipment only when we believe it will result in incremental net sales with our customers. Our maintenance capital expenditures, which we identify as the minimum capital expenditures to service current customer volumes and initiatives, are approximately $3-3.5 million annually.
The PVC Acquisition
In February 2010, we acquired PVC. PVC had little direct business overlap with our business, which has enabled us to achieve significant cost synergies through implementation of an integration plan including resin purchasing efficiencies, manufacturing cost savings, consolidation of certain of the two companies’ plants and lower overhead costs as a result of the closure of PVC’s corporate headquarters. As a result of this transaction, all references in this annual report to the Company before February 16, 2010 shall be referred to as "Predecessor". All references in this annual report to the Company after February 16, 2010 shall be referred to as "Successor".
Plant consolidation activities related to the PVC Acquisition included the consolidation of the Nashua, New Hampshire operation into the Philmont, New York plant, and the consolidation of PVC’s Hazleton, Pennsylvania operations into our Hazleton plant. In Hazleton, both companies operated facilities in the same city presenting the opportunity to combine the manufacturing assets of both facilities, reduce the fixed operating costs in the manufacturing operation through overhead reductions, and create a strong platform for expanded future growth. The former PVC facility was converted to a warehouse and distribution center managing the distribution of the products from the Hazleton manufacturing site. In addition, both Pretium and PVC operated specialty EBM facilities in the Northeast, in Nashua and Philmont, respectively. As both facilities had excess capacity, we were able to consolidate substantially all manufacturing assets and business from the Nashua facility into the Philmont site. This consolidation was done to realize a leveraging of the fixed costs of the Philmont site available from the reduction of the overhead of the Nashua facility.
Subsequent to the PVC Acquisition, we transitioned the operations of our Muscatine, Iowa plant to our Seymour, Indiana and Manchester, Pennsylvania plants, resulting in further cost savings. The Muscatine transition began in August 2010 and was completed in March 2011. This consolidation was driven by the deterioration in sales to the agricultural chemical market over several years which, while not one of our primary markets, was the Muscatine plant’s primary market. This consolidation was made possible by the PVC Acquisition as the acquired Manchester facility operates the same specialty barrier process for the manufacture of specialty bottles as was in place in Muscatine. Similar to the other consolidations, this project allowed us to eliminate redundant processes and facilities and better leverage our costs.
Total restructuring costs incurred during the fiscal year ended September 30, 2011 were $2.5 million. These costs consisted of facility consolidation costs ($1 million) and other exit costs ($1.5 million). Total restructuring costs incurred during the period of February 17, 2010 to September 30, 2010 were $6.7 million and were comprised of severance payments ($2.7 million), facility consolidation costs ($1.7 million) and other exit costs ($2.3 million). There were no restructuring costs incurred during the fiscal year ended September 30, 2012.
Effects of Inflation
While inflationary increases in certain costs, such as resin and energy, have had an effect on our operating results over the past three years, changes in general inflation have had a minimal effect on our operating results in each of the last three fiscal years. Sales prices and volumes have historically been more strongly influenced by supply and demand factors in specific markets than by inflationary factors. Our costs, especially resin, can fluctuate substantially, sometimes within a relatively short period of time, and can have a significant effect on our business, financial condition and results of operations.
Results of Operations
The following discussion of our financial condition and results of operations covers certain periods prior to the Acquisition. As a result of the Acquisition, our historical results of operations are not comparable on a period to period basis. Therefore, for comparison purposes, we have presented the results of operations for the fiscal year ended September 30, 2010 on a pro forma basis as if the transactions occurred on October 1, 2009. We believe that this approach is beneficial to the reader by providing an easier-to-read discussion of our results of operations and provides the reader with information from which to analyze our financial results that is consistent with the manner that management reviews and analyzes results of operations. The discussion is provided for comparative purposes only and the value of such a comparison may be limited.
The following table sets forth our historical results of operations for the periods indicated below.
Performance during the Fiscal Year Ended September 30, 2012 (“FY 2012”) Compared with the Fiscal Year Ended September 30, 2011 (“FY 2011”)
The following is a discussion of the results of operations for FY 2012 and FY 2011:
Net Sales
Net sales were $232.2 million during FY 2012, which represents a decrease of $5.0 million, or 2%, as compared to $237.2 million during FY 2011. The decrease in net sales was primarily attributable to lower resin prices, which resulted in lower transaction prices, combined with a shift in product mix to lighter weight products compared to FY 2011. Total units sold increased approximately 1%, driven by a 6% increase in sales of preforms, while bottle sales were flat compared to FY 2011. The impact of the increase in unit volumes to net sales was more than offset by the impact of the shift in product mix and lower transaction prices compared to FY 2011.
Gross Profit
Gross profit during FY 2012 was $31.5 million, which represents an increase of $0.2 million compared to $31.3 million during FY 2011. Gross margin as a percentage of net sales was 13.6% during FY 2012 compared to 13.2% during FY 2011. Gross profit was positively impacted during FY 2012 by lower conversion costs, which was primarily driven by integration-related manufacturing variances of $2.4 million in FY 2011 being eliminated in FY 2012, and a planned reduction in direct labor costs. The impact of the reduction in conversion costs was partially offset by a $1.4 million increase in depreciation expense. Gross profit excluding depreciation expense increased $1.6 million compared to FY 2011. Gross profit excluding depreciation expense as a percentage of net sales was 19.8% during FY 2012 compared to 18.7% during FY 2011.
Operating Expenses
SG&A Expenses
SG&A expenses for FY 2012 were $18.5 million, compared to expenses of $18.3 million in FY 2011. The increase compared to FY 2011 was driven by additional administrative expenses to support our assessment of the design and operating effectiveness of our internal controls over financial reporting.
Other Operating Expenses
Other operating expenses during FY 2012 were $2.4 million, which represents a decrease of $3.1 million, or 56.4% compared to FY 2011. The improvement in other operating expenses is primarily due to $2.5 million of restructuring costs incurred during FY 2011 related to plant integrations as part of our PVC integration plan, which was completed during FY 2011. In addition, transaction related fees and expenses decreased $0.9 million driven by a $0.4 million decrease in fees associated with the registration of the Notes with the SEC during FY 2011 and a $0.5 million decrease in professional fees associated with our exploration of acquisition opportunities. The impact of unfavorable changes in foreign currency exchange rates compared to FY2011 partially offset the decreases in transaction related fees and expenses and restructuring expenses by $0.3 million.
Other Expenses
Interest expense during FY 2012 was $19.6 million, which represents an increase of $3.3 million, or 20.3%, compared to FY 2011. Interest expense, excluding amortization of deferred financing fees, increased $2.7 million compared to FY 2011 due to the increased level of indebtedness as a result of the Refinancing. Amortization of deferred financing fees included in interest expense increased $0.6 million due to the capitalization of $9.7 million of deferred financing fees as a result of the Refinancing.
We recorded a $5.5 million loss on the extinguishment of debt repaid in connection with the Refinancing on March 31, 2011. The amount represents the write off of net deferred financing costs from previously outstanding costs, original issue discount, prepayment penalties and other related costs from the Refinancing.
Income Tax Provision
As a limited liability company, we are a pass-through tax entity. No provision, except for certain states in which we conduct business, as well as certain of our subsidiaries, is made in the financial statements for income taxes. Our subsidiaries, Robb and PVC, are subject to corporate income taxes under Subchapter C of the Internal Revenue Code. We recognized an income tax provision of $2.5 million and $2.0 million during FY 2012 and FY 2011, respectively, for Robb and PVC based on their pre-tax income or loss.
Performance during the Fiscal Year Ended September 30, 2011 (“FY 2011”) Compared with the Pro Forma Fiscal Year Ended September 30, 2010 (“PF 2010”)
The following is a discussion of the results of operations for FY 2011 and PF 2010:
Net Sales
Net sales during FY 2011 were $237.2 million, which represents an increase of $3.1 million, or 1.3%, as compared to $234.1 million during PF 2010. With significant increases in raw material costs, particularly in PET resin, during the current period, we had higher transaction prices because we operate with resin price pass-through mechanisms with our customers that allow us to pass through changes in resin costs typically subject to one to four month delay. The impact of higher transaction pricing was offset by a decrease in overall volumes resulting from the closure of our Muscatine, IA facility, which ceased most operations in late 2010 and was closed in March 2011.
Gross Profit
Gross profit during FY 2011 was $31.3 million (or 13.2% of net sales), which represents a decrease of $2.6 million, or 7.6% as compared to $33.9 million (or 14.5% of net sales) during PF 2010. During FY 2011, we experienced significant resin price increases. As we pass through changes in resin costs to all of our customers, a timing delay, typically one to four months, exists and the pass through is generally not recognized in the period in which resin costs changed. This timing delay negatively impacted the FY 2011 margins. The decrease in gross profit percentage was offset slightly by the cost reductions resulting from consolidation of our operations.
Operating Expenses
SG&A Expenses
SG&A expenses during FY 2011 were $18.3 million, which represents a decrease of $4.5 million, or 19.8%, as compared to PF 2010. The decrease is due to SG&A reductions derived from the termination of operations of the PVC headquarters in Eatontown, NJ, along with other reductions related to our integration plan, which reduced the impact to on-going expenses.
Other Operating Expenses
Other operating expenses during FY 2011 were $5.4 million, which represents a decrease of $4.0 million, or 42.3%, as compared to PF 2010. The FY 2011 other operating expenses primarily consisted of $2.5 million of restructuring costs related to plant integrations as part of our PVC integration plan, $1.0 million of professional fees associated with our exploration of acquisition opportunities, and $0.5 million of fees associated with the registration of the Notes with the SEC. The PF 2010 other operating expenses includes $6.7 million of restructuring expenses related to the initial steps of our PVC integration plan.
Other Expenses
Interest expense during FY 2011 was $16.3 million, which represents an increase of $0.7 million, or 4.7%, as compared to $15.6 million during PF 2010. The amortization of deferred financing fees included in interest expense during FY 2011 and PF 2010 was $1.3 million and $0.4 million, respectively. Interest expense, excluding amortization of deferred financing fees, decreased $0.2 million during FY 2011 primarily due to the lower borrowing levels in place for us after the Acquisition. Prior to the Refinancing in March 2011, our borrowing levels and effective interest rate of these borrowings were lower than levels reflected in PF 2010. For the period subsequent to the Refinancing, our borrowing levels and effective interest rate increased compared to the levels reflected in PF 2010.
Income Tax Provision
As a limited liability company, we are a pass-through tax entity. No provision, except for certain states in which we conduct business, as well as certain of our subsidiaries, is made in the financial statements for income taxes. Our subsidiaries, Robb and PVC, are subject to corporate income taxes under Subchapter C of the Internal Revenue Code. For FY 2011, we recognized an
income tax provision of $2.0 million compared to a provision of $0.2 million for the PF 2010 Period for Robb and PVC based on their pre-tax income or loss recognized.
Non-GAAP Financial Measures
We have included information concerning EBITDA and Adjusted EBITDA in this annual report because they are the bases upon which our management assesses our operating performance and are components of certain covenants in our ABL Facility. Furthermore, we believe these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of debt issuers, many of which present EBITDA and Adjusted EBITDA when reporting their results. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by other noteworthy items.
We define EBITDA as net income (loss) plus interest expense, tax expense (benefit), and depreciation and amortization, and Adjusted EBITDA as EBITDA further adjusted to eliminate the impact of certain noteworthy items that we do not consider indicative of our ongoing operating performance.
The following table presents a reconciliation of net loss to EBITDA and Adjusted EBITDA for the periods indicated below:
(a)
In connection with the Acquisition, we entered into a management services agreement with Castle Harlan to provide business and organizational strategy, financial and investment management, advisory, and merchant and investment banking services.
(b)
In connection with the Acquisition, we entered into a consulting agreement with Keith S. Harbison, the controlling equity holder of Pretium prior to the Acquisition, and an equity co-investor in Pretium Holding.
(c)
Represents professional fees associated with the registration of our notes with the SEC and the exploration of acquisition opportunities.
(d)
Represents the final settlement of outstanding workers compensation claims associated with our closed facility in Muscatine, IA.
(e)
We recorded a loss on the extinguishment of debt repaid in connection with the Refinancing on March 31, 2011. The amount represents the write off of net deferred financing costs from previously outstanding costs, original issue discount, prepayment penalties and other related costs from the Refinancing.
