| You should carefully consider each of the risks and uncertainties we describe below, and all of the other information in this Form 10-K and the Company’s other SEC filings |
| Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become important factors that may harm our business |
| Risks Related to Our Business and Industry We may not generate profits in the future and we had net losses in recent years |
| For the fiscal years ended December 31, 2005 and 2004 we had a net loss of dlra60dtta0 million and dlra6dtta8 million, respectively |
| For the fiscal year ended December 31, 2003, we had a net loss of dlra220dtta5 million, which included a goodwill impairment charge of dlra183dtta0 million |
| Continuing net operating losses may limit our ability to service our debt and fund our operations and we may not generate net income from operations in the future |
| Factors contributing to operating losses in recent years included, but were not limited to, price competition and the implementation of price reductions to extend customer contracts; an asset impairment charge; a write-off of deferred financing costs; delays in conversions to PET from other forms of packaging; an unfavorable shift in conventional product mix; operating difficulties in our European business; and higher inventory levels that produced an increase in warehousing and product handling costs |
| These and other factors may continue to adversely affect our business |
| If we do not generate sufficient cash flow, we will not be able to service our debt and provide for ongoing operations |
| If we are unable to generate sufficient cash from operating activities to service our debt and fund our operations, or if we are unable to refinance our debt, we may have to defer capital expenditures or sell assets to generate cash, which could weaken our competitive position |
| As of December 31, 2005, we had dlra405dtta2 million in principal amount of debt outstanding consisting of our secured notes, our senior subordinated notes, other long-term debt and borrowings under our credit facility |
| As of December 31, 2005, dlra10dtta5 million was drawn under our credit facility and we were able to incur up to an additional dlra48dtta8 million of indebtedness under our credit facility based on the size of our borrowing base as of such date |
| We will need to generate enough cash to service our debt and to fund our operations |
| Although interest rates and the amount outstanding under our credit facility and the secured notes may vary, based on interest rates in effect as of December 31, 2005, servicing our outstanding indebtedness would require annual payments of dlra37dtta6 million of interest (excluding dlra2dtta2 million of annual amortization of financing fees and debt discount) |
| Our ability to generate cash depends to some extent on general economic, competitive, legislative and other factors beyond our control |
| Borrowings under our credit facility may alleviate our short-term cash needs, but any borrowings under such facility may further increase our debt |
| In addition, we may need to refinance all or a portion of our debt and we may be unable to do so on commercially reasonable terms or at all |
| Moreover, it may be more difficult for us to refinance our credit facility or other debt because we have granted liens on substantially all of our assets to secure our credit facility and our secured notes |
| Our debt may negatively impact our liquidity, limit our ability to obtain additional financing and harm our competitive position |
| Our debt may have important negative consequences for us, such as: • limiting our ability to obtain additional financing; • limiting funds available for us because we must dedicate a substantial portion of our cash flow from operations to the payment of interest expense, thereby reducing the funds available to us for other purposes, including capital expenditures; 9 ______________________________________________________________________ [37]Table of Contents • increasing our vulnerability to economic downturns and changing market and industry conditions; and • limiting our ability to compete with companies that are not as highly leveraged and that may be better positioned to withstand economic downturns |
| Our annual debt service costs will vary because some of our debt bears floating interest rates, and the amount outstanding under the credit facility will change from time to time |
| However, based on interest rates and debt levels at December 31, 2005, our annualized cash interest costs for fiscal 2006 would be approximately dlra37dtta6 million |
| We and our subsidiaries may be able to incur substantial additional debt in the future |
| If new debt is added to our current debt limit or debt levels or the current debt levels of our subsidiaries, the related risks that we and they now face could intensify |
| We currently plan to finance ordinary business operations through borrowings under our credit facility, which are subject to conditions and borrowing base limitations, because we expect to be cash flow negative through the first half of 2006 |
| We had a net negative cash flow from operating and investing activities of dlra7dtta3 million for the 12 months ended December 31, 2005 |
| We expect to have negative cash flow from operating activities and after investing activities through the first half of 2006 |
| We currently plan to finance ordinary business operations through borrowings under our credit facility through the second half of 2006 |
| Our ability to borrow funds under our credit facility is subject to our compliance with various covenants as of the date of borrowing, including borrowing base limitations that are dependent upon the future level of our eligible accounts receivables and inventory in the United States and the United Kingdom |
| Even if we are in compliance with all such covenants, the total amount of the facility may be unavailable if the value of the collateral securing the facility falls below certain levels, or if the administrative agent determines that eligibility reserves should be applied to the amount otherwise available under the facility |
| Certain of the components of the borrowing base are subject to the discretion of the administrative agent |
| As of December 31, 2005, we had borrowings under our credit facility of dlra10dtta5 million and available credit of dlra48dtta8 million |
| In addition, the administrative agent has the customary ability to reduce, unilaterally, our borrowing availability at any time by, for example, establishing reserves or declaring certain collateral ineligible |
| Certain of our inventory is located on properties that we lease and if we are unable to obtain consents from the landlords, such inventory may not be eligible for inclusion in the borrowing base, thereby reducing our borrowing availability |
