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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1998 Commission File Number 1-566
GREIF BROS. CORPORATION
(Exact name of registrant as specified in its charter)
State of Delaware 31-4388903
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
425 Winter Road, Delaware, Ohio 43015
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 740-549-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Class "A" Common Stock
Class "B" Common Stock
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of January 12, 1999 was approximately $90,825,669.
The number of shares outstanding of each of the Registrant's classes of common
stock, as of January 12, 1999 was as follows:
Class A Common Stock - 10,909,672
Class B Common Stock - 12,001,793
Listed hereunder are the documents, portions of which are incorporated by
reference, and the parts of this Form 10-K into which such portions are
incorporated:
1. The Registrant's Proxy Statement for use in connection with the Annual
Meeting of Shareholders to be held on February 22, 1999, portions of which are
incorporated by reference into Part III of this Form 10-K, which Proxy
Statement will be filed within 120 days of October 31, 1998.
1
PART I
Item 1. Business
The Company principally manufactures industrial shipping containers
and containerboard and related products which it sells to customers in many
industries, primarily in the United States, Canada and Mexico, through
direct sales contact with its customers. There were no significant changes
in the business since the beginning of the year.
The Company operates over 100 locations in 28 states of the United
States, three provinces of Canada and one state of Mexico and, as such, is
subject to federal, state, local and foreign regulations in effect at the
various localities.
Due to the variety of products, the Company has many customers buying
different types of the Company's products and, due to the scope of the
Company's sales, no one customer is considered principal in the total
operation of the Company.
Because the Company supplies a cross section of industries, such as
chemicals, food products, petroleum products, pharmaceuticals and metal
products, and because the Company must make spot deliveries on a day-to-day
basis as its product is required by its customers, the Company does not
operate on a backlog to any significant extent and maintains only limited
levels of finished goods. Many customers place their orders weekly for
delivery during the week.
The Company's business is highly competitive in all respects (price,
quality and service), and the Company experiences substantial competition
in selling its products. Many of the Company's competitors are larger than
the Company.
While research and development projects are important to the Company's
continued growth, the amount expended in any year is not material in
relation to the results of operations of the Company.
The Company's raw materials are principally pulpwood, waste paper for
recycling, paper, steel and resins. In the current year, as in prior
years, certain of these materials have been in short supply, but to date
these shortages have not had a significant effect on the Company's
operations.
The Company's business is not materially dependent upon patents,
trademarks, licenses or franchises.
The business of the Company is not seasonal to any significant extent
and has not recently been significantly affected by inflation.
The approximate number of persons employed during the year was 5,150.
2
Item 1. Business (concluded)
Acquisitions and Dispositions
A description of significant acquisitions and dispositions is included
in Note 2 to the Consolidated Financial Statements on pages 43-45 of this
Form 10-K, which Note is part of the financial statements contained in Item
8 of this Form 10-K, and which Note is incorporated herein by reference.
In January 1999, the Company purchased the assets of the intermediate
bulk containers business of Sonoco Products Company. Prior to the
acquisition, the Company has been marketing and selling this product under
a distributorship agreement that was entered into on March 30, 1998.
Industry Segments
Financial information concerning the Company's industry segments as
required by Item 101(b) is included in Note 11 to the Consolidated
Financial Statements on pages 55-57 on this Form 10-K, which Note is
incorporated herein by reference.
3
Item 2. Properties
The following are the Company's principal locations and products
manufactured at such facilities or the use of such facilities. The Company
considers its operating properties to be in satisfactory condition and
adequate to meet its present needs. However, the Company expects to make
further additions, improvements and consolidations of its properties as the
Company's business continues to expand.
Location Products Manufactured/Use Industry Segment
Alabama:
Creola (1) Fibre drums Industrial shipping
containers
Cullman Steel drums Industrial shipping
containers
Arkansas:
Batesville (2) Fibre drums Industrial shipping
containers
California:
Fontana Steel drums Industrial shipping
containers
LaPalma Fibre drums Industrial shipping
containers
Merced Steel drums Industrial shipping
containers
Morgan Hill Fibre drums Industrial shipping
containers
Sante Fe
Springs (3) Warehouse Industrial shipping
containers
Stockton Corrugated honeycomb Containerboard
Connecticut:
Windsor Locks (4) Fibre drums Industrial shipping
containers
Colorado:
Denver (5) Warehouse Industrial shipping
containers
Georgia:
Dalton (6) Packaging services Industrial shipping
containers
Lithonia Fibre drums and laminator Industrial shipping
containers
Macon Corrugated honeycomb Containerboard
Marietta (7) General office Industrial shipping
containers
4
Item 2. Properties (continued)
Location Products Manufactured /Use Industry Segment
Illinois:
Blue Island Fibre drums Industrial shipping
containers
Centralia Corrugated containers and sheets Containerboard
Chicago Steel drums Industrial shipping
containers
Lockport Plastic drums Industrial shipping
containers
Lombard (8) General office Industrial shipping
containers
Lombard (9) Research center Industrial shipping
containers
Naperville (10) Fibre drums Industrial shipping
containers
Northlake Fibre drums and plastic drums Industrial shipping
containers
Oreana Corrugated containers Containerboard
Posen Corrugated honeycomb Containerboard
Posen (11) Warehouse Containerboard
Quincy (37) Warehouse Containerboard
Indiana:
Ferdinand (12) Corrugated containers Containerboard
Kansas:
Kansas City (13) Fibre drums Industrial shipping
containers
Winfield Steel drums Industrial shipping
containers
Kentucky:
Erlanger (14) Corrugated containers Containerboard
Louisville Corrugated sheets Containerboard
Louisville (15) Corrugated containers Containerboard
Louisville (37) Warehouse Containerboard
Mt. Sterling Plastic drums Industrial shipping
containers
Mt. Sterling (37) Warehouse Industrial shipping
containers
Winchester Corrugated containers Containerboard
Winchester (16) Warehouse Containerboard
Louisiana:
St. Gabriel Steel drums and plastic drums Industrial shipping
containers
5
Item 2. Properties (continued)
Location Products Manufactured /Use Industry Segment
Massachusetts:
Mansfield Fibre drums Industrial shipping
containers
West
Springfield (17) Sales office Industrial shipping
containers
Worcester Plywood reels Industrial shipping
containers
Michigan:
Canton Warehouse Containerboard
Grand Rapids Corrugated sheets Containerboard
Mason Corrugated sheets Containerboard
Roseville Corrugated containers Containerboard
Taylor Fibre drums Industrial shipping
containers
Minnesota:
Minneapolis Fibre drums Industrial shipping
containers
Rosemount Multiwall bags Industrial shipping
containers
St. Paul Tight cooperage Industrial shipping
containers
St. Paul (18) General office Industrial shipping
containers
Mississippi:
Durant Plastic products Industrial shipping
containers
Jackson (19) General office
Missouri:
Wright City (20) Fibre drums Industrial shipping
containers
Nebraska:
Omaha (21) Multiwall bags Industrial shipping
containers
Omaha Warehouse Industrial shipping
containers
6
Item 2. Properties (continued)
Location Products Manufactured /Use Industry Segment
New Jersey:
Englishtown (22) Fibre drums Industrial shipping
containers
Rahway Fibre drums and plastic drums Industrial shipping
containers
Spotswood Fibre drums Industrial shipping
containers
Teterboro Fibre drums Industrial shipping
containers
New York:
Syracuse Fibre drums Industrial shipping
containers
Tonawanda Fibre drums Industrial shipping
containers
North Carolina:
Bladenboro Steel drums Industrial shipping
containers
Charlotte (23) Fibre drums Industrial shipping
containers
Concord Corrugated sheets Containerboard
Ohio:
Caldwell Steel drums Industrial shipping
containers
Canton (37) Corrugated containers Containerboard
Cincinnati Corrugated sheets Containerboard
Cleveland Corrugated containers Containerboard
Columbus (24) General office Industrial shipping
containers
Columbus (25) General office
Delaware Principal office
Delaware (26) Research center Industrial shipping
containers
Fostoria Corrugated containers Containerboard
Hebron Plastic drums Industrial shipping
containers
Massillon Recycled containerboard Containerboard
Massillon Corrugated sheets Containerboard
Tiffin Corrugated containers Containerboard
Van Wert Fibre drum Industrial shipping
containers
Zanesville Corrugated containers and sheets Containerboard
7
Item 2. Properties (continued)
Location Products Manufactured /Use Industry Segment
Pennsylvania:
Hazelton Corrugated honeycomb Containerboard
Hazelton (27) Plastic drums Industrial shipping
containers
Reno (37) Corrugated containers Containerboard
Stroudsburg Drum hardware Industrial shipping
containers
Twin Oaks Fibre drums Industrial shipping
containers
Washington Corrugated containers and sheets Containerboard
Wayne (28) Sales office Industrial shipping
containers
Tennessee:
Kingsport Fibre drums Industrial shipping
containers
Texas:
Angleton Steel drums Industrial shipping
containers
Fort Worth Fibre drums Industrial shipping
containers
Houston (29) Fibre drums Industrial shipping
containers
Houston (30) Plastic drums Industrial shipping
containers
Houston (31) Sales office Industrial shipping
containers
LaPorte Steel drums and plastic drums Industrial shipping
containers
Waco Corrugated honeycomb Containerboard
Virginia:
Riverville Containerboard Containerboard
Washington:
Vancouver (32) Corrugated honeycomb Containerboard
Vancouver (33) Warehouse Containerboard
West Virginia:
Culloden (34) Fibre drums Industrial shipping
containers
Huntington (35) Corrugated containers and sheets Containerboard
Huntington (36) Warehouse Containerboard
Wisconsin:
Sheboygan Fibre drums Industrial shipping
containers
8
Item 2. Properties (continued)
Location Products Manufactured /Use Industry Segment
Canada
Alberta:
Lloydminster Steel drums, fibre drums Industrial shipping
and plastic drums containers
Ontario:
Belleville Fibre drums and plastic products Industrial shipping
containers
Bowmanville Spiral tubes Industrial shipping
containers
Fort Frances Spiral tubes Industrial shipping
containers
Fruitland Drum hardware Industrial shipping
containers
Milton Fibre drums Industrial shipping
containers
Niagara Falls General office Industrial shipping
containers
Oakville Steel drums Industrial shipping
containers
Stoney Creek Steel drums Industrial shipping
containers
Winona Research center and drum hardware Industrial shipping
containers
Quebec:
La Salle Fibre drums Industrial shipping
containers
Maple Grove Pallets Industrial shipping
containers
Pointe Aux
Trembles Fibre drums and spiral tubes Industrial shipping
containers
Mexico
Estado de Mexico:
Naucalpan
de Juarez Fibre drums Industrial shipping
containers
9
Item 2. Properties (concluded)
Note: All properties are held in fee except as noted below:
Exceptions:
(1) Lease expires June 30, 2000
(2) Lease expires August 31, 1999
(3) Lease expires February 28, 1999
(4) Lease expires December 31, 1998
(5) Lease expires December 15, 1998
(6) Lease expires September 30, 2002
(7) Lease expires April 14, 2001
(8) Lease expires April 30, 1999
(9) Lease expires July 31, 2007
(10) Lease expires June 30, 2000
(11) Lease expires April 30, 1999
(12) Lease expires October 26, 1999
(13) Lease expires March 31, 1999
(14) Lease expires October 6, 2003
(15) Lease expires December 31, 1998
(16) Lease expires December 31, 1998
(17) Lease expires August 31, 1999
(18) Lease expires December 31, 1999
(19) Lease expires August 31, 2001
(20) Lease expires August 31, 2005
(21) Lease expires June 30, 1999
(22) Lease expires February 28, 2003
(23) Lease expires September 30, 2003
(24) Lease expires November 30, 1999
(25) Lease expires August 31, 2001
(26) Lease expires June 30, 2001
(27) Lease expires April 30, 2006
(28) Lease expires December 31, 2000
(29) Lease expires December 31, 2001
(30) Lease expires September 30, 2002
(31) Lease expires June 30, 2001
(32) Lease expires January 31, 2002
(33) Lease expires February 28, 2002
(34) Lease expires January 31, 2002
(35) Lease expires October 7, 2001
(36) Lease expires March 31, 2000
(37) Lease operates month to month
The Company also owns in fee a substantial number of scattered timber
tracts comprising approximately 319,000 acres in the states of Alabama,
Arkansas, Florida, Georgia, Louisiana, Mississippi and Virginia and the
provinces of Nova Scotia, Ontario and Quebec in Canada.