(f)
Represents the implementation of several initiatives to restructure and realign manufacturing and administrative resources. These costs incurred in connection with these initiatives consisted of severance, facility consolidation costs, and other exit costs incurred as part of the PVC integration plan.
(g)
As a result of the Acquisition and related operational integration plans, we consolidated the Nashua, New Hampshire operation into the Philmont, New York plant and we consolidated PVC's Hazelton, Pennsylvania operation into our Hazelton, Pennsylvania plant. Beginning in July 2010, we experienced certain material and labor variances from our standard operating costs reflected in our historical results. We consider these material and labor variances to be noteworthy as we incurred incremental costs to manufacture our products. Variances in the amount of $2.4 million were incurred during FY 2011. These material and labor variances associated with the integration plans ceased in the quarter ended June 30, 2011.
(h)
Represents transaction related costs as included in acquisition fees and expenses in the consolidated statement of operations. For the period October 1, 2009 to February 16, 2010, approximately $0.6 million of these costs were deferred acquisition related costs that were previously capitalized under FASB Statement No. 141, Business Combinations, (now part of ASC Topic 805 Business Combinations).
(i)
Represents the increase in inventories to fair value in the purchase accounting adjustments recorded as a result of the Acquisition. The amount was charged to costs of goods during the period February 17, 2010 to September 30, 2010.
(j)
Represents deferred financing fees as included in bank related loan costs in the consolidated statement of operations.
(k)
Represents the foreign currency translation impact on debt previously held by our Canadian subsidiary. Concurrent with the Acquisition, the debt held at the Canadian subsidiary was repaid in full.
EBITDA and Adjusted EBITDA are supplemental measures to assess our operating performance that are not required by, or presented in accordance with, GAAP. EBITDA and Adjusted EBITDA are not measures of our financial performance under GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with GAAP or as an alternative to cash flow from operating activities as measures of our liquidity. Our measurements of EBITDA and Adjusted EBITDA and the ratios related thereto may not be comparable to similarly titled measures of other companies. Furthermore, EBITDA and Adjusted EBITDA have limitations as analytical tools and you should not consider them in isolation, or as substitutes for, analysis of our operating results or cash flows as reported under GAAP. Some of these limitations are:
•
EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
•
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
•
EBITDA and Adjusted EBITDA do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments, on our debt;
•
although depreciation and amortization are non-cash charges, the assets being depreciated or amortized may have to be replaced in the future, EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;
•
EBITDA and Adjusted EBITDA are adjusted for certain noteworthy and non-cash income or expense items that are reflected in our statements of cash flows; and
•
other companies in our industry will calculate the measures differently than we do, limiting their usefulness as comparative measures.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only for supplemental purposes.
Liquidity and Capital Resources
Liquidity
Our principal ongoing source of operating liquidity is cash generated by our business operations and borrowings from our ABL Facility.
The ABL Facility provides senior secured financing of up to $30.0 million, subject to borrowing base and certain other restrictions on availability. As of September 30, 2012, there were no borrowings outstanding under our ABL Facility, which bears interest at variable rates and matures on September 30, 2015. At September 30, 2012, letters of credit issued and outstanding were $1.6 million and borrowing availability under the ABL Facility was $28.4 million.
We believe that cash flows from operations and borrowings from the ABL Facility will be sufficient to meet our existing liquidity needs for the next 12 months.
On March 31, 2011, the Company and Pretium Finance issued $150.0 million aggregate principal amount of the Notes. The Notes are guaranteed by all of the Company's existing and future domestic subsidiaries (other than Pretium Finance) and mature on April 1, 2016.
We were in compliance with all of the covenants contained in our Notes and ABL Facility as of September 30, 2012.
Cash Flows
Our cash flows from operating, investing and financing activities for the fiscal years ended September 30, 2012 and 2011 are summarized in the following table:
As of September 30, 2012, we had cash and cash equivalents of $0.9 million. We consider all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying value of these investments approximates fair value.
Cash provided by operating activities was $10.0 million during FY 2012, compared to $5.0 million of cash provided by operating activities during FY 2011. This improvement was primarily due to higher income from operations (excluding non-cash charges for depreciation and amortization) and an increase in cash provided by operating working capital compared to FY 2011. The change in operating assets and liabilities provided $3.5 million of cash during FY 2012 and used $0.1 million during FY 2011. The changes in operating assets and liabilities included:
•
Cash provided by accounts receivable of $1.6 million and $1.4 million during FY 2012 and FY 2011, respectively, reflecting timing of shipments within both periods and an improvement in days sales outstanding attributable to improvements in collection efforts during FY 2012.
•
Cash provided by inventories was $0.5 million during FY 2012 due to improvements in inventory management and lower resin costs. Inventories required $4.9 million of cash during FY 2011 primarily due to significant increases in resin costs during the period, particularly PET.
•
Changes in prepaid expenses and other current assets provided $0.5 million of cash during FY 2012 and used $0.5 million of cash during FY 2011. The generation of cash during FY 2012 was primarily due to a decrease in income taxes receivable while the use of cash in FY 2011 was primarily due to an increase in income taxes receivable.
•
Changes in accounts payable and accrued expenses provided cash of $1.0 million and used cash of $3.0 million during FY 2012 and FY 2011, respectively, primarily due to timing of payments to vendors at September 30.
•
Accrued interest and bank fees generated cash of $6.9 million during FY 2011, due to an increase in accrued interest as a result of increased indebtedness and a change in the timing of interest payments as a result of the Refinancing. The Notes require payment of interest semiannually on April 1 and October 1. At September 30, 2012 and 2011 there was six months of interest accrued under the Notes, and therefore the change in accrued interest during FY 2012 was not significant.
Net cash used in investing activities was $9.6 million and $8.4 million during FY 2012 and FY 2011, respectively, resulting from specific cash purchases of property, plant and equipment.
Financing activities used $0.7 million of cash during FY 2012 and generated $3.2 million during FY 2011. The use of cash during FY 2012 was primarily due to paying off all outstanding borrowings under the ABL Facility during the period. The cash provided by financing activities during FY 2011 represented borrowings under our ABL Facility to fund operating and investing activities.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(ii).
Contractual Obligations
The following table reflects our contractual commitments associated with our debt and other obligations as of September 30, 2012:
(1)
Consists of our obligations of principal and interest payments under the Notes and the ABL Facility as of September 30, 2012.
(2)
Consists of our obligations under our management agreement. See Item 13 “Certain Relationships and Related Transactions, and Director Independence-Management Agreement.”
(3)
Consists of our obligations under our consulting agreement. See Item 13 “Certain Relationships and Related Transactions, and Director Independence-Consulting Agreement.”
(4)
Consists of open purchase orders as of September 30, 2012.
Critical Accounting Policies
We evaluated the accounting policies used in the preparation of our financial statements and related notes and believes those policies to be reasonable and appropriate. Our significant accounting policies are described in Note 1 “Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” included elsewhere in this annual report. Certain of these accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The most significant areas involving management judgments and estimates are described below. We believe that the amounts recorded in our financial statements related to these areas are based on our best judgments and estimates, although actual results could differ materially under different assumptions or conditions.
Accounts Receivable
Accounts receivable are stated at the amount we expect to collect from outstanding balances. Accounts receivable are recorded at the invoiced amount and do not bear interest. We grant trade credit to our customers, which primarily are manufacturers of personal care products, food, household chemicals, lawn and garden products, and industrial chemical products, and to bottle distributors that sell to such manufacturers. We perform periodic credit evaluations of our customers and generally do not require collateral. We maintain allowances for doubtful accounts for estimated losses resulting from customers’ potential failure to make payments. The allowance for doubtful accounts represents our best estimate of the amount of probable credit losses in
our existing accounts receivable. Such estimate is based on historical experience and known specific factors associated with such customers.
Inventories
Inventories include material, labor and overhead and are stated at the lower of cost or market with cost determined by the average cost method. We utilize historical experience and any other known specific factors, such as future demand and market conditions, to provide estimated reserves for excess and obsolete inventory. If actual market conditions deteriorate, additional inventory reserves may be recorded.
Goodwill and Other Indefinite-Lived Intangible Assets
We account for goodwill and other indefinite-lived intangible assets in accordance with the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 350, Goodwill and Other Intangible Assets. In accordance with ASC 350, intangible assets deemed to have indefinite lives and goodwill are not subject to amortization but are tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired or that there is a probable reduction in the fair value of a reporting unit below its aggregate carrying value. We perform the impairment test of the carrying values of our goodwill and indefinite-lived intangible assets at the reporting unit level during the second quarter of each fiscal year using balances as of December 31.
The goodwill impairment test involves a two-step process. The first step involves comparing the estimated fair value of the reporting unit with its aggregate carrying value, including goodwill. If the reporting unit’s aggregate carrying value exceeds its estimated fair value, we perform the second step of the goodwill impairment test. The second step involves comparing the implied fair value of the reporting unit’s goodwill with the carrying value of that goodwill to measure the amount of impairment loss, if any.
The impairment test for indefinite-lived intangibles involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
As a result of these tests, we recorded no impairment charges for the fiscal year ended September 30, 2012.
Long-Lived Assets
We account for long-lived assets, including intangible assets that are amortized, in accordance with FASB ASC 360-10-05-4, Impairment or Disposal of Long-Lived Assets (“FASB ASC 360-10-05-4”) which requires that all long-lived assets be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Such events and circumstances include the occurrence of an adverse change in the market involving the business employing the related long-lived assets or a situation in which it is more likely than not that we will dispose of such assets. If indicators of impairment are present, reviews are performed to determine whether the carrying value of the long-lived assets to be held and used is impaired. Such reviews involve a comparison of the carrying amount of the asset group to the future net undiscounted cash flows expected to be generated by those assets over their remaining useful lives. If the comparison indicates that there is impairment, the impairment loss to be recognized as a non-cash charge to earnings is measured by the amount by which the carrying amount of the assets exceeds their fair value and the impaired assets are written down to their fair value or, if fair value is not readily determinable, to an estimated fair value based on discounted expected future cash flows. Assets to be disposed are reported at the lower of the carrying amount or fair value, less costs to dispose.
Income Taxes
We are a limited liability company. For income tax purposes, we are considered a pass-through tax entity. Accordingly, we are generally not subject to federal or state income taxes, except for certain states in which it conducts business, and no provision for income taxes has been made in these consolidated financial statements other than for certain subsidiaries which are Subchapter C Corporations.
For those subsidiaries, which are Subchapter C Corporations, we account for income taxes in accordance with the asset and liability based approach. Under that approach, deferred income tax assets and liabilities are determined based on the difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect when such differences are expected to reverse. A valuation allowance is recorded, if necessary, to reduce deferred tax assets to their estimated realizable value.
We have adopted FASB ASC 740, Income Taxes, which creates a single model to address accounting for uncertainty in tax positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.
Foreign Operations
Our functional currency is the U.S. dollar, except for Pretium Canada Company (“Pretium Canada”), whose functional currency is the Canadian dollar. Results of operations and cash flows are generally translated at average exchange rates during the period, and assets and liabilities are translated at end of period exchange rates. Translation adjustments resulting from this process are reported as a component of members’ equity.
Transaction gains and losses that arise from exchange rate fluctuations on transactions and balances denominated in a currency other than the functional currency are generally included in the results of operations as incurred.
Fair Value of Financial Instruments and Other Intangibles
The carrying amounts in our consolidated balance sheets for debt at September 30, 2012 and 2011 are reported on an amortized cost basis, which approximates the fair value of the debt based on the borrowing rates available to us at those balance sheet dates for loans with similar terms and maturities.
The carrying amounts of cash, receivables, payables, and other current assets and liabilities approximate fair value because of the short term maturity of those instruments.
We measure fair value in accordance with accounting guidance that requires an entity to base fair value on an exit price and maximize the use of observable inputs and minimize the use of unobservable inputs when determining an exit price. Fair value is the price to sell an asset or transfer a liability between market participants at the measurement date. Fair value measurements assume the asset or liability is exchanged in an orderly manner; the exchange is in the principal market for that asset or liability (or in the most advantageous market when no principal market exists); and the market participants are independent, knowledgeable, able and willing to transact an exchange.
Considerable judgment is required in interpreting market data used to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value.
As described above, we evaluate our intangible and long-lived assets for impairment or recoverability and, if necessary, measure their fair value. Such fair value is determined in accordance with FASB ASC 820, Fair Value Measurements and Disclosures, using unobservable inputs or an income approach, which represent Level 3 inputs under FASB ASC 820.