| If we are unable to fully access our credit facility, we may become illiquid and we may be unable to finance our ordinary business activities |
| Our interest expense may increase since indebtedness under the secured notes and our credit facility is subject to floating interest rates |
| The secured notes and our borrowings under our credit facility are subject to floating interest rates and the amount outstanding under the credit facility will change from time to time |
| Based on interest rates and debt levels at December 31, 2005, our annualized cash interest costs for fiscal 2006 would be approximately dlra37dtta6 million |
| Changes in economic conditions could result in higher interest rates, thereby increasing our interest expense and reducing our funds available for operations and other purposes |
| As of December 31, 2005, we had approximately dlra230dtta5 million in borrowings under the secured notes and our credit facility |
| As of December 31, 2005, we were able to incur up to an additional dlra48dtta8 million of indebtedness under our credit facility based on the size of our borrowing base as of such date |
| A 1prca increase in market interest rates on our floating rate borrowings outstanding as of December 31, 2005 after giving effect to the swap described below would result in an annual increase in our interest expense and a decrease in our income before taxes of approximately dlra1dtta3 million |
| In May 2005, we entered into an interest rate swap on dlra100dtta0 million notional amount of our secured notes and our credit facility |
| The interest rate swap involved the exchange of floating interest payments based on three month LIBOR rate for a fixed rate of 7dtta9prca |
| 10 ______________________________________________________________________ [38]Table of Contents Our flexibility in operating our business and our ability to repay our indebtedness may be limited as a result of certain covenant restrictions in the instruments governing our indebtedness |
| Our credit facility and the indentures governing the secured notes and our senior subordinated notes contain a number of restrictive covenants that impose significant restrictions on us |
| Compliance with these restrictive covenants will limit our flexibility in operating our business |
| Failure to comply with these covenants could give rise to an event of default under the indentures governing the secured notes and our senior subordinated notes |
| These covenants restrict, among other things, our ability to: • incur additional indebtedness and guarantee obligations; • create liens; • engage in mergers, consolidations, liquidations or the creation of subsidiaries; • change the nature of our business; • make equity investments or loans; • sell, lease or otherwise dispose of assets; • engage in sale and leaseback transactions and operating lease transactions; • sell or discount notes or receivables; • engage in transactions with affiliates; • pay dividends, make distributions or redeem any equity securities; • modify our organizational documents or certain debt documents; • change our accounting treatment and reporting practices; • engage in speculative transactions; • enter into agreements restricting our ability or the ability of a subsidiary to incur liens, or restricting the ability of a subsidiary to pay dividends to, make or repay loans to, transfer property to, or guarantee indebtedness of, us or any of our other subsidiaries; • prepay certain indebtedness; and • allow debt to be designated as senior debt |
| Our credit facility also includes financial covenants that are dependent on our achieving our operating plans |
| If we default on any of our covenants, including as a result of significantly falling short of our operating plans, and are unable to obtain an amendment or waiver, the lenders could cause all amounts outstanding under our credit facility, the secured notes and our senior subordinated notes to be due and payable immediately and the lenders under our credit facility or the trustee under the indenture governing the secured notes could proceed against any collateral securing that indebtedness |
| Our assets or cash flow may not be sufficient to repay fully the borrowings under our different forms of indebtedness, either upon maturity or if accelerated upon an event of default |
| In addition, any event of default or declaration of acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments |
| A default or potential acceleration could impact our ability to attract and retain customers and could negatively impact trade credit availability and terms |
| Our credit facility is secured by our domestic and United Kingdom inventory, accounts receivable, investment property, instruments, chattel paper, documents, deposit accounts and other intangibles, as well as a pledge of all of the outstanding capital stock of our domestic and United Kingdom subsidiaries and 65prca of the voting stock of our other foreign subsidiaries |
| As of December 31, 2005 and 2004, the book value of such assets was approximately dlra160dtta5 million and dlra159dtta6 million, respectively |
| 11 ______________________________________________________________________ [39]Table of Contents Conventional PET containers account for over 75prca of our sales and generally carry low profit margins |
| For the years ended December 31, 2005 and 2004, approximately 78prca and 80prca respectively, of our sales related to conventional PET containers which are primarily used for carbonated soft drinks and bottled water |
| These products generally carry low profit margins |
| Profitability is driven principally by volume and maintaining efficient manufacturing operations |
| The market for conventional products may decline |
| In recent years, the largest growth within conventional products has come from bottled water |
| We believe that over time our profitability from water bottle sales may decline as economic factors force some water bottlers into self manufacturing of PET bottles and some smaller water bottlers out of business |
| In addition, based upon current market conditions, we do not expect appreciable growth in the carbonated soft drink market in the near term |
| If the market for custom PET packaging does not grow as large or as quickly as we anticipate, our growth and profitability may be lower than we currently expect |
| To the extent that the custom PET market does not grow as large or as quickly as we anticipate, our growth and profitability may be lower than we currently expect |
| We believe that one of the keys to our future success will be our ability to sell more custom PET products |
| Partly because of the more complex technologies required for custom PET, our margins are generally higher for custom PET products than for conventional PET products |