10
Item 3. Legal Proceedings
The Company has no pending material legal proceedings.
From time to time, various legal proceedings arise at Federal, State
or Local levels involving environmental sites to which the Company has
shipped, directly or indirectly, small amounts of toxic waste, such as
paint solvents, etc. The Company, to date, has been classified as a "de
minimis" participant and, as such, has not been subject, in any instance,
to material sanctions or sanctions greater than $100,000.
In addition, from time to time, but less frequently, the Company has
been cited for violations of environmental regulations. Except for the
following situation, none of these violations involve or are expected to
involve sanctions of $100,000 or more.
Currently, the only exposure known to the Company which may exceed
$100,000 relates to a pollution situation at its Strother Field plant in
Winfield, Kansas. A record of decision issued by the U.S. Environmental
Protection Agency (EPA) has set forth estimated remedial costs which could
expose the Company to approximately $3,000,000 in expense under certain
assumptions. If the Company ultimately is required to incur this expense,
a significant portion would be paid over 10 years. The Kansas site
involves groundwater pollution and certain soil pollution that was found to
exist on the Company's property. The estimated costs of the remedy
currently preferred by the EPA for the soil pollution on the Company's land
represents approximately $2,000,000 of the estimated $3,000,000 in expense.
The final remedies have not been selected. In an effort to minimize
its exposure for soil pollution, the Company has undertaken further
engineering borings and analysis to attempt to identify a more definitive
soil area which would require remediation. However, there can be no
assurance that the Company will be successful in minimizing such exposure,
and there can be no assurance that the total expense incurred by the
Company in remediating this site will not exceed $3,000,000.
A reserve for $2,000,000 was recorded by the Company during fiscal
1995 since it was considered the most likely amount of loss. To date,
$385,000 has been charged against the reserve. The remaining reserve is
considered adequate.
11
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
Executive Officers of the Company
The following information relates to Executive Officers of the Company
(elected annually):
Year first became
Name Age Positions and Offices Executive Officer
Michael J. Gasser 47 Chairman of the Board 1988
of Directors and Chief
Executive Officer,
Chairman of the
Executive and
Nominating Committees
William B. Sparks, Jr. 57 Director, President 1995
and Chief Operating
Officer, member of the
Executive Committee
Charles R. Chandler 63 Director, Vice 1996
Chairman, member of
the Executive
Committee
Joseph W. Reed 61 Chief Financial 1997
Officer and Secretary
Michael L. Roane 43 Vice President, Human 1998
Resources
Lloyd D. Baker 65 President of Soterra, 1975
Incorporated
(subsidiary company)
John P. Berg 78 President Emeritus 1972
Michael M. Bixby 55 Vice President, 1980
Strategic Accounts
Ronald L. Brown 51 Vice President, Sales 1996
and Marketing
12
Executive Officers of the Company (continued)
Year first became
Name Age Positions and Offices Executive Officer
Wayne R. Carlberg 55 Vice President, 1998
Marketing
John K. Dieker 35 Corporate Controller 1996
Elco Drost 53 President of Greif 1996
Containers Inc.
(subsidiary company)
Russell A Fazio 55 Vice President, Field 1998
Sales
Michael A. Giles 48 Vice President, 1996
Manufacturing,
Containerboard Mill
Operations
C.J. Guilbeau 51 Vice President and 1986
Associate Director of
Manufacturing
Sharon R. Maxwell 49 Assistant Secretary 1997
Philip R. Metzger 51 Treasurer 1995
Bruce J. Miller 43 Vice President, Sales 1998
and Marketing,
Corrugated Products
and Services
Mark J. Mooney 41 Vice President, 1997
Packaging Services
William R. Mordecai 46 Vice President, Sales 1997
and Marketing,
Containerboard and
Paper
Jerome B. Nolder, Jr. 40 Vice President, 1996
Container Operations
William R. Shew 68 Special Assistant to 1996
the Vice Chairman
13
Executive Officers of the Company (continued)
Year first became
Name Age Positions and Offices Executive Officer
Kent P. Snead 53 Corporate Director of 1997
Strategic Projects
Karl Svendsen 57 Vice President, 1998
Manufacturing
Except as indicated below, each Executive Officer has served in his
present capacity for at least five years.
Mr. Michael J. Gasser was elected Chairman of the Board of Directors
and Chief Executive Officer during 1994. Prior to that time, and for more
than five years, he served as a Vice President of the Company.
Mr. William B. Sparks, Jr. was elected President and Chief Operating
Officer during 1995. Prior to that time, and for more than five years, he
served as Chief Executive Officer of Down River International, Inc., a
former subsidiary of the Company.
Mr. Charles R. Chandler was elected Vice Chairman during 1996. Prior
to that time, and for more than five years, he served as President and
Chief Operating Officer of Virginia Fibre Corporation (now Greif Bros.
Corporation of Virginia), a subsidiary of the Company.
Mr. Joseph W. Reed was elected Chief Financial Officer and Secretary
in 1997. Prior to that time, and for more than five years, he served as
Senior Vice President, Finance and Administration - CFO of Pharmacia, Inc.
Mr. Michael L. Roane was elected Vice President, Human Resources, in
1998. Prior to that time, and for more than the past five years, Mr. Roane
served as Vice President, Human Resources, for Owens and Minor, Inc.
Mr. Lloyd D. Baker was elected President of Soterra, Incorporated
(subsidiary company) during 1997. Prior to that time, and for more than
five years, he served as a Vice President of the Company.
Mr. John P. Berg was elected President Emeritus in 1996. Prior to
that time, he served as President of the Company and General Manager of one
of its divisions for more than five years.
Mr. Michael M. Bixby became Vice President, Strategic Accounts, during
1998. During the past five years, he has been a Vice President of the
Company.
14
Executive Officers of the Company (continued)
Mr. Ronald L. Brown became Vice President, Sales and Marketing, during
1997. Prior to that time, and for more than five years, he served as
President and Chief Operating Officer for Down River International (former
subsidiary company).
Mr. Wayne R. Carlberg was elected Vice President, Marketing, during
1998. Prior to that time, and for more than five years, he held the
position of Sales Manager for the Industrial Container Division of Sonoco
Products Company, which was acquired on March 31, 1998.
Mr. John K. Dieker was elected Corporate Controller in 1995. Prior to
that time, and for more than five years, he served as Assistant Corporate
Controller.
During 1996, Mr. Elco Drost was elected President of Greif Containers
Inc. (subsidiary company) and continues to serve in this capacity. Prior
to that time, and for more than five years, he served as Vice President for
the subsidiary company.
Mr. Russell A. Fazio was elected Vice President, Field Sales, during
1998. Prior to that time, and for more than five years, he held the
position of Manager, Strategic Account Programs, for the Industrial
Container Division of Sonoco Products Company, which was acquired on March
31, 1998.
Mr. Michael A. Giles became Vice President, Manufacturing,
Containerboard Mill Operations, in 1997. He was Executive Vice President of
Virginia Fibre Corporation (now Greif Bros. Corporation of Virginia,
subsidiary company) in 1996. From 1995 to 1996, he served as Vice
President of Manufacturing and, prior to that time, Vice President of
Finance and Treasurer at the subsidiary company for more than five years.
Mr. C.J. Guilbeau became Vice President and Associate Director of
Manufacturing during 1997. During the past five years, he has served as
Vice President of the Company.
Ms. Sharon R. Maxwell was elected Assistant Secretary during 1997.
Prior to that time, and for more than five years, she served as
administrative assistant to the Chairman.
Mr. Philip R. Metzger was elected Treasurer in 1995. Prior to that
time, and for more than the past five years, he served as Assistant
Treasurer and Assistant Controller.
15
Executive Officers of the Company (concluded)
Mr. Bruce J. Miller was elected Vice President, Sales and Marketing,
Corrugated Products and Services, during 1998. In 1997 and early 1998, Mr.