Revenue Recognition
Revenue is recognized from product sales when there is persuasive evidence of an arrangement, the price is fixed or determinable, the goods are shipped and the title and risk of loss pass to the customer, and collectability is reasonably assured. We record shipping and handling costs charged to customers in net sales, with the related expense recorded in cost of sales. Sales are recorded net of discounts, allowances and returns. Sales allowances are recorded as a reduction to sales in accordance with guidance under ASC 605-50, Customer Payments and Incentives. We pass resin cost adjustments to customers in the form of price adjustments on future quantities sold, typically subject to a one to four month timing delay, and there are no unbilled amounts reflected in our financial statements.
Restructuring Expenses
We account for costs incurred in connection with the closure and consolidation of facilities and functions in accordance with FASB ASC 420, Exit or Disposal Cost Obligations; FASB ASC 712, Compensation - Nonretirement Postemployment Benefits; FASB ASC 360-10-05-4; FASB ASC 805, Business Combinations (“FASB ASC 805”); and Emerging Issues Task Force (“EITF”) No. 95-3 (superseded by FASB ASC 805). Such costs include employee termination benefits (one-time arrangements and benefits attributable to prior service); termination of contractual obligations; the write-down of current and long-term assets to the lower of cost or fair value; and other direct incremental costs including relocation of employees, inventory and equipment.
Recent Accounting Pronouncements
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income (“ASU 2011-05”). This update requires that the components of net income, the components of other comprehensive income and the total of comprehensive income be presented as a single continuous financial statement or in two separate but consecutive statements. The option of presenting other comprehensive income in the statement of stockholders’ equity is eliminated. This update also requires the presentation on the face of the financial statements of reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. In December 2011, the FASB issued ASU 2011-12, which deferred the guidance on whether to require entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement where net income is presented and the statement where other comprehensive income is presented for both interim and annual financial statements. ASU 2011-12 reinstated the requirements for the presentation of reclassifications that were in place prior to the issuance of ASU 2011-05 and did not change the effective date for ASU 2011-05. For public entities, the amendments in ASU 2011-05 and ASU 2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and should be applied retrospectively. The adoption of this guidance in fiscal 2012 concerned disclosure only and did not have an impact on the Company's consolidated financial position or results of operations.
In September 2011, the FASB issued ASU No. 2011-08, Testing for Goodwill Impairment (“ASU 2011-08”). ASU 2011-08 amends existing guidance by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the performance of the two-step goodwill impairment test, as currently prescribed by ASC Topic 350, is required. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company does not currently expect the adoption of this update in fiscal 2013 will have a significant effect on its consolidated financial statements and related disclosures.
In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). ASU 2012-02 amends existing guidance by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If an entity determines that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, then the performance of the quantitative impairment test, as currently prescribed by ASC Topic 350-30, is required. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company does not currently expect the adoption of this update in fiscal 2013 will have a significant effect on its consolidated financial statements and related disclosures.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk in connection with changes in foreign exchange rates and interest rates, primarily in connection with interest on the outstanding balance under our ABL Facility.
Foreign Exchange Risk
We are exposed to fluctuations in foreign currency cash flows related to our Canadian operations, intercompany product shipments and intercompany loans. Additionally, we are exposed to volatility in the translation of foreign currency earnings to U.S. dollars. Primary exposures include the U.S. dollar versus functional currencies of our major markets, which include the Canadian dollar. We assess foreign currency risk based on transactional cash flows, identify naturally offsetting positions and purchase hedging instruments to protect anticipated exposures. We do not consider the potential loss arising from a hypothetical 10% adverse change in quoted foreign currency exchange rates, as of September 30, 2012, to be material.
Interest Rate Risk
We are exposed to interest rate volatility with regard to the current existing issuances of variable rate debt under our ABL Facility. Primary exposure includes movements in the U.S. prime rate and LIBOR. We manage interest rate risk by incurring a mix of indebtedness bearing interest at both floating and fixed rates at inception and maintain an ongoing balance between floating and fixed rates on this mix of indebtedness through the use of interest rate swaps when necessary. At September 30, 2012, we had no floating rate debt outstanding and the weighted average interest rate for all debt was 11.5%.
Item 8.
Item 8.
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Board of Directors
Pretium Packaging, LLC:
We have audited the accompanying consolidated balance sheets of Pretium Packaging, LLC and subsidiaries (the Company) as of September 30, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), changes in members' equity (deficit), and cash flows for the years ended September 30, 2012 and 2011 and the periods from February 17, 2010 to September 30, 2010 (Successor period) and from October 1, 2009 to February16, 2010 (Predecessor period). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pretium Packaging, LLC and subsidiaries as of September 30, 2012 and 2011, and the results of their operations and their cash flows for the years ended September 30, 2012 and 2011 and the periods from February 17, 2010 to September 30, 2010 (Successor period) and from October 1, 2009 to February 16, 2010 (Predecessor period), in conformity with U.S. generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, all of the Company's operations were acquired by Pretium Intermediate Holding, LLC on the close of business on February 16, 2010 in a transaction accounted for as a business combination. As a result of the acquisition, the consolidated financial information for the periods after acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable.
PRETIUM PACKAGING, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
See accompanying notes to consolidated financial statements.
PRETIUM PACKAGING, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
See accompanying notes to consolidated financial statements.
PRETIUM PACKAGING, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
See accompanying notes to consolidated financial statements.
PRETIUM PACKAGING, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
(in thousands)
See accompanying notes to consolidated financial statements.
PRETIUM PACKAGING, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See accompanying notes to consolidated financial statements.
PRETIUM PACKAGING, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See accompanying notes to consolidated financial statements.
PRETIUM PACKAGING, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Note 1.
Summary of Significant Accounting Policies
Basis of Presentation
Pretium Packaging, L.L.C. (the “Company”) was formed in 1998 (its origins date back to 1992) as a Delaware limited liability company for the purpose of acquiring and operating plastics manufacturing related businesses.
On February 16, 2010, all of the Company’s operations were acquired by Pretium Intermediate Holding, LLC. (the “Acquisition”), a newly formed Delaware corporation for the purpose of the Acquisition. This transaction was accounted for as a business combination, which required an allocation of the total consideration to the identifiable assets and liabilities measured at fair value at the acquisition date. The Company is now a wholly owned subsidiary of Pretium Intermediate Holding, LLC (“Pretium Intermediate”), which is a wholly owned subsidiary of Pretium Holding, LLC (“Pretium Holding”).
As a result of this transaction, all references in these consolidated financial statements to the Company before February 16, 2010 shall be referred to as "Predecessor". All references in these consolidated financial statements to the Company after February 16, 2010 shall be referred to as "Successor".
At September 30, 2012, the Company conducted its business from its corporate headquarters in Chesterfield, Missouri, with nine manufacturing plants in the United States and two in Canada (Pretium Canada). The Company manufactures a variety of injection blow molded (“IBM”), extrusion blow molded (“EBM”), injection stretch blow molded (“SBM”) and injection molded plastic bottles, jars, containers, preforms, and closures. Substantially all of the Company’s workforce at its Canadian facilities is employed under collective bargaining agreements.
The accompanying consolidated financial statements reflect the operations of the Company and its subsidiaries.
Principles of Consolidation
The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.
Estimates and Assumptions
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates that affect the consolidated financial statements include, but are not limited to, recoverability of inventories, collectability of accounts receivable, useful lives of property, plant, and equipment related to depreciation periods, valuation of goodwill and intangible assets, and realizability of deferred tax assets.
Cash Equivalents
The carrying amount of cash and cash equivalents approximates their fair value. The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are stated at the amount the Company expects to collect from outstanding balances. Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company grants trade credit to its customers, which primarily are manufacturers of personal care products, food, household chemicals, lawn and garden products, and industrial chemical products, and to bottle distributors that sell to such manufacturers. The Company performs periodic credit evaluations of its customers and generally does not require collateral. The Company maintains allowances for doubtful accounts for estimated losses resulting from customers’ potential failure to make payments. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. Such estimate is based on historical experience and known specific factors associated with such customers.
Inventories
Inventories include material, labor and overhead and are stated at the lower of cost or market with cost determined by the average cost method. The Company utilizes historical experience and any other known specific factors, such as future demand and market conditions, to provide estimated reserves for excess and obsolete inventory. If actual market conditions deteriorate, additional inventory reserves may be recorded.
Property, Plant, and Equipment
Property, plant, and equipment are carried at cost, less accumulated depreciation, using the straight line method. For the Successor periods, buildings and improvements are depreciated over 20 years, machinery and equipment over 5 to 7 years, and molds over 5 years. Leasehold improvements are amortized over the shorter of the lease term or the useful life of the improvements. For the Predecessor periods, buildings and improvements were depreciated over 15 to 31.5 years, machinery and equipment over 3 to 10 years, and molds over 5 years. Leasehold improvements were amortized over the shorter of the lease term or the useful life of the improvements. Depreciation and amortization are included in cost of sales and within operating expenses in the Consolidated Statements of Operations based on the use of the assets.
Goodwill and Other Indefinite-Lived Intangible Assets
We account for goodwill and other intangible assets in accordance with the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 350, Goodwill and Other Intangible Assets. In accordance with ASC 350, intangible assets deemed to have indefinite lives and goodwill are not subject to amortization but are tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired or that there is a probable reduction in the fair value of a reporting unit below its aggregate carrying value. The Company performs the impairment test of the carrying values of its goodwill and indefinite-lived intangible assets at the reporting unit level during the second quarter of each fiscal year using balances as of December 31.
The goodwill impairment test involves a two-step process. The first step involves comparing the estimated fair value of the reporting unit with its aggregate carrying value, including goodwill. If the reporting unit’s aggregate carrying value exceeds its estimated fair value, the Company performs the second step of the goodwill impairment test. The second step involves comparing the implied fair value of the reporting unit’s goodwill with the carrying value of that goodwill to measure the amount of impairment loss, if any.
The impairment test for indefinite-lived intangibles involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
As a result of these tests we recorded no impairment charges for the fiscal year ended September 30, 2012.
Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations or expected to be disposed of when events and circumstances indicate that the assets might be impaired and when those assets are expected to generate undiscounted cash flows that would be less than their carrying amounts in accordance with ASC 360-10, Impairment or Disposal of Long-Lived Assets. No indicators of impairment existed at September 30, 2012 and 2011.
Deferred Financing Fees
Deferred financing fees are amortized using the straight line method, which approximated the effective interest method over the respective loan periods. On March 31, 2011 the Company refinanced its outstanding debt, as further discussed in Note 6. As a result of the refinancing the company recognized a $5.5 million loss on the extinguishment of debt, of which $2.8 million represented the write off of net deferred financing costs and $0.8 million represented the write-off of original issue discount associated with the previously outstanding debt. The remaining loss represents the payment of prepayment penalties and other related costs.
During the year ended September 30, 2011, the Company capitalized costs of $9.7 million related to financing fees paid in conjunction with its debt refinancing. The amortization of deferred financing fees was $2.0 million and $1.3 million for the years ended September 30, 2012 and 2011, respectively, and $0.4 million for the period from February 17, 2010 to September 30, 2010, and is included in interest expense in the accompanying consolidated statement of operations. Amortization was $0.9 million for the period from October 1, 2009 to February 16, 2010, and is included in bank related loan costs in the accompanying consolidated statement of operations. The effect of the change in presentation of amortization expense was not material to the consolidated statements of operations.
Income Taxes
The Company is a limited liability company. For income tax purposes, it is considered a pass-through tax entity. Accordingly, it is generally not subject to federal or state income taxes, except for certain states in which it conducts business, and no provision for income taxes has been made in these consolidated financial statements other than for certain subsidiaries which are Subchapter C Corporations.
For those subsidiaries, the Company accounts for income taxes in accordance with the asset and liability based approach. Under that approach, deferred income tax assets and liabilities are determined based on the difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect when such differences are expected to reverse. A valuation allowance is recorded, if necessary, to reduce deferred tax assets to their estimated realizable value.
The Company has adopted FASB ASC 740, Income Taxes, which creates a single model to address accounting for uncertainty in tax positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The Company recognized the effects of the adoption of the cumulative effect of accounting for uncertainty in tax positions within ASC 740 in its Consolidated Statement of Changes in Members’ Equity for the Predecessor period ended February 16, 2010 of $0.3 million.