| We believe that an increasing number of products will convert from glass, metal and other packaging to custom PET packaging |
| A slow rate of conversion would limit our growth |
| Our net sales and profitability may decline if we lose PepsiCo as a customer or if PepsiCo reduces the number of containers that it purchases from us |
| PepsiCo may in its discretion terminate its supply agreements with us if we materially breach any of our obligations under the applicable agreement or if a third party acquires more than 20prca (or 25prca in the case of a specified third party who currently owns 23dtta9prca of our common stock) of our outstanding capital stock or United States-based PET assets |
| The loss of PepsiCo as a customer would cause our net sales and profitability to decline significantly |
| Our main supply agreement with PepsiCo expires on December 31, 2007 |
| Our sales to PepsiCo accounted for approximately 33prca and 30prca, respectively, of our revenue for the years ended December 31, 2005 and 2004 |
| In addition, notwithstanding PepsiCo’s commitment to purchase containers from us in certain geographic regions, PepsiCo may purchase containers from a third party for such regions under several circumstances, including our failure to meet our supply obligations and our failure to meet specified contractual quality standards |
| The loss of our intellectual property rights, for which we enjoy limited protection, would negatively impact our ability to compete in the PET industry |
| If we are unable to maintain the proprietary nature of our technologies, we may lose the ability to generate royalties in the future by licensing our patented technologies and our competitors may use our technologies to compete with us |
| We have a number of patents covering various aspects of the design and construction of our products, including our Oxbar technology |
| Our patents may not withstand challenge in litigation, and patents do not ensure that competitors will not develop competing products, design around our patents or infringe upon our patents |
| The costs of litigation to defend our patents could be substantial and may outweigh the benefits of enforcing our rights under our patents |
| We market our products internationally, and the patent laws of foreign countries may offer less protection than the patent laws of the United States |
| Not all of our domestic patents have been registered in other countries |
| We also rely on trade secrets, know-how and other unpatented proprietary technology, and others may independently develop the same or similar technology or otherwise obtain access to our unpatented technology |
| To protect our trade secrets, know-how and other proprietary information, we require 12 ______________________________________________________________________ [40]Table of Contents employees, consultants, advisors and collaborators to enter into confidentiality agreements with us |
| These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of this information |
| In addition, we have from time to time received letters from third parties suggesting that we may be infringing their intellectual property rights, and third parties may bring infringement suits against us |
| If the claims of these third parties are successful, we may be required to seek licenses from these third parties or refrain from using the claimed technology |
| In addition, other parties use oxygen barrier technologies, and to the extent we determine that any such technologies infringe upon our patents, we may have to bring infringement suits to enforce our patent rights |
| In any such infringement suit, a defendant would likely seek to invalidate the patents at issue |
| We have licensed Oxbar to some of our competitors which may allow our licensed competitors to compete more effectively with us |
| We have licensed to some of our competitors certain applications of our Oxbar technology |
| This may offset some of the competitive advantage offered by Oxbar and allow our licensed competitors to compete more effectively with us |
| We may also license other technologies that currently exist or that we may develop in the future |
| Any such licensing activity may harm our competitive position |
| The competitive advantages of our Oxbar technology may also be weakened by the sublicense rights held by a third party |
| Oxbar technology is subject to a worldwide royalty-free cross-license with Rexam AB, which owns several patents relating to oxygen-scavenging technology |
| The cross-license agreement gives both parties the right to use and sublicense each other’s oxygen scavenging technology patents, but not each other’s know-how |
| The competitive advantages that we believe can be achieved through Oxbar may not be fully realized to the extent that Rexam uses Oxbar to compete with us or sublicenses Oxbar to any of our existing or potential competitors or customers, or other third parties |
| From time to time we have attempted to negotiate a new agreement with Rexam to modify our respective rights to Oxbar, but to date no such agreement has been concluded and such an agreement may never be concluded |
| Our products and services may become obsolete |
| Significant technological changes could render our existing technology or our products and services obsolete |
| The markets in which we operate are characterized by rapid technological change, frequent new product and service introductions and evolving industry standards |
| Our ability to compete may dissipate if our existing technologies are rendered obsolete |
| Our United States and European Oxbar patents begin to expire in 2008 |
| If we are unable to respond successfully to technological developments or do not respond in a cost-effective way, or if we do not develop new technologies, our net sales and profitability may decline |
| To be successful, we must adapt to rapidly changing markets by continually improving our products and services and by developing new products and services to meet the needs of our customers |
| Our ability to develop these products and services will depend, in part, on our ability to license leading technologies useful in our business and develop new offerings and technology that address the needs of our customers |
| Similarly, the equipment that we use may be rendered obsolete by new technologies |
| A significant investment in new equipment may reduce our profitability |
| Our business and operations may be disrupted if we have difficulty replacing key personnel |
| We believe that our success will depend on continued employment by us of senior management and key technical personnel |
| If one or more of these persons are unable or unwilling to continue in their present positions, and if we are unable to attract and retain other comparable personnel, our business and operations could be disrupted |