Miller served as Director, Vendor Management Programs, for the Industrial
Shipping Containers segment. Prior to that time, and for more than five
years, he served as a Vice President of Down River International, Inc.
(former subsidiary company).
Mr. Mark J. Mooney became Vice President, Packaging Services, during
1998. Prior to that time, Mr. Mooney served as Vice President, National
Sales, and prior to 1996, and for more than the past five years, he served
as the Operations Director, Multiwall Bags, at one of its divisions.
Mr. William R. Mordecai became Vice President, Sales and Marketing,
Containerboard and Paper, during 1997. During 1996 to 1997, Mr. Mordecai
served as Director, Containerboard Marketing, for Virginia Fibre
Corporation (now Greif Bros. Corporation of Virginia, subsidiary company).
Prior to that time, and for more than five years, he served as President of
Pimlico Paper Corporation.
Mr. Jerome B. Nolder, Jr. became Vice President, Container Operations,
during 1997. Prior to that time, he served as General Manager of one of its
divisions since 1994, and prior to that time, he served as Operations
Manager for the division for more than five years.
Mr. William R. Shew became Special Assistant to the Vice Chairman
during 1997. Prior to that time, and for more than the past five years, he
served as President of Greif Board Corporation (subsidiary company).
Mr. Kent P. Snead became Corporate Director of Strategic Projects
during 1997. Prior to that time, and for more than the past five years, he
served as the Engineering Manager for Virginia Fibre Corporation
(subsidiary company).
Mr. Karl Svendsen was elected Vice President, Manufacturing, during
1998. Prior to that time, he served as Vice President, Operating
Resources, for the Industrial Container Division of Sonoco Products
Company, acquired on March 30, 1998, for more than five years.
16
PART II
Item 5. Market for the Registrant's Common Stock and
Related Security Holder Matters
The Class A and Class B Common Stock are traded on the NASDAQ Stock Market.
The high and low sales prices for each quarterly period during the
last two fiscal years are as follows:
Quarter Ended,
Jan. 31, Apr. 30, July 31, Oct. 31,
1998 1998 1998 1998
Market price (Class A Common Stock):
High $35 3/4 $41 1/4 $40 3/4 $40 5/8
Low $32 $35 $35 $27 1/2
Market price (Class B Common Stock):
High $40 $44 $43 3/4 $43
Low $33 1/2 $37 1/2 $40 3/4 $34
Quarter Ended,
Jan. 31, Apr. 30, July 31, Oct. 31,
1997 1997 1997 1997
Market price (Class A Common Stock):
High $31 $31 1/4 $31 1/4 $36 1/2
Low $27 $25 $23 3/4 $30
Market price (Class B Common Stock):
High $35 $35 $33 $37 1/4
Low $30 $28 1/4 $26 3/4 $31 1/4
As of December 18, 1998, there were 747 shareholders of record of the
Class A Common Stock and 181 shareholders of record of the Class B Common
Stock.
The Company paid five dividends of varying amounts during its fiscal
year computed on the basis described in Note 5 to the Consolidated
Financial Statements on page 48 of this Form 10-K, which is hereby
incorporated by reference. The annual dividends paid for the last three
fiscal years are as follows:
1998 fiscal year dividends per share - Class A $.48; Class B $.71
1997 fiscal year dividends per share - Class A $.60; Class B $.89
1996 fiscal year dividends per share - Class A $.48; Class B $.71
17
Item 6. Selected Financial Data
The 5-year selected financial data is as follows (Dollars in
thousands, except per share amounts):
Years Ended October 31,
1998 1997 1996 1995 1994
Net sales $801,131 $648,984 $637,368 $719,345 $583,526
Net income $ 33,104 $ 18,086 $ 42,747 $ 60,133 $ 33,754
Total assets $829,363 $550,089 $512,338 $467,662 $419,074
Long-term
obligations $235,000 $ 52,152 $ 25,203 $ 14,365 $ 28,215
Dividends per share:
Class A Common
Stock $ .48 $ .60 $ .48 $ .40 $ .30
Class B Common
Stock $ .71 $ .89 $ .71 $ .59 $ .44
Basic and diluted earnings per share:
Class A Common
Stock $ 1.15 $ .63 $ 1.48 $ 1.96 $ 1.10
Class B Common
Stock $ 1.71 $ .94 $ 2.22 $ 2.93 $ 1.64
Current year amounts include the results of operations and assets of
the industrial containers business of Sonoco Products Company acquired on
March 30, 1998. The increase in long-term obligations is a result of this
acquisition.
The results of operations include the effects of pretax restructuring
charges of $27.5 million and $6.2 million for 1998 and 1997, respectively.
Prior year earnings per share have been restated to reflect the
adoption of SFAS No. 128 (see Note 1 to the Consolidated Financial
Statements).
18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FINANCIAL DATA
Presented below are certain comparative data illustrative of the
following discussion of the Company's results of operations, financial
condition and changes in financial condition (Dollars in thousands):
1998 1997 1996
Net sales:
Industrial Shipping Containers $444,130 $333,005 $322,330
Containerboard 357,001 315,979 315,038
Total $801,131 $648,984 $637,368
Operating profit:
Industrial Shipping Containers $ 26,928 $ 10,687 $ 13,533
Containerboard 40,972 2,480 40,129
Total $ 67,900 $ 13,167 $ 53,662
Net income $ 33,104 $ 18,086 $ 42,747
Current ratio 2.6:1 2.9:1 3.7:1
Cash flows from operations $ 76,862 $ 40,115 $ 81,906
Increase (decrease) in working
capital $ 46,001 $(22,257) $(13,973)
Capital expenditures $ 38,093 $ 36,193 $ 74,395
Acquisitions $185,395 $ 41,724 $ 9,275
RESULTS OF OPERATIONS
The Company had net income, excluding the effect of a $27.5 million
restructuring charge, of $49.4 million, or $1.71 and $2.56 per share for
the Class A and Class B Common Stock, respectively, compared to net income,
excluding the effect of a $6.2 million restructuring charge, of $21.9
million, or $.76 and $1.13 per share for the Class A and Class B Common
Stock, respectively, last year. Including the effect of the restructuring
charge, the Company reported net income of $33.1 million, or $1.15 and
$1.71 per share for the Class A and Class B Common Stock, respectively, for
1998. Prior year net income, inclusive of the effect of that year's
restructuring charge, was $18.1 million, or $.63 and $.94 per share for the
Class A and Class B Common Stock, respectively.
19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The increase in net income, excluding the effect of the restructuring
charges, was due primarily to improved operating profits for the
Containerboard segment resulting from higher average paper prices over the
prior year. In addition, the acquisition of the industrial containers
business of Sonoco and several timberland sales contributed to the
improvement in net income.
Historically, revenues or earnings may or may not be indicative of
future operations because of various economic factors. As explained below,
the Company is subject to the general economic conditions of its customers
and the industry in which it operates.
The Company's Industrial Shipping Containers segment, where packages
manufactured by the Company are purchased by other manufacturers and
suppliers, is substantially subject to the general economic conditions and
business success of the Company's customers.
Similarly, the Company's Containerboard segment is subject to the
general economic conditions and the effect of the operating rates of the
containerboard industry, including pricing pressures from its competitors.
The Company remains confident that, with the financial strength that
it has built over its 121-year existence, it will be able to effectively
compete in its highly competitive markets.
Net Sales
Net sales increased $152.1 million or 23.4% during the current year as
compared to the previous year.
The net sales of the Industrial Shipping Containers segment increased
by $111.1 million or 33.4% in comparison to the prior year. This increase
was primarily the result of the acquisition of the industrial containers
business of Sonoco which contributed $123.5 million of net sales during
1998.
The net sales of the Containerboard segment increased by $41.0 million
or 13.0% in comparison to the prior year. This increase was primarily the
result of a $35.9 million increase in net sales from the Company's paper
mills which was attributed primarily to the improved sales prices of its
products. The higher sales prices were caused by the overall improvement
of the containerboard market. In addition, the purchase of Independent
Container, Inc. and Centralia Container, Inc. in May 1997 and June 1997,
respectively, contributed $24.0 million in additional net sales as a result
of higher sales volume. In August 1997, the Company disposed of its wood
components plants in Kentucky, California, Washington and Oregon with prior
year net sales of $37.0 million.
20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Industrial Shipping Containers segment had an increase in net
sales of $10.7 million or 3.3% in 1997 as compared to 1996. The increase
was due primarily to the purchase of two steel drum operations located in
Merced, California and Oakville, Ontario, Canada in 1997 which contributed
$19.1 million in sales during 1997. The increase that resulted from this
acquisition was partially offset by the disposal of one of the Company's
injection molding facilities located in Ohio during February 1997. Net
sales for the location sold amounted to $3.6 million in 1997 and $12.3
million in 1996. The location was sold since it was determined that it no
longer met the strategic objectives of the Company.
The Containerboard segment had a slight increase in net sales in 1997
as compared to 1996. Excess capacity in the containerboard market caused
sales prices for containerboard and related products to be lower. In fact,
paper prices reached a 19-year low in May 1997. This reduction in sales
prices from the Company's paper mills was partially offset by an increase
in sales volume in 1997 as compared to 1996. In addition, the sale of the
wood components plants caused a decrease in sales since the prior year.
Net sales for these locations amounted to $37.0 million in 1997 and $42.5
million in 1996. Furthermore, the Company completed three acquisitions of
corrugated container companies: Aero Box Company located in Roseville,
Michigan; Independent Container, Inc. with locations in Louisville and
Erlanger, Kentucky and Ferdinand, Indiana; and Centralia Container, Inc.
located in Centralia, Illinois. These acquisitions, as well as the two
acquisitions from the prior year, contributed $48.7 million of net sales
during 1997. In the prior year, there were $7.3 million of net sales
relating to the 1996 acquisitions.
Operating Profit
During 1998, the increase in operating profit of $54.7 million was due
primarily to an improvement in gross profit margin of 19.5% this year
compared to 13.4% last year. This increase was caused by higher sales
prices per unit in the Containerboard segment without a corresponding
increase in the cost of products sold. In addition, the inclusion of the
industrial containers business of Sonoco contributed to this increase. The
increase in gross profit was partially offset by higher selling, general
and administrative expenses included in both segments over the prior year.