Foreign Operations
The Company’s functional currency is the U.S. Dollar, except for Pretium Canada, whose functional currency is the Canadian Dollar. Results of operations and cash flows are generally translated at average exchange rates during the period and reflected as gains or losses from foreign currency exchange rates. Assets and liabilities are translated at end of period exchange rates at the stated month end exchange rate. Translation adjustments resulting from this process are reported as a component of members’ equity (deficit).
Transaction gains and losses that arise from exchange rate fluctuations on transactions and balances denominated in a currency other than the functional currency are generally included in the results of operations as incurred. Foreign currency transaction losses (gains) included in operations amounted to $0.03 million, $(0.26) million, $(0.20) million, and $(0.58) million, during the years ended September 30, 2012 and 2011, and during the periods from February 17, 2010 to September 30, 2010 and October 1, 2009 to February 16, 2010, respectively.
Comprehensive Income (Loss)
The Company classifies its accumulated other comprehensive income (loss), which is comprised solely of cumulative foreign currency translation adjustments, as a separate component of members’ equity (deficit).
Fair Value of Financial Instruments and Other Intangibles
The Company measures fair value in accordance with accounting guidance that requires an entity to base fair value on an exit price and maximize the use of observable inputs and minimize the use of unobservable inputs when determining an exit price. Fair value is the price to sell an asset or transfer a liability between market participants at the measurement date. Fair value measurements assume the asset or liability is exchanged in an orderly manner; the exchange is in the principal market for that asset or liability (or in the most advantageous market when no principal market exists); and the market participants are independent, knowledgeable, able and willing to transact an exchange.
Considerable judgment is required in interpreting market data used to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value.
As described above, the Company evaluates its intangible and long-lived assets for impairment or recoverability and, if necessary, measures their fair value. Such fair value is determined in accordance with FASB ASC 820, Fair Value Measurements and Disclosures, using unobservable inputs or an income approach, which represent Level 3 inputs under FASB ASC 820.
Revenue Recognition
Revenue is recognized from product sales when there is persuasive evidence of an arrangement, the price is fixed or determinable, the goods are shipped and the title and risk of loss pass to the customer, and collectability is reasonably assured. The Company records shipping and handling costs charged to customers in net sales, with the related expense recorded in cost
of sales. Sales are recorded net of discounts, allowances and returns. Sales allowances are recorded as a reduction to sales in accordance with guidance under FASB ASC 605-50, Customer Payments and Incentives. The Company passes resin cost adjustments to customers in the form of price adjustments on future quantities sold, typically subject to a one to four month timing delay, and there are no unbilled amounts reflected in the financial statements.
Restructuring Expenses
The Company accounts for costs incurred in connection with the closure and consolidation of facilities and functions in accordance with FASB ASC 420, Exit or Disposal Cost Obligations; and ASC 805, Business Combinations. Such costs include employee termination benefits (one-time arrangements and benefits attributable to prior service); termination of contractual obligations; the write-down of current and long-term assets to the lower of cost or fair value; and other direct incremental costs including relocation of employees, inventory and equipment.
Research & Development
Research and development expenditures are expensed as incurred. Substantially all engineering and development costs are related to developing new products or designing significant improvements to existing products or processes. Costs primarily include salaries and benefits, facility costs and outside services and have not been material for the periods presented.
Recently Adopted Accounting Pronouncements
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income (“ASU 2011-05”). This update requires that the components of net income, the components of other comprehensive income and the total of comprehensive income be presented as a single continuous financial statement or in two separate but consecutive statements. The option of presenting other comprehensive income in the statement of stockholders’ equity is eliminated. This update also requires the presentation on the face of the financial statements of reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. In December 2011, the FASB issued ASU 2011-12, which deferred the guidance on whether to require entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement where net income is presented and the statement where other comprehensive income is presented for both interim and annual financial statements. ASU 2011-12 reinstated the requirements for the presentation of reclassifications that were in place prior to the issuance of ASU 2011-05 and did not change the effective date for ASU 2011-05. For public entities, the amendments in ASU 2011-05 and ASU 2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and should be applied retrospectively. The adoption of this guidance in fiscal 2012 concerned disclosure only and did not have an impact on the Company's consolidated financial position or results of operations.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). This update requires the following new disclosures: (i) the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and a description of the reasons for the transfers; and (ii) a reconciliation for fair value measurements using significant unobservable inputs (Level 3), including separate information about purchases, sales, issuances, and settlements. The update also clarifies existing requirements about fair value measurement disclosures and disclosures about inputs and valuation techniques. The new disclosures and clarifications of existing disclosures were effective for interim and annual reporting periods beginning after December 15, 2009, except for the reconciliation of Level 3 activity, which was effective for the Company in the first quarter of 2012. The adoption of this update in fiscal 2012 concerned disclosure only and did not have an impact on the Company's consolidated financial position or results of operations.
Recently Issued Accounting Pronouncements
In September 2011, the FASB issued ASU No. 2011-08, Testing for Goodwill Impairment (“ASU 2011-08”). ASU 2011-08 amends existing guidance by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the performance of the two-step goodwill impairment test, as currently prescribed by ASC Topic 350, is required. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company does not currently expect the adoption of this update in fiscal 2013 will have a significant effect on its consolidated financial statements and related disclosures.
In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). ASU 2012-02 amends existing guidance by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If an entity determines that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, then the performance of the quantitative impairment test, as currently prescribed by ASC Topic 350-30, is required. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company does not currently expect the adoption of this update in fiscal 2013 will have a significant effect on its consolidated financial statements and related disclosures.
Note 2.
Accounts Receivable
Accounts receivable at September 30, 2012 and 2011 consist of the following:
The allowance for doubtful accounts activity for the fiscal years ended September 30, 2012 and 2011, and for the periods October 1, 2009 through February 16, 2010 and February 17, 2010 through September 30, 2010, was as follows:
(a)
Reflects opening reserve balance resulting from the PVC Acquisition.
Note 3.
Inventories
Inventories, stated at lower of cost or market, consisted of the following at September 30, 2012 and September 30, 2011:
Note 4.
Property, Plant, and Equipment, Net
Property, plant, and equipment at September 30, 2012 and 2011 consist of the following:
Depreciation expense was $14.8 million and $13.4 million for the years ended September 30, 2012 and 2011, respectively. Depreciation expense was $7.5 million and $3.1 million for the periods from February 17, 2010 to September 30, 2012 and October 1, 2009 through February 16, 2010, respectively.
Note 5.
Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying amount of goodwill for years ended September 30, 2012 and 2011 are presented in the table below:
The Company performs the annual impairment test of the carrying values of its goodwill as of December 31 of each fiscal year. Under the impairment test, if the reporting unit's aggregate carrying value exceeds its estimated fair value, goodwill impairment is recognized to the extent that the reporting unit's carrying amount of goodwill exceeds the implied value of the goodwill.
The Company completed its annual impairment test of the carrying value of its goodwill as of December 31, 2011 and concluded there was no impairment. In performing its goodwill impairment test, the Company determined the estimated fair value of its reporting unit utilizing a combination of the market approach (weighted at 25% for the comparable company method and 25% for the reference transactions method) and the income approach (weighted at 50%). The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach makes use of unobservable factors, and the key assumptions that impact the calculation of fair value, including the Company's estimates of the projected revenues, cash flows and a discount rate applied to such cash flows. In developing projected revenues and cash flows, the Company considered available information including, but not limited to, its short-term internal forecasts, historical results, anticipated impact of implemented restructuring initiatives, and its expectations about the strength of the current economy. In addition, the Company forecasted sales growth to trend up to an inflationary growth rate of 5% per annum by fiscal 2013 and beyond. The determination of the discount rate was based on the weighted-average cost of capital with the cost of equity determined using the capital asset pricing model (“CAPM”). The CAPM uses assumptions such as a risk-free rate, an equity risk premium and a small stock premium. These assumptions were derived from publicly available information. Therefore, the Company believes its assumptions are reflective of the assumptions made by market participants.
In order to evaluate the sensitivity of the fair value calculation on the goodwill impairment testing, the Company applied a hypothetical 10% decrease to the fair value of the reporting unit, which it believes represented a reasonably possible change at the time of the test. This hypothetical 10% decrease did not change the results of the Company's impairment testing.
Other Intangible Assets
The following table presents the gross carrying amount and accumulated amortization of other intangible assets at September 30, 2012:
The following table presents the gross carrying amount and accumulated amortization of other intangible assets at September 30, 2011:
The Company completed its annual impairment test of the carrying value of its indefinite lived trademarks as of December 31, 2011 and concluded there was no impairment. In performing its impairment test, the Company determined the estimated fair value of its trademarks utilizing the relief from royalties method.
Customer relationships are amortized over 20 years. The accumulated amortization related to the Trademarks is related to the subsequent amortization of the PVC trademarks. The Pretium trademark is not amortized and has an indefinite useful life.
Amortization expense was $1.3 million during the each of the years ended September 30, 2012 and 2011. Amortization expense was $0.9 million during the period from February 17, 2010 to September 30, 2010. There was no amortization expense during the period from October 1, 2009 through February 16, 2010.
The estimated aggregate amortization expense for each of the five succeeding fiscal years as of September 30, 2012 is $1.3 million .
Note 6.
Long-term Debt
At September 30, 2012 and 2011, long-term debt obligations consisted of the following:
On March 31, 2011, the Company refinanced the debt used to fund the Acquisition and the PVC Acquisition. As described further below, the Company, together with Pretium Finance, Inc. (“Pretium Finance”), its wholly-owned subsidiary, issued $150 million of 11.5% Senior Secured Notes due April 1, 2016 and entered into an ABL Facility (the “ABL Facility”) of $25 million in order to fund the refinancing (the “Refinancing”). The ABL Facility entered into on March 31, 2011 was subsequently amended and restated on April 20, 2011, which reduced the Company's interest rates and increased its borrowing availability to $30 million, among other things.
Under the terms of the Company’s debt agreements, at September 30, 2012, the scheduled interest rates and maturity dates were as follows:
*
The revolving line of credit also has interest rate options based on LIBOR plus a margin of 1.5%.
11.5% Senior Secured Notes
On March 31, 2011 the Company, together with Pretium Finance as co-issuer (together, the “Issuers”) issued $150 million in aggregate principal amount of 11.5% Senior Secured Notes due April 1, 2016 (the “Senior Secured Notes”). The Senior Secured Notes bear interest at a fixed annual rate of 11.5% from April 1, 2011, paid semi-annually, commencing October 1, 2011.
The Senior Secured Notes are guaranteed by all of the Company's subsidiaries other than Pretium Finance and are secured, subject to permitted liens and except for certain excluded assets, on a second priority basis by substantially all of the Issuers' and the guarantors' current future property and assets. The Senior Secured Notes and the guarantees are effectively junior to the Issuers' and the guarantors' obligations under the amended ABL Facility and will be effectively junior to any secured indebtedness that is either secured by assets that are not collateral for the Senior Secured Notes and the guarantees or secured by a prior lien on the collateral for the Senior Secured Notes and the guarantees, in each case, to the extent of the value of the assets securing such indebtedness. All of the Company's subsidiaries other than Pretium Finance are guarantors under the amended ABL Facility.
On or after April 1, 2014, the Issuers may redeem all or a part of the Senior Secured Notes at a redemption price not to exceed 105.75% plus accrued and unpaid interest and special interest, if any, to the redemption date. At any time prior to April 1, 2014, the Issuers may redeem up to 35% of the aggregate principal amount of the Senior Secured Notes at a redemption price not to exceed 111.5% plus accrued and unpaid interest and special interest, if any, to the redemption date, with certain of the proceeds realized from the sale of any equity securities; provided, however, that at least 65% of the original principal of the Senior Secured Notes are outstanding immediately following the redemption. If the Issuers sell certain assets or experience specific kinds of changes of control, the Issuers must offer to repurchase the Senior Secured Notes.
ABL Facility
As part of the Refinancing, the Company entered into a Credit Agreement, dated as of March 31, 2011, among the Company, certain subsidiaries of the Company as co-borrowers, Pretium Intermediate, the guarantors party thereto, Jefferies Finance LLC as administrative agent, collateral agent and issuing bank and the lenders party thereto.