| Several members of our senior management have extensive industry experience, and it would be difficult to find new personnel with comparable experience |
| Because our business is highly specialized, we believe that it would also be difficult to replace our key technical personnel |
| In addition, we do not currently maintain key man insurance for any of our senior managers or technical personnel |
| 13 ______________________________________________________________________ [41]Table of Contents As our customers change their product lines and marketing strategies, demand for our products may fluctuate |
| A reduction in demand for PET packaging may reduce our net sales and negatively impact our prospects for future growth |
| From time to time our customers change product lines, eliminate product lines and reduce the amount that they spend on marketing product lines |
| As a result, our customers’ demand for PET packaging may fluctuate or decrease permanently |
| Consolidation of our customers may increase their negotiating leverage and reduce our net sales and profitability |
| The consolidation of our customers may reduce our net sales and profitability |
| If one of our larger customers acquires one of our smaller customers, or if two of our customers merge, the combined customer’s negotiating leverage with us may increase and our business with the combined customer may become less profitable |
| In addition, if one of our customers is acquired by a company that has a relationship with one of our competitors, we may lose that customer’s business |
| The consolidation of purchasing power through buyer cooperatives or similar organizations may also harm our profitability |
| We may lose business to other forms of packaging or to our competitors in the PET industry |
| Competition from producers of other forms of packaging and our competitors within the PET industry may cause our customers to purchase other types of packaging or to purchase PET containers from our competitors, which may reduce our net sales and profitability |
| PET containers compete in the packaging market with other plastic containers, glass bottles, metal cans, paperboard cartons and other materials |
| Changes in the relative cost and quality of other packaging materials may reduce the market for PET containers |
| Some of our competitors have greater financial, technical and marketing resources than we do |
| Our current or potential competitors may offer products at a lower cost or products that are superior to ours |
| In addition, our competitors may be more effective and efficient in integrating new technologies |
| Although we typically sell to our customers pursuant to contracts with terms of two to five years, many of our contracts (and typically our most significant contracts) provide that our customers may purchase from an alternative source if we cannot provide products that are of similar quality at an equivalent price |
| If we lower prices in response to such provisions, or if we lose a significant amount of business from one or more customers, our net sales and profitability may decline |
| In addition to competition with other independent suppliers of PET packaging, some of our potential customers produce their own PET containers |
| Coca-Cola, one of the largest end-users of conventional PET containers in the United States, self-manufactures its own PET preforms and blows its own bottles |
| Some of our customers have developed in-house preform production and bottle blowing capacity, and we believe that such in-house capabilities will continue to be developed in the future |
| This may reduce our sales and our profitability |
| If we do not have adequate funds to meet our capital needs, our business may be impaired and our profitability reduced |
| If we do not have adequate funds to make our capital expenditures or if the expected benefits of capital expenditures are not achieved, our business may be impaired and our profitability reduced |
| Our business is capital intensive, and our equipment is currently operating at near full capacity |
| We expect to have substantial capital needs in the near future for capacity expansion |
| If we do not have funds available to satisfy our capital expenditure requirements, we may not be able to pursue our strategy for profitable growth |
| We cannot be certain that our capital needs will not be larger than expected |
| We also cannot be certain that the expected benefits of any capital expenditures will be achieved |
| The future cash flows of our British and Dutch operations may not be sufficient to cover the carrying value of their assets |
| As a result of a shortfall in performance and results below revised expectations during the third quarter of 2005 in our British and Dutch operations, the Company performed an interim impairment test as of 14 ______________________________________________________________________ [42]Table of Contents September 30, 2005 |
| In accordance with SFAS Nodtta 144 “Accounting for the Impairment or Disposal of Long-lived Assets”, the impairment test was based on the undiscounted cash flows from the asset base as compared to the carrying value of those assets |
| Based on these reduced earnings expectations, the undiscounted cash flows of both the United Kingdom and Holland operations were insufficient to recover the carrying value of these assets over the remaining useful lives |
| The Company then calculated the fair value of the assets of both operations based on discounted projected net cash flows and recorded a fixed asset impairment loss of dlra22dtta2 million for these operations to write the asset carrying values down to fair value |
| The total loss of dlra22dtta2 million is based on a write down of dlra16dtta5 million for the United Kingdom operation and dlra5dtta7 million for the Holland facility |
| If the United Kingdom and Holland operations do not meet revised expectations then an additional asset impairment may be required |
| We require large quantities of resin to manufacture our products so that increases in the price of resin may negatively impact our financial results and may deter the growth of the PET market |
| We use large quantities of plastic resin in manufacturing our products and increases in the price of resin may increase our cost of products sold, reduce our profitability and reduce our prospects for growth |
| Resin is the principal raw material used in the manufacture of our products |
| Resin is subject to substantial price fluctuations |
| Resin is a petrochemical product and resin prices may fluctuate with prices in the worldwide oil and gas markets |
| Political or economic events in oil or gas producing countries, such as those in the Middle East, may impact the price of resin |
| We generally do not have long-term supply contracts with our resin suppliers and are therefore subject to the risk of fluctuations in the price of resin |