The higher selling, general and administrative expenses were due primarily
to additional expenses related to the industrial containers business of
Sonoco, prior year acquisitions and amortization of goodwill.
21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The operating profit of the Industrial Shipping Containers segment was
$10.7 million or 3.2% of net sales in 1997 as compared to $13.5 million or
4.2% of net sales in 1996. Price pressures on its products affected the
operating profits of this segment. During 1997, the Company experienced
lower profitability due to higher cost of raw materials without a
corresponding increase in sales prices.
The operating profit of the Containerboard segment was $2.5 million or
0.8% of net sales in 1997 as compared to $40.1 million or 12.7% of net
sales in 1996. The decrease in 1997 is due to the reduction in sales prices
resulting in less favorable gross profit margins.
Restructuring Costs
During the third quarter of 1998, the Company approved a plan to
consolidate some of its locations in order to improve operating
efficiencies and capabilities. The plan was a result of a study to
determine whether certain locations, either existing or newly acquired,
should be closed or relocated to a different facility. As a result of this
plan, the Company recognized a restructuring charge of $27.5 million in
connection with eighteen of the Company's existing plants that will be
closed during 1998 and 1999. These plants were not part of the industrial
containers business of the Sonoco acquisition. The charge relates to $20.9
million in employee separation costs (approximately 500 employees) and $6.6
million in other anticipated costs of closing and disposing of the
facilities. As of October 31, 1998, the Company has paid approximately
$2.7 million consisting primarily of severance payments. The Company
expects the remaining liability of $24.8 million to be expended during
1999.
In connection with the consolidation plan, an additional five
locations purchased as part of the industrial containers business of Sonoco
will be closed. Accordingly, the Company recorded a $9.5 million
restructuring liability related to these locations. The liability
consisted of $6.1 million in employee separation costs (approximately 100
employees) and $3.4 million in other anticipated closing and disposition
costs. As of October 31, 1998, the Company has paid approximately $1.9
million consisting primarily of severance payments. The Company believes
the remaining liability of $7.6 million will be expended during 1999.
The Company's management believes that, upon completion of the
consolidation, positive contributions to earnings on an annualized basis
from these actions could approximate an amount equal to the third quarter
restructuring charge as a result of reductions in labor costs and an
improvement in operating efficiencies. These contributions are expected to
begin in the latter part of 1998; however, the most significant impact will
not be realized until the end of 1999 after the plan has been fully
implemented.
22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
During 1997, the Company adopted a plan to consolidate its operations
which included the relocation of certain key operating employees, the
realignment of some of its administrative functions and the reduction of
certain support functions. As a result, there was a charge to income of
$6.2 million during the fourth quarter of 1997. As of October 31, 1998,
all expenditures related to the charge have been made and the liability
accordingly eliminated.
Other Income
Other income increased $3.4 million in 1998 from the prior year due
primarily to $8.9 million of additional sales of timber and timber
properties. The Company analyzes market factors as well as the condition of
its timberlands in order to maximize the gain on its timber sales. In the
prior year, there were $3.7 million of gains on the sale of an injection
molding facility and wood components plants.
In 1997, other income increased $10.8 million from the prior year due
to $3.0 million of additional sales of timber properties. Also, the
Company sold its wood components plants and one of its injection molding
facilities during the year which resulted in $3.7 million of gains on the
sale of capital assets.
Interest Expense
In 1998, interest expense increased $9.3 million from the prior year
due to increased debt relating to the acquisition of the industrial
containers business of Sonoco.
In 1997, interest expense increased $2.2 million from the prior year
as a result of additional debt issued in 1997 and 1996 relating to
acquisitions by the Company and certain capital improvements.
Income Before Income Taxes
Income before income taxes increased $26.1 million in 1998 as compared
to the prior year primarily due to more favorable gross profit margins
experienced by the Containerboard segment than in 1997. In addition, the
industrial containers business of Sonoco contributed $12.9 million and
there were $8.9 million of gains on the sale of timber and timberlands.
These increases were significantly offset by a $27.5 million restructuring
charge in 1998 as compared to a $6.2 million restructuring charge in 1997
and $9.3 million of additional interest expense.
23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Income before income taxes decreased $38.2 million in 1997 as compared
to the prior year due primarily to less favorable gross profit margins in
the Containerboard segment than in 1996. In addition, there was a $6.2
million restructuring charge and a $2.2 million increase in interest
expense. The $3.0 million of higher timber sales and $3.7 million of gains
on the sale of certain facilities offset these reductions.
Income Taxes
The Company anticipates that it will be able to fully realize its
recognized deferred tax assets based upon its projected taxable income.
LIQUIDITY AND CAPITAL RESOURCES
As indicated in the Consolidated Balance Sheets, elsewhere in this
report and in the financial data set forth above, the Company is dedicated
to maintaining a strong financial position. It is management's belief that
this dedication is extremely important during all economic times.
The Company's financial strength is important to continue to achieve
the following goals:
a. To protect the assets of the Company and the intrinsic value of
shareholders' equity in periods of adverse economic conditions.
b. To respond to any large and presently unanticipated cash demands that
might result from future adverse events.
c. To be able to benefit from new developments, new products and new
opportunities in order to achieve the best results for our shareholders.
d. To continue to pay competitive remuneration, including the ever-
increasing costs of employee benefits, to Company employees who produce
the results for the Company's shareholders.
e. To replace and improve plants and equipment. When plants and production
machinery must be replaced, either because of wear or to obtain the
cost-reducing potential of technological improvement required to remain
a low-cost producer in the highly competitive environment in which the
Company operates, the cost of new plants and machinery are often
significantly higher than the historical cost of the items being
replaced.
24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
During 1998, the Company invested approximately $38 million in capital
additions and $185 million for its acquisitions. During the last three years,
the Company has invested $385 million in capital additions and acquisitions.
These investments are an indication of the Company's commitment to be
the quality, low-cost producer and the desirable long-term supplier to all
of our customers.
Management believes that the present financial strength of the Company
will be sufficient to achieve these goals.
On March 30, 1998, the Company acquired all of the outstanding shares
of the industrial containers business of Sonoco for approximately $185
million in cash. The industrial containers business includes twelve fibre
drum plants and five plastic drum plants along with facilities for research
and development, packaging services and distribution. In addition, the
Company entered into an agreement with Sonoco to acquire its intermediate
bulk containers business, which the parties intend to finalize as soon as
necessary approvals are obtained. Pending receipt of such approvals, the
Company markets and sells intermediate bulk containers for Sonoco under a
distributorship agreement.
During 1997, the Company purchased three corrugated container
companies: Aero Box Company, Independent Container, Inc. and Centralia
Container, Inc. In addition, the Company purchased two steel drum
operations. Furthermore, the paper mill in Ohio added a power plant to its
operations and a corrugated carton plant increased its capacity with new
machinery and equipment.
As discussed in prior annual reports, the Company's paper mill in
Virginia made significant improvements to its facilities by adding a new
woodyard and a manufacturing control system. The Company's paper mill in
Ohio made significant improvements to its machinery and equipment. In
addition, a new sheet feeder plant in Michigan was completed during
November 1995. The Company purchased two corrugated container companies,
Decatur Container Corporation and Kyowva Corrugated Container Company, Inc.
during 1996.
The purchase of the industrial containers business of Sonoco has been
the primary reason for the increase in accounts receivable, inventories,
goodwill, property, plant and equipment and accounts payable since October
31, 1997.
25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The increase in the restructuring reserve is primarily due to the
recording of a restructuring charge of $27.5 million, as discussed above,
during the third quarter of 1998. The remaining increase is due to a
restructuring reserve that was set up for certain Sonoco locations,
purchased on March 30, 1998, that will be closed. These amounts primarily
relate to severance arrangements and other costs of closing the plants.
During 1998, the Company entered into a credit agreement which
provides for a revolving credit facility of up to $325 million. The
Company has borrowed money under the credit facility to purchase the
industrial containers business of Sonoco and repay the other long-term
obligations of the Company. The credit agreement contains certain
covenants including maintaining a certain leverage ratio, sufficient
coverage of interest expense and a minimum net worth. In addition, the
Company is limited with respect to additional debt. Finally, there are
certain non-financial covenants including sales of assets, financial
reporting, mergers and acquisitions, investments, change in control and
Employee Retirement Income Security Act compliance.
The increase in other long-term liabilities is primarily the result of
the postretirement health care benefits related to certain employees of the
acquired businesses of Sonoco.
Various lawsuits, claims and proceedings have been or may be
instituted or asserted against the Company, including those pertaining to
environmental, product liability, safety and health matters. While the
amounts claimed may be substantial, the ultimate liability cannot now be
determined because of the considerable uncertainties that exist.
Therefore, it is possible that results of operations or liquidity in a
particular period could be materially affected by certain contingencies.
However, based upon the facts currently available, management believes that
the disposition of matters that are pending or asserted will not have a
materially adverse affect on the financial position of the Company.
During 1997, the Company embarked on a program to implement a new
management information system. The purpose of the new management
information system is to focus on using information technology to link
operations in order to become a low-cost producer and more effectively
service the Company's customers. The ultimate cost of this project is
dependent upon management's final determination of the locations, timing
and extent of integration of the new management information system. As of
October 31, 1998, the Company has spent approximately $12.5 million towards
this project.
26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
In addition to the intermediate bulk containers business of Sonoco and
the new management information system, as described above, the Company has
approved future purchases of approximately $46.5 million. These purchases
are primarily to replace and improve equipment.
Borrowing and self-financing have been the primary sources for past
capital expenditures and acquisitions. The Company anticipates financing
future capital expenditures in a like manner and believes that it will have
adequate funds available for planned expenditures.
On November 1, 1998, a joint venture named CorrChoice was formed to
operate the sheet feeder plants of Michigan Packaging, a subsidiary of the
Company, and Ohio Packaging. The joint venture was formed by the
stockholders of Michigan Packaging and Ohio Packaging contributing their
stock in these companies to CorrChoice in exchange for stock of CorrChoice.
The Company was not required to commit any additional capital resources to
fund the joint venture. The joint venture is expected to be self-
supporting.