On April 20, 2011, the Company entered into an Amended and Restated Credit Agreement, dated as of April 20, 2011, among the Company, certain subsidiaries of the Company as co-borrowers, Pretium Intermediate, the guarantors party thereto, PNC Bank, National Association as administrative agent, collateral agent and issuing bank and the lenders party thereto (the “Amended ABL Facility”).
The Amended ABL Facility provides senior secured financing of up to $30 million, subject to borrowing base and certain other restrictions on availability. The Amended ABL Facility includes a letter of credit and swingline subfacility. The Company, Novapak, Robb, Airopak Corporation, Novapak Corporation and Pretium Canada Company are the borrowers under the Amended ABL Facility. All of the Company's subsidiaries other than Pretium Finance are guarantors under the Amended ABL Facility.
The Amended ABL Facility matures on September 30, 2015. Subject to certain conditions, individual lenders may optionally agree to extend the maturity of their loans and the expiration of the commitments for up to one year.
The Company is required to make mandatory prepayments under the Amended ABL Facility to the extent that the amount of obligations outstanding under the facility (including letters of credit) exceeds the borrowing limits set forth in the facility.
At the Company's request, additional loans in excess of the initial $30 million commitment amount may be made under the Amended ABL Facility at any time after the closing date until the new revolving credit facility matures. The making of any such loans is subject to customary conditions, including absence of defaults, minimum excess availability and obtaining commitments from lenders. However, any such additional loans would require the consent of the holders of the Senior Secured Notes if, after giving effect thereto, the Company would not be in compliance with the Amended ABL Facility limitation set forth in Section 4.09(b)(1) of the Indenture.
The Amended ABL Facility is secured by a first priority security interest in substantially all of the Company's and the guarantors' assets.
Borrowings under the Amended ABL Facility are made as Adjusted Base Rate Loans or Eurodollar Loans at the Company's election. The interest rate payable under Adjusted Base Rate Loans will be based upon an adjusted base rate (equal to the greater of (a) the Base Rate (Prime Rate per the Wall Street Journal) in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50% and (c) except during the Eurodollar Unavailability Period, the Eurodollar Rate for a Eurodollar Loan with a one month interest period plus 1.0%; plus 0.50%). The interest rate payable under Eurodollar Loans will be based upon the published LIBOR rate; plus 1.50%. During continuance of certain events of default under the Amended ABL Credit Facility, a default rate of 2.0% per annum over the rate applicable to Adjusted Base Rate Loans may be imposed.
Interest is calculated on the basis of a 360-day year (365/366 day year with respect to base rate loans) and is payable monthly in arrears for base rate loans and at the end of each interest period for LIBOR loans (but not less frequently than quarterly).
The Amended ABL Facility contains certain customary fees, including letter of credit fees, an unutilized commitment fee, an annual administrative fee, and an upfront fee. Unutilized commitment fees of 0.25% per annum will accrue on undrawn commitments under the facility. The Amended ABL Facility also contains certain operating covenants which are subject to thresholds, qualifications and/ or exceptions in certain cases.
The Amended ABL Facility also requires the Company to achieve and maintain a minimum fixed charge coverage ratio if excess availability under the Amended ABL Facility is below a certain amount. In the event that the sum of excess availability and certain of the Company's cash is less than $3.75 million, the Company will be required to maintain a fixed charge coverage ratio of not less than 1.00 to 1.00 tested quarterly, at the end of a fiscal quarter. Unless certain conditions described therein have been satisfied, the Amended ABL Facility will generally prohibit prepayment of principal under the Senior Secured Notes whether upon default, acceleration or otherwise.
At September 30, 2012, the Company had no outstanding borrowings. Letters of credit issued and outstanding at September 30, 2012 was $1.6 million. Borrowing availability at September 30, 2012 was $28.4 million.
Senior Credit Agreement
On February 16, 2010, and in connection with the Acquisition, the Company entered into a credit agreement with senior lenders (the “Senior Credit Agreement”) consisting of a revolving line of credit and a term note, and a note purchase agreement with secured subordinated lenders. At March 31, 2011 the Senior Credit Agreement was repaid and settled in full.
Senior Subordinated Notes
On February 16, 2010 and in connection with the Acquisition, the Company issued $43.1 million aggregate principal amount of senior subordinated notes due 2016. The Company redeemed the secured subordinated notes in whole and the existing Letter of Credit on March 31, 2011 at a redemption price and recorded principal and accrued unpaid interest plus applicable premium.
Scheduled maturities of long-term debt under the debt agreements at September 30, 2012 are as follows:
Note 7.
Leases
The Company leases various equipment and facilities. Total rental expense was $4.5 million and $4.7 million during the years ended September 30, 2012 and 2011, respectively. Rental expense was $3.6 million and $2.1 million during the periods from February 17, 2010 through September 30, 2010 and October 1, 2009 through February 16, 2010, respectively.
Future minimum lease payments under all noncancelable operating leases with initial or remaining terms in excess of one year at September 30, 2012 are as follows:
Note 8.
401K Plan
The Company maintains a 401(k) defined contribution plan which covers all participating employees who have a minimum of ninety days of service. The Company provides a cash match benefit at the rate of 50% of the first 4% of the participating employees’ gross contributions. Employees become fully vested in the Company’s contribution after three years of service. The Company’s contributions totaled $0.3 million and $0.4 million for the years ended September 30, 2012 and 2011, respectively. Contributions totaled $0.2 million and $0.1 million for the periods from February 17, 2010 through September 30, 2010 and October 1, 2009 through February 16, 2010, respectively.
Note 9.
Pretium Capital Structure
At September 30, 2012, the Company’s capital structure consisted of 1 share of its Class A Member units, held by Pretium Intermediate. Pretium Intermediate is 100% owned by Pretium Holding as of September 30, 2012. The membership units of Pretium Holding are designated Class A units, Class B-1 units, Class B-2 units and Class B-3 units. The Class A and B-2 units contain certain distribution and liquidation preferences, the Class B-1 units contain voting rights and the Class B-3 units are non-voting units intended for employees and directors.
As specified in the Company's Operating Agreement, voting rights are one voting unit for each unit registered in the name of such Member as shown on the Membership Registration maintained by the Company. Income and losses of the Company shall be allocated among the Members in proportion to each Member's respective percentage of voting units when compared with the total Units issued. The Company's cash flows shall first be applied to the payment of the Company's operating expenses (including debt service) and then to maintenance of adequate cash reserves as determined by the Board of Directors in its sole discretion, and shall be distributed from time to time to the Members in proportion to their respective percentage units. No
member has the right to demand and receive any distribution from the Company other than in cash. No distribution shall be made if, as a result thereof, the Company would be in violation of any loan agreement, or if the Company's total assets would be less than the sum of its total liabilities. Transfer, disposition or encumbrance of membership units are subject to certain significant restrictions, including a restriction that prohibits disposals without approval by the Board of Directors.
During the year ended September 30, 2012, the Company made a capital contribution of property, plant, and equipment to Robb. Robb subsequently contributed this property to PVC. The Company is a pass through tax entity, and therefore no deferred tax positions were previously recognized for these assets. As part of this transaction, PVC, which is subject to income tax treatment, established a deferred tax liability of $0.8 million to reflect the difference between the tax basis and the book basis of the contributed property, which also decreased Members' equity by this amount.
During the year ended September 30, 2011, the Company received an investment from its sole member of 0.95 million.
On September 2, 2011, the Company repurchased 250 Class A and 250 Class B-3 membership units of Pretium Holding, LLC from a former executive who resigned in August 2011. The units were repurchased for $21, which represented the value of the members' investment, net of distributions, at the termination date.
On March 31, 2011, in connection with the Refinancing (see Note 6), the Company distributed $30.9 million to Pretium Intermediate. Pretium Intermediate distributed the same amount to Pretium Holding, and Pretium Holding further distributed that amount to its Class A members in accordance with the terms of Pretium Holding's operating agreement.
Note 10.
Income Taxes
The Company is a pass-through tax entity and no provision, except for certain states in which it conducts business as well as certain subsidiary companies which are discussed further below, is made in the consolidated financial statements for income taxes. The following income tax items are related to the applicable subsidiary companies that are subject to income tax treatment:
Deferred taxes for the applicable subsidiary companies are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences, operating loss and other tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.
The components of income tax provision (benefit) are as follows:
The effective tax rate for each of the periods presented differs from the statutory U.S. tax rate. This is primarily due to the Company’s pass-through entity treatment for tax purposes. In addition, for the Company’s taxable subsidiary operations, the effective tax rate differs due to the change in valuation allowance, state income taxes, and the lower statutory rates that apply to Pretium Canada’s operations.
Deferred income taxes for the Company’s taxable subsidiaries reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities at September 30, 2012 and 2011 are as follows:
In assessing the realization 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 scheduled reversal of deferred tax liabilities and generation of future taxable income during the periods in which the deferred tax assets become deductible. Based upon projections for future taxable income over the periods the deferred tax assets are deductible, and the availability of gross deferred tax liabilities to offset gross deferred tax assets, management believes it is more likely than not the Company will realize substantially all of the benefits of these deductible differences at September 30, 2012. A valuation allowance was placed on certain Canadian and state net operating losses for jurisdictions in which it is unlikely that the Company will realize sufficient taxable income during the periods in which certain of the temporary differences become deductible. The net change in the valuation allowance for the fiscal years ended September 30, 2012 and 2011, and the period from February 17, 2010 to September 30, 2010 was $0.6 million, $0.2 million, and ($0.3) million, respectively.
At September 30, 2012, Robb Container Corporation (Robb), a subsidiary of Pretium and a Subchapter C Corporation, had approximately $10.6 million of net operating loss carryforwards that expire in varying amounts beginning in 2021. Based upon the change of ownership rules under IRC Section 382, these separate U.S. net operating loss carryforwards are limited as to the amount of use in any particular year. At September 30, 2012, Pretium Canada has approximately $16.4 million of federal and $15.9 million of provincial net operating losses that expire in varying amounts beginning in 2028. These net operating loss carryforwards are available to only offset future taxable income earned in Canada by Pretium Canada.
The U.S. subsidiaries file consolidated federal and state income tax returns. Generally, the U.S. subsidiaries are not subject to U.S. federal and state examinations for fiscal years prior to 2007. Pretium Canada files a federal return in Canada and a provincial return in Quebec. Pretium Canada is not subject to Canadian federal and Quebec provincial examinations for years prior to its year ended September 30, 2009.
As of September 30, 2012, and 2011, the total balance of unrecognized tax benefits was $0.1 million.
Note 11.
Contingencies
The Company is involved in various claims and legal proceedings and administrative actions arising in the ordinary course of business. In the opinion of management, the ultimate conclusion of these matters will not have a material effect on the Company’s consolidated results of operations, financial position or cash flows.
Note 12.
Restructuring Initiatives
During fiscal 2010, the Company implemented several initiatives to restructure and realign certain manufacturing and administrative resources subsequent to the PVC Acquisition. These plans included the elimination of certain redundant administrative positions at the former PVC corporate headquarters in Eatontown, New Jersey, which was completed in September 2010. They also included the closure and relocation of all manufacturing operations at the Nashua, New Hampshire facility into the Philmont, New York location, which was completed in June 2010. In addition, two Hazleton, Pennsylvania operations were combined with one location retained as a shipping warehouse. The Hazleton consolidation was completed in August 2010. In August 2010 the Company closed the Muscatine, Iowa facility and transferred its operations to Seymour, Indiana and Manchester, Pennsylvania. The Muscatine transition was completed in March 2011.
The total costs incurred during the fiscal year ended September 30, 2011 were $2.5 million. These restructuring costs consisted of facility consolidation costs ($1 million) and other exit costs ($1.5 million). The total cost incurred during the period of February 17, 2010 to September 30, 2010 was $6.7 million and was comprised of severance payments ($2.7 million), facility consolidation costs ($1.7 million) and other exit costs ($2.3 million). There were no such costs incurred during the fiscal year ended September 30, 2012.
Note 13.
Fair Value Measurement
The Company's financial instruments consist primarily of cash equivalents, trade receivables, trade payables and debt instruments. The following methods and assumptions were used to estimate fair values of each class of financial instruments:
Cash and Cash Equivalents, Accounts Receivable and Accounts Payable
The fair values of these financial instruments approximate their carrying amounts due to the short term nature of these instruments.