| Although substantially all of our business is under contracts that permit us to pass changes in the price of resin through to our customers, market conditions may not permit us to fully pass through any future resin price increases or may force us to grant other concessions to customers |
| Significant increases in resin prices, coupled with an inability to promptly pass such increases on to customers, may increase our cost of products sold and reduce our profitability |
| A sustained increase in the price of resin may slow the rate of conversion of alternative packaging materials, such as glass and metal, to PET, or may make these alternative packaging materials more attractive than PET A sustained increase in the price of resin may also result in an increased price to consumers, which may affect consumer preference for PET packaging |
| If these factors reduce the demand for PET packaging, it may significantly reduce our prospects for growth |
| PepsiCo may exercise its right to supply us with an increasing amount of resin, which may reduce our ability to negotiate favorable resin purchase contracts |
| PepsiCo currently supplies us with a portion of our resin requirements for manufacturing PepsiCo containers |
| PepsiCo has the right to supply us with an increasing amount of resin, which may reduce our profitability |
| Because we are a large purchaser of resin, we enjoy significant leverage in negotiating resin purchase agreements |
| To the extent that PepsiCo exercises its right to supply us with an increasing amount of resin, the amount of resin that we purchase will decline and we may lose some of our leverage in negotiating resin purchase agreements |
| If we have to pay higher prices for resin, our costs will increase and we may not be able to offer our customers pricing terms as favorable as those we offer now or as favorable as those offered by our competitors |
| Any failure to obtain resin on a timely basis or any significant interruptions in the supply of resin could prevent us from supplying our customers on a timely basis and disrupt our operations |
| If our suppliers are unable to meet our requirements for resin, it may prevent us from manufacturing our products |
| Our suppliers may not continue to provide resin to us at attractive prices, or at all, and we may not be able to obtain resin in the future from these or other suppliers on the scale and within the time frames we require |
| Any failure to obtain resin on a timely basis at an affordable cost, or any significant delays or interruptions of supply, could prevent us from supplying our customers on a timely basis |
| 15 ______________________________________________________________________ [43]Table of Contents Expansion of our operations might place a significant strain on our suppliers, some of whom have limited resources and production capacity |
| Certain of our suppliers, in turn, may rely on sole or limited sources of supply for components included in the resin that they sell to us |
| In addition, we expect that the European PET market will be a net importer of resin in the near term |
| If we are unable to obtain all of our resin from domestic producers, we may have to import resin |
| Imports may be subject to tariffs and other added costs and may be subject to greater risk of supply disruption owing to shipping distances, reliability of suppliers and other factors |
| We depend on a small number of suppliers for some of the manufacturing equipment that we would need to expand |
| Our business relies on specialized manufacturing equipment that is produced by a small number of suppliers |
| If any of these suppliers increases its prices significantly, goes out of business or is otherwise unable to meet our requirements for necessary equipment, we may be unable to expand our operations |
| This may significantly reduce our prospects for growth |
| We earn a significant portion of our revenue in warmer months, and cool summer weather may result in lower sales |
| Unseasonably cool weather during a summer could reduce our sales and profitability |
| A significant portion of our revenue is attributable to the sale of beverage containers |
| In the past, significant changes in summer weather conditions have affected the demand for beverages, which in turn affects the demand for beverage containers manufactured by us |
| The seasonal nature of our business impacts our cash flows |
| As a result of the seasonal nature of our business, cash flow requirements are the greatest in the first several months of each fiscal year because of the increased working capital required to build inventory for the warmer months and because of lower levels of profitability associated with softer sales during the first few months of each fiscal year |
| A cool summer may have a significant impact on cash flow because of lower profitability and the impact on working capital |
| A small number of stockholders are in a position to influence most of our significant corporate actions because they hold a significant amount of our common stock |
| As of February 28, 2006, Eagle Rock Capital Management, LLC, Wells Fargo & Company, Crown Cork & Seal Company, Inc, and David J Greene and Company, LLC and/or their respective affiliates, had publicly reported the ownership of an aggregate of 7cmam549cmam952 shares, or approximately 60dtta4prca, of our common stock |
| These entities, acting alone or in concert, may be able to influence the outcome of corporate actions requiring stockholder approval |
| As a result, these entities are in a position to influence most of our significant corporate actions |
| We are subject to foreign currency risk and other instabilities from our international operations |
| For the years ended December 31, 2005 and 2004, we derived approximately 23prca and 26prca, respectively, of our revenue from sales in foreign currencies |
| In our financial statements, we translate local currency financial results into United States dollars based on average exchange rates prevailing during a reporting period |
| Our most significant foreign currency exposures are to the British pound and the Euro |
| During times of a strengthening United States dollar, our reported international revenue and earnings will be reduced because the local currency will translate into fewer United States dollars |
| In addition, we may face restrictions on our ability to repatriate funds from our international operations |
| 16 ______________________________________________________________________ [44]Table of Contents As a result of our international operations, we are also subject to risks associated with operating in foreign countries, including changes in governmental policies and regulations, war, acts of terrorism and other sources of instability |
| We are also at risk for acts of terrorism in the United States |