During December 1998, the Company and Abzac, a privately held company
in France, entered into a letter of intent for the exchange of the
Company's spiral core manufacturing assets for a 49% equity interest in
Abzac's fibre drum business. The Company manufactures spiral cores at three
of its Canadian locations. Abzac manufacturers fibre drums at three of its
locations in France. The transaction is subject to due diligence and is
anticipated to be completed during the third quarter of 1999.
YEAR 2000 MATTERS
Historically, certain information technology ("IT") systems of the
Company have used two digits rather than four digits to define that
applicable year, which could result in recognizing a date using "00" as the
year 1900 rather than the year 2000. IT systems include computer software
and hardware in the mainframe, midrange and desktop environments as well as
telecommunications. Additionally, the impact of the problem extends to
non-IT systems, such as automated plant systems and instrumentation. The
Year 2000 issues could result in major failures or misclassifications.
27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Company is actively assessing the Year 2000 readiness of its IT
and non-IT systems, and has begun to remediate certain IT systems. In
addition, the Company is in the process of determining the extent to which
the systems of third parties with whom the Company has significant
relationships may be vulnerable to Year 2000 issues and what impact, if
any, these Year 2000 issues will have on the Company. As part of these
assessments, a compliance plan, which includes the formation of a steering
committee and a timetable for identifying, evaluating, resolving and
testing its Year 2000 issues, has been developed. The steering committee
includes members of the Company's senior management and internal audit
department to ensure that the issues are adequately addressed and completed
in a timely manner.
The timetable provides for the Company's completion of its remediation
of any Year 2000 issues by the end of 1999. According to the compliance
plan, the inventory and assessment phase related to the Company's IT and
non-IT systems are expected to be complete by the end of the second quarter
of 1999. Further, corrections and testing of critical Year 2000 issues are
expected to be complete by the end of the third quarter of 1999. For non-
critical Year 2000 issues, corrections and testing are expected to be
complete by the end of the fourth quarter of 1999.
While it is difficult, at present, to fully quantify the overall cost
of this work, the Company currently estimates its total spending for Year
2000 remediation efforts to be approximately $6 million to $10 million. The
range is a function of ongoing evaluation as to whether certain systems and
equipment will be corrected or replaced, which is largely dependent on
information to be obtained from suppliers or other external sources. This
amount will primarily be expended during 1999. Costs for system maintenance
and modification are expensed as incurred while spending for new hardware,
software or equipment will be capitalized and depreciated over the assets'
useful lives. The Company anticipates funding its Year 2000 expenditures
out of its cash flows from operations. As of October 31, 1998,
approximately $400,000 has been spent related to this effort.
The Company anticipates timely completion of its Year 2000
remediation. However, if the Company does not become Year 2000 compliant on
a timely basis, there could be adverse financial and operational effects on
the Company. The amount of these effects can not be ascertained at this
time.
The Year 2000 steering committee is continuously reviewing the status
of the Company's remediation efforts and, as a necessary part of the
compliance plan discussed above, a contingency plan will be created during
1999. The plan will address alternative solutions to the Company's Year
2000 issues.
28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which is effective in 1999 for the Company. Currently, the only
item in addition to net income that would be included in comprehensive
income is the cumulative translation adjustment.
During 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which is effective in 1999 for
the Company. The impact on the presentation of the Company's segments has
not yet been determined.
In February 1998, the FASB issued SFAS No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits - an amendment
to FASB Statements No. 87, No. 88 and No. 106", which is effective in 1999
for the Company. SFAS No. 132 will not affect the Company's results of
operations, however, the impact on the presentation of the Company's Notes
to Consolidated Financial Statements has not been determined.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective in 2000 for the
Company. The Company has not determined what impact SFAS No. 133 will have
on the Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS; CERTAIN FACTORS AFFECTING FUTURE RESULTS
Statements contained in this Form 10-K or any other reports or
documents prepared by the Company or made by management of the Company may
be "forward-looking" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject
to certain risks and uncertainties that could cause the Company's operating
results to differ materially from those projected. The following factors,
among others, in some cases have affected and in the future could affect
the Company's actual financial performance.
Changes in General Economic Conditions. The Company's customers
generally consist of other manufacturers and suppliers who purchase the
Company's industrial shipping containers and containerboard for their own
containment and shipping purposes. Because the Company supplies a cross
section of many industries, such as chemicals, food products, petroleum
products, pharmaceuticals, and metal products, demand for the Company's
industrial shipping containers and containerboard and related corrugated
products has historically corresponded to changes in general economic
conditions of the United States, Canada and Mexico. Accordingly, the
Company's financial performance is substantially dependent upon the general
economic conditions existing in the United States, Canada and Mexico.
29
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Competition. The Company's business of manufacturing and selling
industrial shipping containers and containerboard is highly competitive.
The most important competitive factors are price, quality and service.
Many of the Company's competitors are substantially larger and have
significantly greater financial resources.
Excess Capacity in Containerboard Segment. Industry demand for
containerboard products has declined in recent years causing excess
capacity in this segment of the Company's business. This excess capacity
has in turn caused lower sales prices in the containerboard market,
evidenced by paper prices reaching a 19-year low in May 1997. These excess
capacity levels and competitive pricing pressures in the containerboard
market have negatively impacted the Company's financial performance in
recent years. Management does not anticipate that paper prices will be as
favorable in 1999 as in 1998, which could negatively impact the Company's
net sales and operating profits.
Raw Material Shortages. The Company's raw materials are principally
pulpwood, waste paper for recycling, paper, steel and resins. Certain of
these materials have been, and in the future may be, in short supply.
Shortages in raw materials could adversely affect the Company's operations.
Failure of Year 2000 Compliance. The Company is actively assessing
its Year 2000 readiness, including the extent to which third parties with
whom the Company has significant relationships may be vulnerable to Year
2000 issues and what impact, if any, these Year 2000 issues will have on
the Company. As part of these assessments, a compliance plan, which
includes the formation of a steering committee and a timetable for
identifying, evaluating, resolving and testing its Year 2000 issues, has
been developed. The Company anticipates timely completion of its Year 2000
remediation by the end of 1999. However, the failure to become Year 2000
compliant on a timely basis could have a material adverse affect on the
Company's operations and financial performance. The Year 2000 steering
committee is continuously reviewing the status of the Company's remediation
efforts and, as a necessary part of the compliance plan discussed above, a
contingency plan will be created during 1999 to address alternative
solutions to the Company's Year 2000 issues.
30
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (concluded)
Environmental and Health and Safety Matters; Product Liability
Claims. The Company must comply with extensive rules and regulations
regarding federal, state and local environmental matters, such as air and
water quality and waste disposal. The Company must also comply with
extensive rules and regulations regarding safety and health matters. The
failure to materially comply with such rules and regulations could
adversely affect the Company's operations. Furthermore, litigation or
claims against the Company with respect to such matters could adversely
affect the Company's financial performance. The Company may also become
subject to product liability claims which could adversely affect the
Company.
Risks Associated with Acquisitions. During the past several years the
Company has invested, and for the foreseeable future the Company
anticipates investing, a substantial amount of capital in acquisitions.
Acquisitions involve numerous risks, including the failure to retain key
employees and contracts and the inability to integrate businesses without
material disruption. In addition, other companies in the Company's
industries have similar acquisition strategies. There can be no assurance
that any future acquisitions will be successfully integrated into the
Company's operations, that competition for acquisitions will not intensify
or that the Company will be able to complete such acquisitions on
acceptable terms and conditions. In addition, the costs of unsuccessful
acquisition efforts may adversely affect the Company's financial
performance.
Timberland Sales. The Company has a significant inventory of standing
timber and timberlands. The frequency and volume of sales of timber and
timberland will have an effect on the Company's financial performance.
31
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk:
The Company is subject to interest rate risk related to its financial
instruments which include borrowings under its $325 million revolving
credit facility and interest rate swap agreements with an aggregate
notional amount of $160 million. The Company does not enter into financial
instruments for trading or speculative purposes. The interest rate swap
agreements have been entered into to manage the Company's exposure to its
variable rate borrowing.
The table below provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates. For the revolving credit facility, the table
presents principal cash flows and related weighted average interest rates
by contractual maturity dates. For interest rate swaps, the table presents
annual amortization of notional amounts and weighted average interest rates
by contractual maturity dates. Under the swap agreements, the Company
receives interest quarterly from the counterparty and pays interest
quarterly to the counterparty. The fair value of the revolving credit
facility is based on current rates available to the Company for debt of the
same remaining maturity. The fair values of the interest rate swap
agreements have been determined by the counterparty.
Financial Instruments
(Dollars in millions)
Expected Maturity Date
There- Fair
1999 2000 2001 2002 2003 after Total Value
Liabilities
Revolving credit
facility:
Variable rate $ -- $ -- $ -- $ -- $235 (a) $ -- $ 235 $ 235
Average interest
rate 5.50%(b)
Interest rate
derivatives
Interest rate swaps:
Variable to
fixed rates $ 10 $ 20 $ 30 $ 10 $ 20 $ 70 $160 $ (7)
Average pay rate 6.15% 6.15% 5.53% 6.15% 6.15% 6.15% 6.03%
Average receive
rate (c) 5.22% 5.22% 5.22% 5.22% 5.22% 5.22% 5.22%
(a) Includes $235 million of borrowings under the $325 million unsecured
revolving credit facility which expires in 2003. The Company has the
option under the credit facility to repay borrowings prior to 2003 or
to request an extension.
(b) Variable rate specified is based on the prime rate or LIBOR rate
plus a calculated margin at October 31, 1998. Interest is paid and
reset quarterly.
32
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
(concluded)
[FN]
(c) The average receive rate is based upon the LIBOR rate at October
31,1998. The rates presented are not intended to project the
Company's expectations for the future.
Foreign Currency Risk:
The Company's exposure to foreign currency fluctuations on its
financial instruments is not material because most of these instruments are
denominated in U.S. dollars. The net sales and total assets of the Company
which are denominated in foreign currencies (i.e., Canadian dollars and
Mexican pesos) represent less than 10% of the consolidated net sales and
total assets.