Long-Term Debt
The Company’s long-term debt as of September 30, 2012 consists of fixed rate debt. The fair value of the Company’s long-term debt was based on market price information. The Company’s fixed rate debt, which includes 11.5% Senior Notes due April 1, 2016, totaled $150 million, as of September 30, 2012. The fair value of this debt approximates its carrying amount based on market price information at September 30, 2012. The estimated fair value is not indicative of the amount that the Company would have to pay to redeem these notes since they are infrequently traded and are not callable at this value.
Recurring Fair Value Measurements
The Company does not have any financial assets or liabilities measured at fair value on a recurring basis as of September 30, 2012 and 2011.
Non-recurring Fair value Measurements
Non-financial assets and liabilities, such as goodwill and long-lived assets, are tested for impairment on the occurrence of a triggering event or in the case of goodwill and other indefinite-lived intangible assets, on at least an annual basis. The Company did not identify any events or changes in circumstances that would indicate that the carrying amount of long-lived assets may not be recoverable as of September 30, 2012 and 2011.
The Company does not have any other financial instruments within the scope of the fair value disclosure requirements as of September 30, 2012 and 2011.
Note 14.
Related Party Transactions
On February 17, 2010, the former majority owner of the Company, who now serves on the Company's Board of Directors, entered into a seven year consulting agreement (including a non-competition clause). The Company's cost for these services was $1.0 million for each of the years ended September 30, 2012 and 2011, and $0.7 million for the period from February 17, 2010 to September 30, 2010.
The Company has entered into a management agreement to retain Castle Harlan, Inc. to provide business and organizational strategy, financial and investment management, advisory, and merchant and investment banking services to the Company. In exchange for these services, the Company pays management fees of $2.3 million, annually. The Company recorded total
expense related to this agreement of $2.3 million for each of the years ended September 30, 2012 and 2011 and $1.4 million for the period from February 17, 2010 to September 30, 2010.
The fees for both of these related party agreements are included within selling, general and administrative expenses in the condensed consolidated statements of operations.
Note 15.
Segment Information
The Company operates as a single reportable segment based on the “management” approach. This approach designates the internal reporting used by management for making decisions and assessing performance as the source of the reportable segments. The following table provides the geographic distributions of the Company's net sales for the fiscal years ended September 30, 2012 and 2011, and for the periods February 17, 2010 through September 30, 2010 and October 1, 2009 through February 16, 2010:
The following table provides the geographic distributions of the Company's long-lived assets as of September 30, 2012 and September 30, 2011:
Note 16.
Quarterly Financial Information (Unaudited)
Quarterly results of operations for the years ended September 30, 2012 and 2011 were as follows:
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
Our management carried out an evaluation (as required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”)), with the participation of the President and Chief Executive Officer and the Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act), as of the end of the period covered by this annual report. Based upon this evaluation, the President and Chief Executive Officer and the Vice President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this annual report, such that the information relating to the Company and its consolidated subsidiaries required to be disclosed by the Company in the reports that it files or submits under the Exchange Act (i) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to the Company’s management, including its principal executive and financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act).
Under the supervision and with the participation of the President and Chief Executive Officer and the Vice President and Chief Financial Officer, management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of September 30, 2012.
Changes in Controls and Procedures
There was no change in internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B.
Other Information
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
The following table sets forth certain information regarding the board of directors of our parent, Pretium Holding. Through its board of directors, our parent oversees all matters affecting our operations and activities, as we do not have a separate board of directors. In addition, the table sets forth information regarding our senior management. Each of the individuals has served as a member of the applicable board of directors and/or as an officer, as the case may be, since the dates indicated below in their biographical information.
George A. Abd. Mr. Abd became our Chief Executive Officer and a member of the board of directors of Pretium Holding on February 16, 2010. Prior to that he was Chief Executive Officer of our predecessor since January 1, 2008. Mr. Abd was President and Chief Executive Officer and a director of Spartech Corporation, a producer of plastic sheet, compounds and packaging products, from May 2005 to July 2007 and Executive Vice President, Color and Specialty Compounds of Spartech from September 2000 to May 2005. Mr. Abd holds a B.A. in economics and M.B.A. in business administration from the University of Notre Dame. As our Chief Executive Officer, Mr. Abd brings extensive knowledge of our current operations and the plastics packaging industry to the board of directors of Pretium Holding.
Robert A. Robison. Mr. Robison became our Vice President and Chief Financial Officer on February 16, 2010. Prior to that he was Vice President and Chief Financial Officer of our predecessor since 2004. Mr. Robison was Chief Financial Officer of Siegel-Robert, Inc. from 1996 to 2003; and Corporate Controller of Siegel-Robert, Inc. from 1986 to 1996. Prior to that he was on the audit staff at Peat Marwick and Mitchell CPA from 1979 to 1986. Mr. Robison received his B.S. in accounting from the University of Missouri.
Daniel P. Lally. Mr. Lally became our Senior Vice President of Sales and Marketing on August 12, 2011. Prior to that he was Vice President of Sales of Pretium since January 2009 and Director of Sales from August 2004 to December 2008. Prior to that he was President of Advance Auto Alarm and Car Stereo from 1994 to 2000. Mr. Lally received a B.S. in Finance from St. Louis University and an M.B.A from Olin School of Business, Washington University in St. Louis.
Jeffrey J. Nelb. Mr. Nelb became our Senior Vice President of Manufacturing on January 1, 2011. Prior to that he was Vice President and General Manager-North Branch of RathGibson, Inc., a manufacturer of stainless steel and specialty alloy, precision-welded tubing products, from September 2006 to December 2010. Mr. Nelb was Vice President, North American Operations for Dyno Nobel Inc., a manufacturer of commercial explosives and explosives initiating systems and components, from 2003 to 2006. Prior to that, Mr. Nelb held various management positions with The Ensign-Bickford Company, including
Commercial Products Manager from 1997 to 2003 and Corporate Controller from 1993 to 1997. Mr. Nelb received an A.B. in Economics from Dartmouth College and M.B.A. from the University of Michigan.
Timothy J. Wehrfritz. Mr. Wehrfritz became our Vice President of Administration on February 16, 2010. Prior to that he was Vice President, Administration of our predecessor since 2003. Mr. Wehrfritz was an employee of Monsanto from February 1973 to October 2001. Mr. Wehrfritz has a B.S. degree in mechanical engineering and an M.B.A. with special emphasis in organizational structure from the University of Detroit.
Sharad Prasad. Mr. Prasad became our Vice President of Quality and Continuous Improvement on February 16, 2010. Prior to that he was Vice President of Quality of PVC since 1993. Mr. Prasad received his B.S. in industrial and production engineering from Bangalore University in India and received an M.S. in industrial engineering from the New Jersey Institute of Technology.
Keith S. Harbison. Mr. Harbison became a member of the board of directors of Pretium Holding on February 16, 2010. He was Chairman of the board of our predecessor from 2008 to 2010. He was the President and Chief Executive Officer of our predecessor from inception in July 1992 to 2008. Prior to forming our predecessor, Mr. Harbison worked in the commercial real-estate development industry and was a cofounder of a long-distance telephone company. Mr. Harbison is Chairman of the St. Louis Children’s Hospital Foundation Board and serves as a director of BJC Healthcare, serving as the chair of the audit committee. Mr. Harbison received a B.S. degree in Business Administration from Texas Christian University. Mr. Harbison has broad historical knowledge of our operations, and brings extensive knowledge of the plastics packaging industry to the board of directors of Pretium Holding.
Harley B. Kaplan. Mr. Kaplan became a member of the board of directors of Pretium Holding on February 16, 2010. He has been the Chief Executive Officer and President of Dexter Magnetic Technologies, an industry leading design and manufacturing company specializing in magnetic assemblies for the aerospace and defense, energy, medical and industrial markets since 2009. Mr. Kaplan served as Chairman and Chief Executive Officer for RathGibson, Inc., a manufacturer of stainless steel and specialty alloy, precision-welded tubing products from 2005 to August 2008. Mr. Kaplan was President of RathGibson, Inc. from 2003 to 2005. Prior to that, he was Group Executive for IDEX Corporation, a manufacturer of precision pumping and fluid distribution equipment from March 2002 through April 2003 and served as President and Chief Executive Officer of Wells Lamont Corporation from April 2001 through March 2002. Mr. Kaplan’s prior experience also includes President of Koehler-Bright Star, Inc. and President of the Lighting Division at Goodrich. In addition, Mr. Kaplan worked for Berkshire Hathaway Corporation’s Scott Fetzer Manufacturing Group for nine years. Mr. Kaplan holds bachelor degrees in both Mechanical Engineering and Accounting from the University of Cincinnati. Mr. Kaplan has extensive leadership experience in other manufacturing businesses, which allows him to bring additional perspective to the board of directors of Pretium Holding.
Alan H. Miller. Mr. Miller became a member of the board of directors of Pretium Holding on February 16, 2010. Mr. Miller is currently a private investor and serves as a director of several private companies. He served as President and Chief Executive Officer of Laird, Inc., the U.S. division of The Laird Group PLC and a manufacturer of specialty folding cartons and special commercial printing and a distributor of rigid plastics, from 1986 until 1994 and a director of The Laird Group PLC, from 1988 to 2001. Mr. Miller served as a director of Sealed Air Corporation from 1984 to 2002. Prior to that he was President and Chief Executive Officer of Cellu- Products, Co., a manufacturer of specialty papers, polyolefin films and foam for packaging products and raw materials for converted products used in health care and cosmetics markets, from 1970 until its acquisition by Sealed Air in 1983. He started his career at Raytheon Company, where he held numerous positions. He is affiliated with numerous professional and industry associations including Technical Association of Pulp and Paper Industry, Society of Plastics Engineers and Institute of Packaging Professionals. Mr. Miller is a graduate of the Wharton School of University of Pennsylvania and completed graduate work in Business and Engineering at Northeastern University, Boston College and MIT. Mr. Miller has significant management experience in and knowledge of the packaging industry.
Howard D. Morgan. Mr. Morgan became a member of the board of directors of Pretium Holding on February 16, 2010. Mr. Morgan has been with Castle Harlan since 1996 and currently serves as Co-President. From 2000 to 2002, Mr. Morgan was executive director of CHAMP Private Equity, an affiliate of Castle Harlan in Sydney, Australia. Mr. Morgan has been a director and executive committee member of CHAMP Private Equity since its inception. Prior to joining Castle Harlan in 1996, Mr. Morgan was a partner at The Ropart Group, a private equity investment firm, where he was particularly instrumental in the acquisitions and growth of Blyth, Inc. and XTRA Corporation. Mr. Morgan began his career as an associate at Allen & Company, Inc., working in mergers and acquisitions and private equity. He is a board member of CHAMP, IDQ Holdings, Inc. and is a former director of over a dozen companies, including UK-based Polypipe Global Holdings, Austar United Communications Ltd., AmeriCast Technologies, Ciao Bella Gelato Company, Ion Track Instruments, Land ‘N’ Sea Distributing and Penrice Soda Products. Mr. Morgan is an officer of the Harvard Business School Alumni Association, Chairman of the Harvard Business School Club of New York, and a director of the Alexander Hamilton Institute, the Parkinson’s Disease Foundation and the World Press Institute and Treasurer of the Friends of the Garvan Institute of Medical Research. Mr. Morgan received his Bachelor’s degree in Mathematics and Political Science from Hamilton College and holds an M.B.A. from the Harvard Business School. As the current Co-President of Castle Harlan and as a director of companies in other industries, Mr.
Morgan has broad financial expertise and has substantial experience serving on the boards of both publicly and privately-held companies.
Anand T. Philip. Mr. Philip became a member of the board of directors of Pretium Holding on February 16, 2010. Mr. Philip has been with Castle Harlan since 2006 and currently serves as a Managing Director. Prior to joining Castle Harlan, Mr. Philip was an investment professional at the Blackstone Group from 2002 to 2004, where he focused on private equity transactions across a wide range of industries for Blackstone Capital Partners III and IV, as well as Blackstone Communication Partners. Between 2000 and 2002, he worked at Wasserstein & Co., where he focused on principal investing for U.S. Equity Partners. He began his career in the Merchant Banking Group of Wasserstein Perella. His former directorships include AmeriCast Technologies, Inc, where he served as Audit Committee Chairman. He received a B.A. in Economics from Ohio Wesleyan University, where he was a Trustee Scholar and graduated Magna Cum Laude. Mr. Philip holds an M.B.A. from the Harvard Business School. Mr. Philip is a member of the Board of Trustees of Ohio Wesleyan University. Mr. Philip has a high level of financial literacy and experience advising portfolio companies in matters relating to corporate finance.