| These risks may negatively impact our financial condition and results of operations |
| Higher energy costs or frequent or sustained power interruptions may increase our operating costs and limit our ability to supply our customers |
| Electrical power is vital to our operations, and we rely on a continuous power supply to conduct our business |
| If energy costs substantially increase in the future, we could experience a significant increase in operating costs |
| In addition, we have experienced power interruptions at our manufacturing facilities, particularly during severe weather conditions |
| Frequent or sustained power interruptions, particularly at our larger manufacturing facilities, may limit our ability to supply our customers and negatively impact our business |
| We are exposed to the risk of liabilities or claims related to environmental and health and safety standards |
| Our facilities and operations are subject to federal, state, local and foreign environmental and employee health and safety laws and regulations, including those regarding the use, storage, handling, generation, transportation, treatment, emission and disposal of certain substances and remediation of environmental impacts to soil and groundwater |
| The nature of our operations exposes us to the risk of liabilities or claims with respect to environmental and worker health and safety matters |
| Currently, we are involved in a small number of compliance and remediation efforts primarily concerning wastewater discharge and possible soil and groundwater contamination, including investigations and certain other activities at our Didam, Netherlands facility |
| Based on information presently available, we do not believe that the cost of these efforts will be material |
| However, environmental and health and safety matters cannot be predicted with certainty, and actual costs may increase materially |
| We face products liability risks and the risk of negative publicity if our products fail or if our customers and suppliers are affected by products liability risks or negative publicity |
| Our business is exposed to products liability risk and the risk of negative publicity if our products fail |
| Although we maintain insurance for products liability claims, the amount and scope of our insurance may not be adequate to cover a products liability claim that is successfully asserted against us |
| Our products liability insurance does not cover product recall costs |
| In addition, products liability insurance could become more expensive and difficult to maintain and, in the future, may not be available on commercially reasonable terms or at all |
| In addition, we are exposed to the products liability risk and negative publicity affecting our customers and suppliers |
| Because many of our customers are food, beverage and other consumer products companies, with their own products liability risks, our sales may decline if any of our customers are sued on a products liability claim |
| We may also suffer a decline in sales from the negative publicity associated with such a lawsuit or with adverse public perceptions in general regarding our products or our customers’ products that use our containers |
| Our operations and profitability could suffer if we experience labor relations problems or if we do not reach new union agreements on satisfactory terms |
| A prolonged work stoppage or strike could prevent us from operating our manufacturing facilities |
| The contract with our union employees in our Didam, Netherlands facility expires on September 30, 2006 |
| The contract with our union employees in our Sherburn, England facility expired on December 31, 2005 |
| We believe that our employee relations are good and that we will be able to reach a new agreement on satisfactory terms |
| However, we may not be able to reach a new agreement without a work stoppage or strike and any new agreements that are reached may not be reached on terms satisfactory to us |
| 17 ______________________________________________________________________ [45]Table of Contents We have a significant amount of goodwill and may be required to write down goodwill in certain circumstances, which would result in lower reported net income (or higher net losses) and a reduction of our net worth |
| We have a significant amount of goodwill and a write-down of our goodwill would reduce our net worth and would reduce our net income or increase our net loss |
| At December 31, 2005 we had dlra148dtta8 million of goodwill |
| In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards Nodtta 142, “Goodwill and Other Intangible Assets |
| ” Under this standard, we will no longer amortize goodwill reflected on our balance sheet |
| We are, however, required to evaluate goodwill reflected on our balance sheet to determine whether the goodwill is impaired under the guidelines of the standard |
| Accordingly, we will need to test the value of our goodwill for impairment at least annually and, under certain circumstances, recognize an impairment charge |
| One circumstance that may indicate the need for an immediate impairment review would be if our book value was in excess of our market capitalization |
| In the second quarter of 2003, we recognized an impairment charge of dlra183dtta0 million partly as a result of a decline in our market capitalization |
| We may not be able to report accurately our financial results or prevent fraud if we fail to maintain an effective system of internal controls |
| Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud |
| Any inability to provide reliable financial reports or prevent fraud could harm our business |
| We must annually evaluate our internal procedures to satisfy the requirements of the Sarbanes-Oxley Act of 2002, which requires management and our auditors to evaluate and assess the effectiveness of our internal controls |
| If we fail to remedy or maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we could be subject to regulatory scrutiny, civil or criminal penalties or shareholder litigation |
| In addition, failure to maintain adequate internal controls could result in financial statements that do not accurately reflect our financial condition |
| We might not be able to complete the work necessary to fully comply with the requirements of the Sarbanes-Oxley Act |
| Our auditors might not complete their review and assessment of our internal controls in a timely manner |
| Finally, our management and our auditors might not conclude that our internal controls are effective |
| We are subject to lawsuits and claims that could adversely affect our results of operations and financial position |
| We are subject to lawsuits and claims in the normal course of business and related to businesses operated by predecessor corporations |