Commodity Price Risk:
The Company has no financial instruments subject to commodity price
risks.
33
Item 8. Financial Statements and Supplementary Data
GREIF BROS. CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
For the years ended October 31, 1998 1997 1996
Net sales $801,131 $648,984 $637,368
Other income:
Interest and other 7,466 12,918 5,214
Gain on timber sales 21,553 12,681 9,626
830,150 674,583 652,208
Costs and expenses (including
depreciation of $35,585 in 1998,
$30,660 in 1997 and $26,348 in
1996):
Cost of products sold 644,892 562,165 515,775
Selling, general and administrative 90,282 74,058 68,220
Restructuring costs 27,461 6,185 --
Interest 11,928 2,670 517
774,563 645,078 584,512
Income before income taxes 55,587 29,505 67,696
Income taxes 22,483 11,419 24,949
Net income $ 33,104 $ 18,086 $ 42,747
Basic and diluted earnings per share:
1998 1997 1996
Class A Common Stock $ 1.15 $ .63 $ 1.48
Class B Common Stock $ 1.71 $ .94 $ 2.22
[FN]
See accompanying Notes to Consolidated Financial Statements.
34
Item 8. Financial Statements and Supplementary Data (continued)
GREIF BROS. CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
October 31, 1998 1997
CURRENT ASSETS
Cash and cash equivalents $ 41,329 $ 17,719
Canadian government securities 6,654 7,533
Trade accounts receivable - less allowance of
$2,918 for doubtful items ($847 in 1997) 113,931 81,582
Inventories 64,851 44,892
Deferred tax asset 13,355 5,719
Prepaid expenses and other 16,626 15,473
Total current assets 256,746 172,918
LONG-TERM ASSETS
Goodwill - less amortization 123,677 17,352
Other long-term assets 27,395 22,022
151,072 39,374
PROPERTIES, PLANTS AND EQUIPMENT - at cost
Timber properties - less depletion 9,067 6,884
Land 17,294 11,139
Buildings 60,839 139,713
Machinery and equipment 505,236 424,177
Capital projects in progress 17,045 17,546
Accumulated depreciation (287,936) (261,662)
421,545 337,797
$829,363 $550,089
[FN]
See accompanying Notes to Consolidated Financial Statements.
35
Item 8. Financial Statements and Supplementary Data (continued)
GREIF BROS. CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
October 31, 1998 1997
CURRENT LIABILITIES
Outstanding checks in excess of funds on
deposit $ 6,951 $ 5,122
Accounts payable 38,410 30,589
Current portion of long-term obligations -- 8,504
Accrued payrolls and employee benefits 9,859 9,502
Restructuring reserves 32,411 4,319
Other current liabilities 10,604 2,372
Total current liabilities 98,235 60,408
LONG-TERM LIABILITIES
Long-term obligations 235,000 43,648
Deferred tax liability 36,412 29,740
Postretirement benefit liability 25,554 --
Other long-term liabilities 17,230 16,155
Total long-term liabilities 314,196 89,543
SHAREHOLDERS' EQUITY
Capital stock, without par value 9,936 9,739
Class A Common Stock:
Authorized 32,000,000 shares;
issued 21,140,960 shares;
outstanding 10,909,672 shares
(10,900,672 in 1997)
Class B Common Stock:
Authorized and issued 17,280,000 shares;
outstanding 12,001,793 shares
Treasury stock, at cost (41,858) (41,868)
Class A Common Stock: 10,231,288 shares
(10,240,288 in 1997)
Class B Common Stock: 5,278,207 shares
Retained earnings 456,898 437,550
Cumulative translation adjustment (8,044) (5,283)
416,932 400,138
$829,363 $550,089
[FN]
See accompanying Notes to Consolidated Financial Statements.
36
Item 8. Financial Statements and Supplementary Data (continued)
GREIF BROS. CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the years ended October 31, 1998 1997 1996
Cash flows from operating activities:
Net income $ 33,104 $ 18,086 $ 42,747
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 39,686 31,926 26,420
Deferred income taxes (964) 4,703 9,308
Gain on disposals of properties, plants
and equipment, net (1,747) (7,023) (412)
Increase (decrease) in cash from changes
in certain assets and liabilities, net of
effects from acquisitions:
Trade accounts receivable (4,271) (769) 4,831
Inventories (2,794) 9,660 6,356
Prepaid expenses and other (1,367) (2,563) 420
Other long-term assets (5,447) (11,719) (75)
Outstanding checks in excess of funds on
deposit 1,829 3,979 (1,840)
Accounts payable (467) (2,170) (3,641)
Accrued payrolls and employee benefits (2,729) 130 (1,904)
Restructuring reserves 17,858 4,319 --
Other current liabilities 6,288 (6,989) 5,412
Postretirement benefit liability (1,765) -- --
Other long-term liabilities (352) (1,455) (5,716)
Net cash provided by operating activities 76,862 40,115 81,906
Cash flows from investing activities:
Acquisitions of companies, net of cash
acquired (186,472) (41,121) (284)
Disposals of investments in government
securities -- 12,585 1,481
Purchases of investments in government
securities -- (639) (1,979)
Purchases of properties, plants and
equipment (38,093) (36,193) (74,395)
Proceeds on disposals of properties,
plants and equipment 3,041 7,634 851
Net cash used in investing activities (221,524) (57,734) (74,326)
Cash flows from financing activities:
Proceeds from issuance of
long-term obligations 271,000 52,753 11,329
Payments on long-term obligations (88,152) (25,804) (3,692)
Payments on short-term obligations -- -- (6,668)
Debt issuance costs (410) -- --
Acquisitions of treasury stock -- (31) --
Exercise of stock options 207 735 --
Dividends paid (13,756) (17,208) (13,740)
Net cash provided by (used in) financing
activities 168,889 10,445 (12,771)
Effects of exchange rates on cash (617) (1,667) 139
Net increase (decrease) in cash and cash
equivalents 23,610 (8,841) (5,052)
Cash and cash equivalents at beginning
of year 17,719 26,560 31,612
Cash and cash equivalents at end of year $ 41,329 $ 17,719 $ 26,560
[FN]
See accompanying notes to Consolidated Financial Statements.
37
Item 8. Financial Statements and Supplementary Data (continued)
GREIF BROS. CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars and shares in thousands, except per share amounts)
Cumulative
Capital Stock Treasury Stock Retained Translation Shareholders'
Shares Amount Shares Amount Earnings Adjustment Equity
Balance
at November
1, 1995 24,075 $9,034 14,346 $(40,776) $407,665 $(3,390) $372,533
Net income 42,747 42,747
Dividends paid
(Note 5):
Class A - $.48 (5,219) (5,219)
Class B - $.71 (8,521) (8,521)
Treasury shares
acquired (1,200) 1,200 (1,091) (1,091)
Foreign currency
Translation 183 183
Balance at
October
31, 1996 22,875 $9,034 15,546 $(41,867) $436,672 $(3,207) $400,632
Net income 18,086 18,086
Dividends paid
(Note 5):
Class A - $.60 (6,526) (6,526)
Class B - $.89 (10,682) (10,682)
Treasury shares
acquired (1) 1 (31) (31)
Stock options
exercised 28 705 (28) 30 735
Foreign currency
translation (2,076) (2,076)
Balance at
October
31, 1997 22,902 $9,739 15,519 $(41,868) $437,550 $(5,283) $400,138
Net income 33,104 33,104
Dividends paid
(Note 5):
Class A - $.48 (5,235) (5,235)
Class B - $.71 (8,521) (8,521)
Stock options
exercised 9 197 (9) 10 207
Foreign currency
translation (2,761) (2,761)
Balance at
October
31, 1998 22,911 $9,936 15,510 $(41,858) $456,898 $(8,044) $416,932
[FN]
See accompanying Notes to Consolidated Financial Statements.
38
Item 8. Financial Statements and Supplementary Data (continued)
GREIF BROS. CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The Business
Greif Bros. Corporation and its subsidiaries (the "Company")
principally manufactures industrial shipping containers and containerboard
and related products which it sells to customers in many industries
primarily in the United States, Canada and Mexico. The Company operates
over 100 locations in 28 states of the United States, three provinces of
Canada and one state of Mexico.
Basis of Consolidation
The Consolidated Financial Statements include the accounts of Greif
Bros. Corporation and its subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The most significant estimates are
related to the allowance for doubtful accounts, expected useful lives
assigned to property, plant and equipment and goodwill, restructuring
reserves, postretirement benefits, income taxes and contingencies. Actual
amounts could differ from those estimated.
Revenue Recognition
Revenue is recognized when goods are shipped.
Income Taxes
Income taxes are accounted for under Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes". In accordance
with this statement, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, as measured by enacted tax rates that are
expected to be in effect in the periods which the deferred tax liabilities
and assets are expected to be settled or realized.
39
Item 8. Financial Statements and Supplementary Data (continued)
Cash and Cash Equivalents
The Company considers highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents. Included
in these amounts are repurchase agreements of $23,300,000 in 1998
($9,300,000 in 1997).
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist primarily of trade
accounts receivable. Such credit risk is considered by management to be
limited due to the Company's many customers, none of whom are considered
principal in the total operations of the Company, doing business in a
variety of industries throughout the United States, Canada and Mexico.
Canadian Government Securities
The Canadian government securities are classified as available-for-
sale and, as such, are reported at their fair value which approximates
amortized cost.
The Company received $10,600,000 in proceeds from the sale of
available-for-sale securities in 1997. The realized gains and losses
included in income are immaterial.
Inventories
Inventories are stated at the lower of cost (approximately 90% on
last-in, first-out basis) or market. The inventories are comprised as
follows (Dollars in thousands):
1998 1997
Finished goods $ 20,557 $ 9,833
Raw materials and work-
in-process 87,694 82,059
108,251 91,892
Reduction to state certain
inventories on last-in, first-
out basis (43,400) (47,000)
$ 64,851 $ 44,892
During 1997 and 1996, the Company experienced last-in, first-out
liquidations which were deemed to be immaterial to the Consolidated
Financial Statements.