William M. Pruellage. Mr. Pruellage became a member of the board of directors of Pretium Holding on February 16, 2010. Mr. Pruellage has been with Castle Harlan since 1997 and currently serves as Co-President. Mr. Pruellage worked in the mergers and acquisitions department of Merrill Lynch & Co., where he assisted clients in strategic planning and corporate mergers. He is a former director of Ames True Temper, Anchor Drilling Fluids, Exterran, RathGibson, Universal Compression, American Achievement Corp., and Verdugt Holdings, LLC. Mr. Pruellage graduated Summa Cum Laude from Georgetown University with a double major in Finance and International Business. He is a member of the Beta Gamma Sigma Honor Society. As the current Co-President of Castle Harlan and as a director of companies in other industries, Mr. Pruellage has broad financial expertise and has substantial experience serving on the boards of both publicly and privately-held companies.
Bernard Reidy. Mr. Reidy became a member of the board of directors of Pretium Holding on February 16, 2010. He has been President of the Catholic Indemnity Insurance Company, a captive property and casualty underwriter since 2008. He was chief operating officer of the Archdiocese of New York from 2000-2009. From 1969-2000 Mr. Reidy was the Chief Financial Officer for the Diocese of Bridgeport. He serves as a member of the Board and as Chairman of the Budget and Investment Committee of Western Connecticut State University Foundation. Mr. Reidy received his bachelor’s degree from Western Connecticut State University and his MBA from the University of Connecticut. Mr. Reidy brings significant operational, financial and accounting expertise and management experience to the board of directors of Pretium Holding.
Brett A. Snyder. Mr. Snyder became a member of the board of directors of Pretium Holding on February 16, 2010. Mr. Snyder has been the President of Nicolet Capital Partners, LLC since 2005. Prior to forming Nicolet, he was a principal and member of the general partner of Windjammer Capital Investors, a middle market private investment firm, from 1998 to 2005. Mr. Snyder is a Chartered Financial Analyst, an active member of the Association for Investment Management and Research and has been involved with the board of directors of several companies during his career including Transilwrap Company, Shari’s Management Corporation, American Fire Protection Group, Brown Publishing Company and MacLean Power Systems. He also supports the Evans Scholars Foundation and was an Evans Scholar at the University of Wisconsin where he graduated with distinction. Mr. Snyder has extensive experience in financing, private equity investment and board service.
Corporate Governance
Committees of the Board of Directors
Audit Committee
Pretium Holding has a standing audit committee which consists of Messrs. Kaplan, Philip, Reidy (Chairman) and Snyder. The audit committee oversees risks related to our financial statements, the financial reporting process, certain compliance issues and accounting matters. The audit committee is also responsible for the oversight of management’s assessment of internal controls, our internal audit function and audits of our financial statements on behalf of the Board. The board of directors of Pretium Holding has determined that Mr. Philip is an “audit committee financial expert,” as that term is defined in the Exchange Act. All members of the audit committee are able to read and understand financial statements and have experience in finance and accounting that provides them with financial sophistication.
Compensation Committee
Pretium Holding has a standing compensation committee which consists of Messrs. Harbison, Miller, Morgan and Pruellage (Chairman). The compensation committee is responsible for making recommendations to the board of directors of Pretium Holding concerning the compensation of our executive officers, including the appropriateness of salary, incentive compensation, and certain benefit plans. Our Compensation Committee evaluates the performance of our executive officers in setting their compensation levels and considers our performance, as well as other factors deemed appropriate by the compensation committee.
Compensation Committee Interlocks and Insider Participation
None of our executive officers has a relationship that would constitute an interlocking relationship with executive officers or directors of another entity or insider participation in compensation decisions.
Code of Ethics
We have adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act of 2002, which applies to management including our Chief Executive Officer and Chief Financial Officer. A copy of the Code of Ethics is available for review on the Company’s website at www.pretiumpkg.com. In the event we determine to amend or waive certain provisions of the Code of Ethics, we will disclose such amendments or waivers on our website at http://www.pretiumpkg.com.
Section 16(a) Beneficial Ownership Reporting Compliance
As we do not have a class of equity securities registered pursuant to Section 12 of the Exchange Act, none of our directors, officers or equity holders were subject to reporting requirements of Section 16(a) of the Exchange Act during the fiscal year ended September 30, 2011.
Item 11.
Item 11.
Executive Compensation
Compensation Discussion and Analysis
Overview
The Compensation Discussion and Analysis discusses the principles underlying our executive compensation policies and decisions for our Named Executive Officers (“NEOs”). It provides qualitative information regarding the manner in which compensation is earned by our NEOs and places in context the data presented in the tables that follow. In addition, we address the compensation paid or awarded during FY 2012 to our NEOs: George A. Abd, our President and Chief Executive Officer (principal executive officer), Robert A. Robison, our Vice President and Chief Financial Officer (principal financial officer and principal accounting officer), Daniel P. Lally, our Senior Vice President of Sales and Marketing, Jeffrey J. Nelb, our Senior Vice President of Manufacturing, and Timothy J. Wehrfritz, our Vice President of Administration.
Our executive compensation program is overseen and administered by the compensation committee of the board of directors of our parent, Pretium Holding (the “Compensation Committee”). The Compensation Committee is responsible for making recommendations to the board of directors of Pretium Holding concerning the compensation of our NEOs, including the appropriateness of base salary, incentive compensation and certain benefit plans. The Compensation Committee evaluates the performance of our NEOs in setting their compensation levels and considers our performance, as well as other factors deemed appropriate by the Compensation Committee. Our Chief Executive Officer presents compensation recommendations for each of our NEOs, other than himself, to the Compensation Committee for its consideration and approval. Mr. Abd’s compensation is determined pursuant to the terms of his employment agreement with the Company (as described below), subject to adjustment by the board of directors of Pretium Holding. The Compensation Committee reviews these proposals and makes all final compensation decisions for NEOs by exercising its discretion in accepting, modifying or rejecting any such recommendations.
Philosophy of Executive Compensation Program
The Compensation Committee seeks to set compensation for our NEOs at a level it believes will enable us to hire and retain individuals in a competitive environment and to reward individual performance and contribution to our overall business goals. The Compensation Committee seeks to align compensation with the achievement of financial and non-financial performance metrics set by the board of directors, which include specified targets for consolidated Adjusted EBITDA and free cash flow, safety and quality standards, and the creation of equity value. Though the board of directors does not formally review peer group compensation structures or use compensation consultants, the board of directors utilizes its own experience and expertise to set compensation levels to maintain competitiveness in the market. The following are the principal objectives in the design of our executive compensation program:
•
Retain and motivate our NEOs with compensation that is competitive within the marketplace and the industry in which we compete;
•
Maintain a reasonable balance among base salary, incentive compensation, and other benefits;
•
Reward our NEOs fairly for achieving performance goals; and
•
Ensure that compensation levels reflect the internal value and future potential of each NEO and the achievement of outstanding individual results.
To meet these objectives, our executive compensation program balances fixed and bonus compensation, as discussed below.
Compensation Risks
The Compensation Committee has evaluated the risks arising from our compensation policies and practices for our NEOs and concluded that such risks are not reasonably likely to have a material adverse effect on the Company. The Compensation Committee believes that the structure of our executive compensation program mitigates risks by avoiding any NEO placing undue emphasis on any particular performance metric at the expense of other aspects of our business. The Compensation Committee believes our performance metrics are aligned with creating long-term value for our Company and do not create an incentive for excessive risk taking. Based on this evaluation, our Compensation Committee determined that our compensation policies do not encourage risk taking that is reasonably likely to have a material adverse effect on the Company.
Elements of Our Executive Compensation Program
In FY 2012, the principal elements of our compensation for our executive officers were:
•
Base salary;
•
Annual bonus; and
•
Benefits,
Each of these elements is discussed in further detail below. In FY 2012, we did not offer any equity-based compensation or any other incentive compensation to our NEOs.
Base Salary
Annual base salary reflects the fixed component of compensation for an executive’s ongoing contribution to the operating performance of his or her functional area of responsibility. The Compensation Committee believes that base salary must be competitive based upon the scope of responsibilities and market compensation of similar executives. The base salary of each of our NEOs is reviewed annually by the Compensation Committee. We believe that base salary does not encourage risk-taking by our NEOs as it is a fixed amount. The Compensation Committee may, in its discretion, also adjust base salary at other times during the year in connection with increased responsibilities or to maintain competitiveness in the market. The base salary for each of Mr. Robison, Mr. Nelb and Mr. Wehrfritz was increased $7,000, $7,000 and $1,737, respectively, in FY 2012 in order to maintain competitiveness in the market. Each of our NEOs are eligible for increases in base salary in FY 2013.
Annual Bonus
Annual cash bonuses may be awarded to our NEOs and are intended to compensate for achievement of outstanding individual results. These cash incentive awards are also aligned with the operational goals of our members and are used to motivate our executives’ performance. Annual cash incentives are paid on the attainment of certain financial and non-financial performance metrics set by the board of directors, which are described below. Performance metrics and targets are established by the board of directors annually during the first fiscal quarter. These targets are intended to be challenging for us to achieve and generally reflect performance above that of the prior year. In addition, the Compensation Committee has the authority to award additional discretionary annual bonuses.
For FY 2012, NEO bonus eligibility was based on the achievement of targets weighted as follows for achievement of the target: 50% for the achievement of the applicable adjusted EBITDA target; 20% for the achievement of the applicable free cash flow target; 20% for the achievement of a quality target; and 10% for the achievement of the safety metric. Payments for the achievement of free cash flow, quality, and safety thresholds are made only if we achieve the adjusted EBITDA threshold.
For bonus purposes, adjusted EBITDA consists of EBITDA further adjusted to add back management and consulting fees, transaction-related fees and expenses representing professional fees associated with our exploration of acquisition opportunities and the registration of our Notes with the SEC, and other adjustments as approved by the Compensation Committee. Free cash flow consists of adjusted EBITDA less working capital requirements or surplus less capital expenditures. Quality is determined by reference to an internal customer satisfaction index that measures the number and severity of complaints relative to total sales per manufacturing facility. Safety consists of the OSHA Recordable Rate which is a standardized calculation rate of injuries and illnesses per employee hours worked. For FY 2012, the threshold, target and maximum bonus targets were determined as follows:
No bonuses were paid to the NEOs during FY 2012, as we did not achieve the adjusted EBITDA threshold.
For FY 2013, the Compensation Committee is expected to establish bonus targets based on the same metrics as in FY 2012. These targets are intended to be challenging for us to achieve and generally reflect performance above that of the prior year.
Benefits
Our NEOs participate in a 401(k) savings plan, under which they are permitted to defer a portion of their income. We make a matching contribution equal to 50% of the first 4% of each NEO’s contributions, subject to annual limits established under the Internal Revenue Code. Our matching contributions to the 401(k) savings plan are fully vested to each NEO’s account when made. Participants may receive distributions from their 401(k) accounts any time after their employment with us is terminated. Our NEOs are also eligible for other benefits, including medical and dental insurance, accidental death insurance and disability insurance, as well as customary paid vacation and holidays. Our NEOs are eligible to participate in these programs on the same basis as our other salaried employees.
Messrs. Abd, Robison, Lally, Nelb, and Wehrfritz received an annual automobile allowance of $10,200 in FY 2012. While no changes were made to the annual automobile allowances compared to FY 2011, all of the NEOs are eligible to receive an adjusted annual automobile allowance in FY 2013.
Summary Compensation Table
The following table sets forth a summary of the compensation paid by us to our NEOs for services rendered in all capacities to us during FY 2012, FY 2011 and FY 2010.
(1)
Started on January 1, 2011.
(a) All Other Compensation
Grants of Plan-Based Awards for FY 2012
We did not make any equity awards or non-equity incentive plan awards to our NEOs in FY 2012.
Outstanding Equity Awards at Fiscal Year-End
As of September 30, 2012, there were no equity awards outstanding.
Pension Benefits and Non-Qualified Deferred Compensation
None of our NEOs participates in any defined benefit pension plan sponsored by the Company. None of our NEOs participates in any nonqualified deferred compensation plan sponsored by the Company.
Agreements with Named Executive Officers
Employment Agreement
On February 16, 2010, we entered into an employment agreement with George A. Abd, to serve as our Chief Executive Officer and President, (the “Employment Agreement”). The term of the Employment Agreement expired on February 16, 2012.