| For example, we and certain of our present and former directors, along with Crown Holdings, Inc, as well as various underwriters, have been named as defendants in a consolidated putative securities class action lawsuit alleging that the registration statement and prospectus for our initial public offering of our common stock on November 14, 2002 contained material misrepresentations and/or omissions |
| We believe that this lawsuit is without merit |
| However, litigation can be costly and time-consuming and the outcomes of lawsuits cannot be predicted |
| A significant judgment in this or any other lawsuits could materially and adversely impact our results of operations and financial position |
| We have an underfunded pension plan and an unfunded post-retirement medical/life insurance plan, which could affect our cash flow and financial condition |
| We maintain funded pension plans in the US, the UK and Holland and an unfunded retiree medical/life insurance plan in the US In 2005, we contributed approximately dlra7dtta5 million in the aggregate to the US pension and retiree medical/life insurance plans, and we expect to contribute approximately dlra5dtta6 million in the 18 ______________________________________________________________________ [46]Table of Contents aggregate to these plans for 2006 |
| As of December 31, 2005, our US pension plan was under funded on a termination basis by approximately dlra29dtta0 million and our unfunded retiree medical and life insurance benefit obligation was approximately dlra4dtta5 million |
| The US pension plan’s assets consist primarily of common stocks and fixed income securities |
| If the performance of these investments does not meet our assumptions, the underfunding of the US pension plan may increase and we may have to contribute additional funds to the US pension plan |
| In addition, federal legislative proposals have been made that could, if enacted, require us to significantly increase our funding obligations to the US pension plan, and recently enacted legislation is expected to increase the premiums that we pay to the Pension Benefit Guaranty Corporation, or PBGC, with respect to the plan |
| The actual impact of the proposed legislation would depend on the requirements of the legislation if enacted, contributions to and distributions from the US pension plan and the investment performance of the US pension plan’s assets |
| An increase in US pension plan contributions and expenses could decrease our available cash to pay outstanding obligations and our net income |
| While the US pension plan continues in effect, we will continue to incur additional pension obligations |
| Our US pension plan is subject to the Employee Retirement Income Security Act of 1974, or ERISA Under ERISA, the PBGC has the authority to terminate an under funded plan under certain circumstances |
| In the event that our US pension plan is terminated for any reason while the plan is underfunded, we will incur a liability to the PBGC that may be equal to the entire amount of the under funding |
| In 2005, we contributed approximately dlra1dtta0 million in the aggregate to the UK and Holland pension plans, and we expect to contribute approximately dlra975cmam000 in the aggregate to these plans for 2006 |
| As of December 31, 2005, these plans were under funded by approximately dlra5dtta1 million |
| Risks Related to Our Relationship with Crown If we lose the benefit of our agreements with Crown, the costs of the services we receive may increase |
| We were a wholly-owned subsidiary of Crown until Crown sold most of our equity in a November 2002 public offering |
| At the time of such offering, we entered into a number of transitional arrangements and other contractual agreements with Crown that were made in the context of a parent-subsidiary relationship and negotiated in the overall context of such offering |
| As a result, these agreements are not on arm’s length terms and are not representative of the terms that we might have reached with unaffiliated third parties or of the terms of future agreements that we may enter into with unaffiliated third parties |
| As a result of a material breach relating to us, Crown may cease to provide these services |
| As the corporate services provided by Crown decrease and as we develop internal information technology and other services, our business may be disrupted |
| We were formerly a wholly owned subsidiary of Crown and received information technology and other corporate services from Crown |
| Following Crown’s sales of our equity in November 2002, Crown continued to provide services to us pursuant to contracts between Crown and us |
| The types of services provided by Crown have since decreased and are expected to continue to decrease as we develop and enhance our own corporate service capabilities over time |
| The development and implementation of these capabilities may divert management’s attention and involve significant costs |
| We expect the development of our own information technology systems to be particularly demanding |
| Our business may be disrupted as we continue the transition to internal corporate services |
| We could be liable for Crown’s pension obligations if the Crown pension plans are terminated and it is determined that the principal purpose of Crown’s sale of our equity was to evade pension liability |
| Under certain circumstances we may be liable for Crown’s pension obligations |
| The Crown pension plans are subject to the Employee Retirement Income Security Act of 1974, or ERISA, and if all Crown pension plans terminated as of December 31, 2003, they would have been under funded on a termination basis by 19 ______________________________________________________________________ [47]Table of Contents approximately dlra760 million |
| Under ERISA, the Pension Benefit Guaranty Corporation, or PBGC, has the authority to terminate an under funded plan under certain circumstances |
| If the Crown pension plans are terminated within five years of the November 20, 2002 closing of Crown’s public sales of our equity, the PBGC may bring a claim under ERISA to hold us liable for the Crown plans’ under funding if it is determined that a principal purpose of such sales was to evade pension liability |
| Because Crown used its proceeds from such sales to pay a portion of its debt, we believe it is unlikely that we would be liable for any such claim, but we may not prevail |
| The actual amount for which we may become liable in the future depends on the future funding status of Crown’s pension plans |
| In any case, if any of these claims are brought against us in the future, they may be costly to defend and they may reduce our liquidity |
| We could be liable for income taxes owed by Crown for the period prior to Crown’s sale of our equity |