40
Item 8. Financial Statements and Supplementary Data (continued)
Properties, Plants and Equipment
Depreciation on properties, plants and equipment is provided by the
straight-line method over the estimated useful lives of the assets as
follows:
Years
Buildings 30-45
Machinery and equipment 3-19
[FN]
Expenditures for repairs and maintenance are charged to expense as
incurred.
Depletion on timber properties is computed on the basis of cost and
the estimated recoverable timber acquired.
When properties are retired or otherwise disposed of, the cost and
accumulated depreciation are eliminated from the asset and related
allowance accounts. Gains or losses are credited or charged to income as
incurred.
Internal Use Software
In 1998, the Company adopted Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". Internal use software is software that is acquired,
internally developed or modified solely to meet the entity's needs and for
which, during the software's development or modification, a plan does not
exist to market the software externally. Costs incurred to develop the
software during the application development stage, upgrades and
enhancements that provide additional functionality should be capitalized.
Adoption of SOP 98-1 did not have a significant impact on the Company's
financial position or results of operations.
Goodwill
Goodwill is amortized on a straight-line basis over fifteen to twenty-
five year periods. Amortization expense was $3,547,000 in 1998, $1,032,000
in 1997 and $20,000 in 1996. Accumulated amortization was $4,599,000 at
October 31, 1998 ($1,052,000 at October 31, 1997).
The Company's policy is to periodically review its goodwill and other
long-lived assets based upon the evaluation of such factors as the
occurrence of a significant adverse event or change in the environment in
which the business operates or if the expected future net cash flows
(undiscounted and without interest) would become less than the carrying
amount of the asset. An impairment loss would be recorded in the period
such determination is made based on the fair value of the related
businesses.
41
Item 8. Financial Statements and Supplementary Data (continued)
Financial Instruments
The carrying amounts of cash and cash equivalents, Canadian government
securities and long-term obligations approximate their fair values. The
carrying amounts of the interest rate swap agreements are zero at October
31, 1998 and $(13,000) at October 31, 1997. The fair values of the interest
rate swap agreements are $(7,020,000) at October 31, 1998 and $(514,000) at
October 31, 1997.
The fair values of the long-term obligations are estimated based on
current rates available to the Company for debt of the same remaining
maturities. The fair values of the interest rate swap agreements have been
determined by the counterparties.
The Company uses interest rate swaps for the purpose of hedging its
exposure to fluctuations in interest rates. The swaps meet the requirements
of designation and correlation for use of the accrual method of accounting.
Differentials in the swapped amounts are recorded as adjustments of the
underlying periodic cash flows that are being hedged.
Foreign Currency Translation
In accordance with SFAS No. 52, "Foreign Currency Translation", the
assets and liabilities denominated in foreign currency are translated into
U.S. dollars at the current rate of exchange existing at year-end and
revenues and expenses are translated at the average monthly exchange rates.
The cumulative translation adjustments, which represent the effects of
translating assets and liabilities of the Company's foreign operations, are
presented in the Consolidated Statements of Changes in Shareholders'
Equity. The transaction gains and losses included in income are
immaterial.
Earnings Per Share
During 1998, the Company adopted SFAS No. 128, "Earnings Per Share".
The provisions of SFAS No. 128 have been retroactively applied to 1997 and
1996.
The Company has two classes of common stock and, as such, applies the
"two-class method" of computing earnings per share as prescribed in SFAS
No. 128. In accordance with the statement, earnings are allocated first to
Class A and Class B Common Stock to the extent that dividends are actually
paid and the remainder allocated assuming all of the earnings for the
period have been distributed in the form of dividends.
42
Item 8. Financial Statements and Supplementary Data (continued)
The following is a reconciliation of the shares used to calculate
basic and diluted earnings per share:
For the year ended October 31,
1998 1997 1996
Class A Common Stock:
Basic earnings per share 10,905,692 10,878,233 10,873,172
Assumed conversion of stock
options 69,014 16,670 13,904
Diluted earnings per share 10,974,706 10,894,903 10,887,076
Class B Common Stock:
Basic and diluted earnings per
share 12,001,793 12,001,793 12,021,793
[FN]
There are 12,000 options that are antidilutive for 1998 (298,600 for
1997 and 164,100 for 1996).
Environmental Cleanup Costs
The Company expenses environmental expenditures related to existing
conditions resulting from past or current operations and from which no
current or future benefit is discernable. Expenditures which extend the
life of the related property or mitigate or prevent future environmental
contamination are capitalized. The Company determines its liability on a
site by site basis and records a liability at the time when it is probable
and can be reasonably estimated. The Company's estimated liability is
reduced to reflect the anticipated participation of other potentially
responsible parties in those instances where it is probable that such
parties are legally responsible and financially capable of paying their
respective shares of the relevant costs.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
1998 presentation.
Recent Accounting Standards
During 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
SFAS No. 130, which will not be effective until 1999 for the Company,
requires companies to present comprehensive income, which is comprised of
net income and other charges and credits to equity that are not the result
of transactions with the owners, in its financial statements. Currently,
the only item in addition to net income that would be included in
comprehensive income is the cumulative translation adjustment.
43
Item 8. Financial Statements and Supplementary Data (continued)
SFAS No. 131, which will not be effective until 1999 for the Company,
requires that reporting segments be redefined in terms of a company's
operating segments. The impact on the presentation of the Company's
segments has not yet been determined.
In February 1998, the FASB issued SFAS No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits - an amendment
to FASB Statements No. 87, No. 88 and No. 106", which is effective in 1999
for the Company. The statement requires the Company to revise disclosures
about pension and other postretirement benefit plans. SFAS No. 132 will not
affect the Company's results of operations, however, the impact on the
presentation of the Company's Notes to Consolidated Financial Statements
has not been determined.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective in 2000 for the
Company. The statement requires that all derivatives be recorded in the
balance sheet as either assets or liabilities and be measured at fair
value. The accounting for changes in fair value of a derivative depends on
the intended use of the derivative and the resulting designation. The
Company has not determined what impact SFAS No. 133 will have on the
Consolidated Financial Statements.
NOTE 2 - ACQUISITIONS AND DISPOSITIONS
On March 30, 1998, pursuant to the terms of a Stock Purchase Agreement
between the Company and Sonoco Products Company ("Sonoco"), the Company
acquired the industrial containers business of Sonoco by purchasing all of
the outstanding shares of KMI Continental Fibre Drum, Inc., a Delaware
corporation ("KMI"), Sonoco Plastic Drum, Inc., an Illinois corporation
("SPD"), GBC Holding Co., a Delaware corporation ("GBC Holding"), and Fibro
Tambor, S.A. de C.V., a Mexican corporation ("Fibro Tambor") and the
membership interest of Sonoco in Total Packaging Systems of Georgia, LLC, a
Delaware limited liability company ("TPS"). KMI, SPD, GBC Holding, Fibro
Tambor, TPS and their respective subsidiaries are in the business of
manufacturing and selling plastic and fibre drums principally in the United
States and Mexico and refurbishing and reconditioning plastic drums
principally in the United States and Mexico.
On March 30, 1998, the Company entered into an agreement with Sonoco
to acquire its intermediate bulk containers business, which the parties
intend to finalize as soon as receipt of necessary approvals are obtained.
Pending receipt of such approvals, the Company markets and sells
intermediate bulk containers for Sonoco under a distributorship agreement.
44
Item 8. Financial Statements and Supplementary Data (continued)
As consideration for the shares of KMI, SPD, GBC Holding and Fibro
Tambor and the membership interest of Sonoco in TPS, the Company paid
$185,395,000 in cash. In addition, the Company paid $1,218,000 in legal and
professional fees related to the acquisition. The acquisition was funded
through new long-term obligations (see Note 4).
The acquisition of the industrial containers business of Sonoco has
been accounted for using the purchase method of accounting and,
accordingly, the purchase price has been allocated to the assets purchased
and liabilities assumed based upon their fair values at the date of
acquisition. The fair values of the tangible assets acquired and the
liabilities assumed were $129,504,000 and $52,298,000 respectively. The
excess of the purchase price over the fair values of the net assets
acquired of $109,407,000 has been recorded as goodwill. The Company's
purchase price allocation has not been finalized with respect to certain
employee benefit and tax matters which could possibly reduce goodwill up to
$10 million. The goodwill is being amortized on a straight-line basis over
twenty-five years based on consideration regarding the age of the acquired
companies, their customers and the risk of obsolescence of their products.
The Consolidated Financial Statements include the operating results of
the acquired businesses from the date of acquisition. In addition, the
income resulting from the distributorship agreement relating to the
intermediate bulk containers business has been included in the Consolidated
Financial Statements since March 30, 1998. However, the income related to
the intermediate bulk containers business has not been reflected in the pro
forma figures prior to that time. The following summarized pro forma
(unaudited) information assumes the acquisition had occurred on November 1,
1996 (Dollars in thousands, except per share amounts):
For the year
ended October 31,
1998 1997
Net sales $871,969 $830,912
Net income $ 30,876 $ 15,425
Basic and diluted earnings per share:
Class A Common Stock $ 1.07 $ .54
Class B Common Stock $ 1.60 $ .80
[FN]
The above amounts reflect adjustments for interest expense related to the
debt issued for the purchase, amortization of goodwill and depreciation
expense on the revalued property, plant and equipment.
45
Item 8. Financial Statements and Supplementary Data (continued)
The pro forma information, as presented above, is not necessarily
indicative of the results which would have been obtained had the
transactions occurred at November 1, 1996, nor are they necessarily
indicative of future results.
In November 1996, the Company purchased the assets of Aero Box
Company, a corrugated container company, located in Michigan. In March
1997, the Company acquired the assets of two steel drum manufacturing
plants located in California and Ontario, Canada. In May 1997, the Company
purchased all of the outstanding common stock of Independent Container,
Inc., a corrugated container company with two locations in Kentucky and a
location in Indiana. In June 1997, the Company purchased all of the
outstanding common stock of Centralia Container, Inc., located in Illinois.
The prior year acquisitions have been accounted for using the purchase
method of accounting and, accordingly, the purchase price has been
allocated to the assets purchased and liabilities assumed based upon the
fair values at the date of acquisition. The excess of the purchase price
over the fair values of the net assets acquired has been recorded as
goodwill. The Consolidated Financial Statements include the operating
results of each business from the date of acquisition. Pro forma results
of operations have not been presented because the results of these
acquisitions were not significant to the Company.