Notwithstanding the expiration of the term of the Employment Agreement, if Mr. Abd’s employment is terminated without “Cause” (as defined in the Employment Agreement) Mr. Abd shall be entitled to receive: (i) payment for accrued unused vacation days, (ii) continued base salary for twelve (12) months after the date Mr. Abd’s employment terminates, (iii) the unpaid portion of the bonus, if any, relating to any year prior to the fiscal year of Mr. Abd’s termination, (iv) an amount equal to the average bonus for the two fiscal years immediately prior to Mr. Abd’s termination, payable in equal installments over the 12 month period after Mr. Abd’s termination, and (v) reimbursement of the cost of continuation coverage of group health coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1986, as amended, for a maximum of eighteen (18) months to the extent that Mr. Abd elects such continuation coverage and is eligible and subject to the terms of the plan and the law.
In addition, for a period of twelve (12) months following the termination of Mr. Abd’s employment for any reason, Mr. Abd is subject to non-competition and non-solicitation restrictions.
Mr. Abd is subject to confidentiality restrictions concerning our trade secrets and confidential information relating to us not readily available from outside sources. Also, Mr. Abd will not, at any time during or following Mr. Abd's termination of
employment, publish or communicate disparaging remarks (as defined in the Employment Agreement) concerning us and that all copies of materials, records and documents produced by Mr. Abd remain our property.
For purposes of the Employment Agreement, “Cause” means, as determined by the Board (i) indictment for a felony or any crime involving dishonesty or theft; (ii) conduct by Mr. Abd in connection with his employment duties or responsibilities that is fraudulent, unlawful or grossly negligent; (iii) Mr. Abd’s willful misconduct, (iv) Mr. Abd’s contravention of specific lawful directions related to a material duty or responsibility which is directed to be undertaken from the board of our parent; (v) Mr. Abd’s material breach of his obligations under the Employment Agreement, including, but not limited to breach of Mr. Abd’s obligations under the Employment Agreement, and Mr. Abd’s continued inattention to or failure to perform adequately the duties to be performed by Mr. Abd pursuant to the Employment Agreement; (vi) any acts of dishonesty by Mr. Abd resulting or intending to result in personal gain or enrichment at the expense of the Company, its subsidiaries or affiliates; (vii) Mr. Abd’s failure to comply with a material policy of the Company, its subsidiaries or affiliates, which, if curable, is not cured or corrected within thirty (30) days after notice from the board of our parent; or (viii) Mr. Abd’s engaging in personal conduct (including, but not limited to harassment or discrimination of employees, or the use or possession at work of any illegal controlled substance) which seriously discredits or seriously damages, or could seriously discredit or seriously damage, the Company, its subsidiaries or affiliates.
Potential Payments Upon Termination or Change in Control
With the exception of Mr. Abd, we do not have any agreements with our NEOs that would entitle them to payments and benefits in connection with any termination of employment or a change in control. The following table describes the payments and benefits that would be provided to Mr. Abd in connection with any termination of employment, including resignation, involuntary termination, death, retirement, disability or a change in control to the extent occurring on September 30, 2012, the last day of our fiscal year. However, the amounts that would actually be paid under each circumstance can only be determined at the time of termination of employment.
The Compensation Committee may, in its discretion, award payments upon termination or change in control to our NEOs other than Mr. Abd on a case by case basis based on facts and circumstances.
(a)
Under the Employment Agreement, upon termination due to death, disability, for “Cause” by us, or by Mr. Abd upon at least sixty (60) days written notice, Mr. Abd, or his legal representative, is entitled to (i) payment of accrued but unpaid base salary to the date of termination and any employee benefits he is entitled to received pursuant to our employee benefit plans in accordance with the terms of such employee benefit plans and appropriate reimbursable expenses incurred but not yet reimbursed.
(b)
Under the Employment Agreement, upon termination by us without “Cause”, Mr. Abd shall be entitled to (i) payment for accrued unused vacation days, (ii) continued base salary for twelve (12) months after the date Mr. Abd’s employment terminates, (iii) the unpaid portion of the bonus, if any, relating to any year prior to the fiscal year of Mr. Abd’s termination, (iv) an amount equal to the average bonus for the two fiscal years immediately prior to Mr. Abd’s termination, payable in equal installments over the 12 month period after Mr. Abd’s termination, and (v)
reimbursement of the cost of continuation coverage of group health coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1986, as amended, for a maximum of eighteen (18) months to the extent that Mr. Abd elects such continuation coverage and is eligible and subject to the terms of the plan and the law.
COMPENSATION OF DIRECTORS
Messrs. Kaplan, Miller and Reidy receive $7,500 per meeting of the board of directors of our parent. Mr. Harbison receives an annual consulting and director fee pursuant to a Consulting Agreement with the Company. See Item 13 “Certain Relationships and Related Transactions, and Director Independence-Consulting Agreement.” None of our parent’s other directors receive compensation for their service as directors of our parent.
The following table sets forth certain information with respect to the compensation we paid to members of the board of directors of our parent during FY 2012.
(1)
For Mr. Harbison, fees earned or paid in cash represent directors fees paid pursuant to a Consulting Agreement between the Company and Mr. Harbison. See Item 13 “Certain Relationships and Related Transactions, and Director Independence-Consulting Agreement.”
(2)
For Mr. Harbison, all other compensation represents consulting fees and additional payments of $845,100 paid pursuant to a Consulting Agreement between Mr. Harbison and the Company and $671 of reimbursement of travel expenses incurred while fulfilling his role as a director. See Item 13 “Certain Relationships and Related Transactions, and Director Independence-Consulting Agreement.” For each other director, all other compensation represents the reimbursement of travel expenses incurred by that director while fulfilling that director’s role as a director.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
All of our outstanding membership interests are held by Pretium Intermediate, which, in turn, is directly wholly-owned by Pretium Holding. Pretium Holding is a member-managed limited liability company.
The membership units of Pretium Holding are designated Class A units, Class B-1 units, Class B-2 units and Class B-3 units. The Class A and B-2 units contain certain distribution and liquidation preferences, the Class B-1 units contain voting rights and the Class B-3 units are non-voting units intended for employees and directors.
The following table sets forth information with respect to the beneficial ownership of Pretium Holding’s units as of November 30, 2012 by:
•
each person who is known to us to beneficially own 5% of more of each class of Pretium Holding’s outstanding units; and
•
each of our executive officers named in the Summary Compensation Table and all of Pretium Holding’s directors as a group.
* Denotes beneficial ownership of less than 1% of the class of units. Beneficial ownership is determined in accordance with the rules of the SEC.
(1)
John K. Castle is the controlling stockholder of Castle Harlan Partners V GP, Inc., the general partner of the general partner of CHPV. Mr. Castle may be deemed to be the beneficial owner of the units owned by CH Pitcher, LLC. Mr. Castle disclaims beneficial ownership of all units referred to in this paragraph in excess of his proportionate partnership share of CHPV. The address for Mr. Castle is c/o Castle Harlan, Inc., 150 East 58th Street, New York, New York 10155.
(2)
Includes membership units directly owned by each of Harbison Corporation, KS Harbison Company, LLC, Keith Harbison Corporation and the Earle H. Harbison Irrevocable Trust FBO Keith S. Harbison UAD November 23, 2010 (collectively, the “Harbison Affiliates”). Keith S. Harbison exercises sole voting and investment authority over all of the Pretium Holding Class A membership units owned by the Harbison Affiliates. As such, Mr. Harbison may be deemed to be the beneficial owner of the units owned by the Harbison Affiliates. Mr. Harbison disclaims beneficial ownership of all units referred to in this paragraph in excess of his proportionate equity interests in each of the Harbison Affiliates. The address for Mr. Harbison is c/o Harbison Corp., 7701 Forsyth Blvd., Suite 1000, St. Louis, Missouri 63105.
(3)
Includes membership units owned by LEF II Holdings, LLC and Cornelia Partners, LLC over which Mr. Snyder exercises sole voting and investment authority. As such, Mr. Snyder may be deemed to be the beneficial owner of units owned by
LEF II Holdings, LLC and Cornelia Partners, LLC. Mr. Snyder disclaims beneficial ownership of all units referred to in this paragraph in excess of his proportionate equity interests in LEF II Holdings, LLC and Cornelia Partners, LLC. The address for Mr. Snyder is c/o Nicolet Capital Partners, LLC 1603 Orrington Avenue, Evanston, Illinois 60201.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Management Agreement
At the closing of the Acquisition, Pretium, Pretium Holding, Pretium Intermediate Holding, PVC, Robb and Mont Royal, L.L.C. (collectively referred to as “Pretium Companies”) entered into a management agreement with Castle Harlan pursuant to which Castle Harlan provides business and organizational strategy, financial and investment management, advisory, merchant and investment banking services to the Pretium Companies upon the terms and conditions set forth in the management agreement.
As compensation for those services, including planning and negotiating the Acquisition and related matters, the Pretium Companies pay Castle Harlan an ongoing annual management fee of $2.25 million plus expenses. The Pretium Companies paid the first year’s management fee in advance. The Pretium Companies also paid Castle Harlan a one-time transaction fee of $0.8 million in connection with the Acquisition.
In addition, if at any time CHPV (including its limited partners) or any of its affiliates makes any additional equity contributions to the Pretium Companies, the Pretium Companies will pay Castle Harlan an annual management fee equal to a fixed percentage of each such equity contribution. At the request of the Pretium Companies, Castle Harlan may perform additional services for fees which will be determined by the Pretium Companies and Castle Harlan. The Pretium Companies will also pay or reimburse Castle Harlan for all out-of-pocket fees and expenses incurred by Castle Harlan and any advisors, consultants, legal counsel and other professionals engaged by Castle Harlan to assist in the provision of services under the management agreement.
Under the management agreement, the Pretium Companies will indemnify Castle Harlan from and against all liabilities, costs, charges and expenses related to the performance of its duties under the management agreement, other than those of the foregoing that result from Castle Harlan’s gross negligence or willful misconduct. The management agreement has an initial term expiring on December 31, 2017, with the term of the agreement renewing automatically from year to year thereafter unless terminated by Castle Harlan or us upon 90 days’ notice prior to the expiration of the then-current term.
We recorded total expense related to the management agreement of $2.3 million for the fiscal year ended September 30, 2012.
Consulting Agreement
In connection with the Acquisition, we negotiated and entered into a Consulting Agreement with Keith S. Harbison, the controlling equity holder of Pretium prior to the Acquisition and an equity co-investor in Pretium Holding, under which Mr. Harbison provides consulting services to us and serves on the board of directors of Pretium Holding.
As compensation for services under this agreement, we pay Mr. Harbison an annual fee equal to $1.0 million in the aggregate. We paid Mr. Harbison $1.0 million in fees under this agreement for the fiscal year ended September 30, 2012.
The consulting agreement has an initial term expiring on the earliest of February 16, 2017, the consummation of a change of control of Pretium Holding or a sale of all or substantially all of Pretium Holding’s assets to a third party, and the date on which the consulting agreement is terminated by us for cause, Mr. Harbison’s death or disability or for any other reason.
Item 14.
Item 14.
Principal Accountant Fees and Services.
Independent Registered Public Accountants
KPMG, LLP (“KPMG”) served as our independent registered public accounting firm for the fiscal years ended September 30, 2012 and 2011. The following table sets forth (in thousands) fees billed or estimated to be billed to us by KPMG for fiscal year 2012 and fiscal year 2011:
Audit fees include fees for the annual audit of our consolidated financial statements, reviews of our interim financial statements, review of our registration statement, and services normally provided by our accountants in connection with statutory and regulatory filings or engagements.
Audit-related fees include fees for work performed in connection with due diligence procedures performed in connection with the exploration of potential transactions.
Tax fees consist of fees for professional services and special transaction related tax projects.
Audit Committee Pre-Approval Policy
Pursuant to our Audit Committee Charter, all permissible non-audit services to be performed by KPMG must be pre-approved by the Audit Committee.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules.
(a)
The following documents are filed as a part of this report:
+
Management contract or compensatory plans or arrangements.
*
Portions of this document have been omitted and filed separately with the SEC pursuant to a request for confidential treatment.
**
Filed herewith.
§
These exhibits are to be filed by amendment. In accordance with Rule 406T of Regulation S-T, these exhibits are not deemed to be filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are not deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.
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.
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.