| Prior to Crown’s sales of our equity in November 2002, our tax results were consolidated with those of Crown and its United States subsidiaries, and we could be liable for income taxes owed by Crown for those years |
| Since November 20, 2002, we have not been part of the federal consolidated group or any state combined or consolidated group including Crown and its United States subsidiaries |
| However, with respect to the years during which we were part of this consolidated group, we are severally liable for the federal income tax liability of each other member of the Crown consolidated group |
| We could also be jointly and severally liable for state tax liabilities of each other member of a combined or consolidated group for state tax purposes for the years that included us or any of our subsidiaries and Crown or any of its subsidiaries |
| Certain of our non-United States subsidiaries were also part of a combined tax group including subsidiaries of Crown |
| We could similarly be liable for foreign taxes of each other member of such a combined tax group for years that our non-United States subsidiaries were included in a combined tax group |
| Consequently, the Internal Revenue Service or other taxing authority may seek payment of any of the foregoing taxes from us |
| Disputes or assessments could arise during future audits by the Internal Revenue Service or other taxing authorities in amounts that we cannot quantify |
| Crown’s creditors may issue claims against us if Crown is unable to meet its financial obligations, including obligations to its lenders, pension plan obligations and payments to settle asbestos-related claims |
| If Crown is unable to meet its own financial obligations, including obligations to its lenders, pension plan obligations and payments to settle asbestos-related claims, Crown’s creditors may try to bring their claims for payment against us |
| If these claims are successful, they may result in significant liabilities to us |
| Crown is highly leveraged and, as of December 31, 2005 the aggregate amount of its outstanding indebtedness was approximately dlra3dtta4 billion |
| A significant portion of Crown’s operating cash flow is used for the payment of principal and interest, funding pension plan obligations and for payments to settle asbestos-related claims brought against Crown |
| Crown may not be able to access the capital markets in the future, or successfully repay, refinance or restructure its debt |
| No claims have been asserted against us by Crown’s own creditors, and asbestos-related claims against Crown have not involved our business |
| While we believe it is unlikely that our historical relationship with Crown would result in liability for claims by Crown’s creditors, we may not prevail in such a claim |
| In any case, if any of these claims are brought against us in the future, they may be costly to defend and they may reduce our cash flow |
| We may also have joint liability with Crown for certain taxes, pension obligations and other similar statutory obligations, as discussed in the two immediately preceding risk factors |
| Two of our directors may have conflicts of interest because of their positions with Crown |
| One of our directors, Frank J Mechura, is an executive officer of Crown |
| Another of our directors, William G Little, is a director of Crown |
| Mechura and Mr |
| Little owe fiduciary duties to the stockholders of each company and may have conflicts of interest in matters involving or affecting us and Crown |
| Under our certificate of incorporation and the corporate agreement between us and Crown, we have renounced any interests or expectation in being offered any business opportunity presented to Crown or any of its affiliates |
| In the event that one of our directors who is also a director, officer or employee of Crown or any of its affiliates acquires knowledge of a potential transaction or matter which may be a corporate opportunity for us, that director will 20 ______________________________________________________________________ [48]Table of Contents have no duty to communicate or present the corporate opportunity to us |
| In addition, that director may communicate or present the corporate opportunity to Crown or any of its affiliates and will not be liable to us or our stockholders for breach of any fiduciary duty as one of our directors by reason of the fact that Crown or any of its affiliates pursues or acquires the corporate opportunity for itself, directs the corporate opportunity to another person or does not communicate information regarding such corporate opportunity to us |
| If any transfers of assets to us in connection with Crown’s sale of our equity are deemed to be fraudulent conveyances by Crown, we may be required to return the assets to Crown |
| If any transfers of assets to us by Crown in connection with Crown’s November 2002 sales of our equity are found to be fraudulent conveyances, we may be required to return the assets to Crown or may be held liable to Crown or its creditors for damages alleged to have resulted from the conveyances |
| In connection with such sales, Crown transferred to us various assets, including intellectual property, and equity interests in certain Crown affiliates |
| A court could hold a transfer to be a fraudulent conveyance if Crown received less than reasonably equivalent value and Crown was insolvent at the time of the transfer, was rendered insolvent by the transfer or was left with unreasonably small capital to engage in its business |
| A transfer may also be held to be a fraudulent conveyance if it was made to hinder, delay or defraud creditors |
| We believe that Crown received reasonably equivalent value and that Crown did not act to hinder, delay or defraud creditors, and we therefore do not believe that any of the transfers to us by Crown in connection with such sales constituted a fraudulent conveyance, even if Crown were later determined to have been rendered insolvent or left with unreasonably small capital |
| However, a court applying the relevant legal standards may not reach the same conclusion |
| In In re WR Grace & Co, the federal bankruptcy court for the District of Delaware held that under the Uniform Fraudulent Transfer Act, whether a transferor is rendered insolvent by a transfer depends on the actual liabilities of the transferor, and not what the transferor knows about such liabilities at the time of the transfer |
| Therefore, under that court’s analysis, liabilities that are unknown, or that are known to exist but whose magnitude is not fully appreciated at the time of the transfer, may be taken into account in the context of a future determination of insolvency |
| If the principle articulated by that court is upheld, it would make it very difficult to know whether a transferor is solvent at the time of transfer, and would increase the risk that a transfer may in the future be found to be a fraudulent conveyance |