In February 1997, the Company sold its injection molding plant in
Ohio. In addition, the Company sold its wood component facilities, which
manufactured door panels, wood moldings and window and door parts, with
locations in Kentucky, California, Washington and Oregon in August 1997.
The transactions resulted in a gain of $3.7 million which is included in
other income.
NOTE 3 - RESTRUCTURING COSTS
During the third quarter of 1998, the Company approved a plan to
consolidate some of its locations in order to improve operating
efficiencies and capabilities. The plan was the result of a study to
determine whether certain locations, either existing or newly acquired,
should be closed or relocated to a different facility. Eighteen existing
fibre drum, steel drum and corrugated container plants will be closed. As
a result, the Company recognized a pretax restructuring charge of
approximately $27.5 million, consisting of $20.9 million in employee
separation costs (approximately 500 employees) and $6.6 million in other
anticipated facility closing and disposition costs. The Company expects to
sell its owned facilities. As of October 31, 1998, the Company has paid
approximately $2.7 million consisting primarily of severance payments. The
Company expects the remaining liability of $24.8 million to be expended in
connection with the ongoing consolidation effort during 1999.
46
Item 8. Financial Statements and Supplementary Data (continued)
In addition, in connection with the consolidation plan, five locations
purchased as part of the industrial containers business of Sonoco (see Note
2) will also be closed. Accordingly, the Company recognized a $9.5 million
restructuring liability related to these locations. The liability
consisted of $6.1 million in employee separation costs (approximately 100
employees) and $3.4 million in other anticipated facility closing and
disposition costs. The Company expects to sell its owned facilities. As of
October 31, 1998, the Company has paid approximately $1.9 million
consisting primarily of severance payments. The Company believes the
remaining liability of $7.6 million will be expended in connection with the
ongoing consolidation during 1999.
During the fourth quarter of 1997, the Company adopted a plan to
consolidate its operations. This plan included the relocation of certain
key operating people to the corporate office. In addition, there was a
realignment of some of the administrative functions that were being
performed at the subsidiary and division offices which resulted in some
staff reductions. Finally, costs associated with the reduction of certain
support functions were incurred. As a result, a restructuring charge of
$6.2 million, consisting primarily of severance benefits, was recorded in
the results of operations. As of October 31, 1998, all expenditures
related to the charge have been made and the liability accordingly
eliminated.
NOTE 4 - LONG-TERM OBLIGATIONS
The Company's long-term obligations, which are primarily with banks,
include the following as of October 31 (Dollars in thousands):
1998 1997
Notes payable:
Fixed rate notes - 5.91% to 9.69%, due 1998 -
2015, secured by certain equipment, real
estate, inventory and receivables $ -- $ 1,558
Variable rate notes - LIBOR plus .25% to .49%
or Prime Rate plus 1%, due 1999 - 2004,
certain notes secured by equipment -- 35,544
Revolving credit agreement and lines of
credit:
Variable rate - tied to LIBOR or Prime Rate,
expiring in 2003 (in 2000 for 1997) 235,000 15,050
Total 235,000 52,152
Less: current portion -- 8,504
Long-term obligations $235,000 $43,648
47
Item 8. Financial Statements and Supplementary Data (continued)
On March 30, 1998, the Company entered into a credit agreement with
various financial institutions, as banks, and KeyBank National Association,
as agent, which provides a revolving credit facility of up to $325 million.
The Company is required to pay a facility fee each quarter equal to .025%
to .050% of the total commitment amount based upon the Company's leverage
ratio. As of October 31, 1998, the Company has borrowed $235 million
primarily to purchase the industrial containers business of Sonoco and to
consolidate all of the Company's other long-term borrowings. The costs
associated with consolidation of the Company's debt are not material to the
results of operations. The interest rate is either based on the prime rate
or LIBOR rate plus a calculated margin amount (.28% at October 31, 1998).
Interest resets on a quarterly basis. At October 31, 1998, the interest
rate is 5.50%. The revolving credit loans are due on March 31, 2003,
however, management intends to extend a portion of the debt beyond that
date.
At October 31, 1998, the Company has outstanding $6.8 million in
letters of credit under the credit agreement. The quarterly fee related to
these letters of credit is .03% of the outstanding amount plus a calculated
margin (.28% at October 31, 1998).
The revolving credit facility contains certain covenants. Under the
most restrictive of these covenants, the Company is required to maintain a
certain leverage ratio, sufficient coverage of interest expense and a
minimum net worth. In addition, the Company is limited with respect to
additional debt. Finally, there are certain non-financial covenants
including sales of assets, financial reporting, mergers and acquisitions,
investments, change in control and Employee Retirement Income Security Act
compliance.
During 1998, the Company entered into an interest rate swap agreement
with a notional amount of $140 million, expiring on March 30, 2008, which
periodically reduces through 2008. The Company entered into another swap
agreement during 1998 with a notional amount of $20 million, expiring on
October 31, 2001. The interest rate swaps were entered into to manage the
Company's exposure to its variable rate debt. Under the agreements, the
Company receives interest quarterly from the counterparty equal to the
LIBOR rate and pays interest quarterly to the counterparty at a fixed rate
of 6.15% and 5.22% for the $140 million and $20 million swap agreements,
respectively. The differentials to be currently paid or received under
these agreements are recorded as an adjustment to interest expense and are
included in interest receivable or payable. The adjustment to interest
expense resulting from the differencials was an increase of $348,000 during
1998.
48
Item 8. Financial Statements and Supplementary Data (continued)
During 1997, the Company entered into interest rate swap agreements
with aggregate notional amounts of $32.7 million without the exchange of
underlying principal. Under such agreements, the Company received interest
from the counterparties equal to amounts incurred under its existing
variable rate debt and paid interest to the counterparties at fixed rates
ranging from 6.43% to 7.39%. During 1998, all of these swap agreements
were terminated. The amounts paid by the Company to terminate these
agreements were immaterial to the Consolidated Financial Statements.
Annual maturities of long-term obligations are $235 million in 2003.
During 1998, the Company paid $11,500,000 of interest ($3,726,000 in
1997 and $862,000 in 1996) related to the long-term obligations. Interest
of $344,000 in 1998, $1,163,000 in 1997 and $569,000 in 1996 was
capitalized.
The Company has entered into non-cancelable operating leases for
buildings, trucks and computer equipment. The future minimum lease payments
for the non-cancelable operating leases are $5,164,000 in 1999, $4,312,000
in 2000, $3,890,000 in 2001, $2,589,000 in 2002, $1,864,000 in 2003 and
$2,762,000 thereafter. Rent expense was $8,615,000 in 1998, $5,684,000 in
1997 and $3,592,000 in 1996.
NOTE 5 - CAPITAL STOCK
Class A Common Stock is entitled to cumulative dividends of 1 cent a
share per year after which Class B Common Stock is entitled to non-
cumulative dividends up to 1/2 cent a share per year. Further distribution
in any year must be made in proportion of 1 cent a share for Class A Common
Stock to 1 1/2 cents a share for Class B Common Stock. The Class A Common
Stock shall have no voting power nor shall it be entitled to notice of
meetings of the shareholders, all rights to vote and all voting power being
vested exclusively in the Class B Common Stock unless four quarterly
cumulative dividends upon the Class A Common Stock are in arrears. There
is no cumulative voting.
NOTE 6 - STOCK OPTIONS
The Company has an Incentive Stock Option Plan ("Option Plan") which
provides the discretionary granting of incentive stock options to key
employees and non-statutory options for non-employees. The aggregate
number of the Company's Class A Common Stock which options may be granted
shall not exceed 1,000,000 shares. Under the terms of the Option Plan,
options are granted at exercise prices equal to the market value on the
date the options are granted and become exercisable two years after date of
grant. Options expire ten years after date of grant.
49
Item 8. Financial Statements and Supplementary Data (continued)
A Directors' Stock Option Plan ("Directors' Plan") which was adopted
in 1996, provides the granting of stock options to Directors who are not
employees of the Company. The aggregate number of the Company's Class A
Common Stock which options may be granted may not exceed 100,000 shares.
Under the terms of the Directors' Plan, options are granted at exercise
prices equal to the market value on the date options are granted and become
exercisable immediately. Options expire ten years after date of grant.
In 1998, 206,275 incentive stock options were granted with option
prices of $31.75 per share. Under the Directors' Plan, 12,000 options were
granted to outside directors with option prices of $36.53 per share.
In 1997, 136,500 incentive stock options were granted with option
prices of $30.00 per share. Under the Directors' Plan, 12,000 options were
granted to outside directors with option prices of $30.50 per share.
In 1996, 152,100 incentive stock options were granted with option
prices of $29.62 per share. Under the Directors' Plan, 12,000 options were
granted to outside directors with option prices of $30.00 per share.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for its stock option plans. If compensation cost would have been
determined based on the fair values at the date of grant under SFAS No.
123, "Accounting for Stock-Based Compensation", pro forma net income and
earnings per share would have been as follows (Dollars in thousands, except
per share amounts):
1998 1997 1996
Net income $31,718 $17,232 $42,534
Basic earnings per share:
Class A Common Stock $ 1.10 $ .60 $ 1.48
Class B Common Stock $ 1.64 $ .89 $ 2.20
Diluted earnings per share:
Class A Common Stock $ 1.10 $ .60 $ 1.47
Class B Common Stock $ 1.64 $ .89 $ 2.20
50
Item 8. Financial Statements and Supplementary Data (continued)
The fair value for each option is estimated on the date of grant using
the Black-Scholes option pricing model, as allowed under SFAS No. 123, with
the following assumptions:
1998 1997 1996
Dividend yield 1.36% 1.31% 1.16%
Volatility rate 22.00% 20.60% 29.20%
Risk-free interest rate 5.36% 6.29% 6.52%
Expected option life 6 years 6 years 6 years
The fair value of shares granted were $9.08, $9.03 and $10.95 at
October 31, 1998, 1997 and 1996, respectively. Stock option activity was
as follows (Shares in thousands):
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Beginning
balance 456 $28.26 374 $27.25 210 $25.38
Granted 218 32.01 148 30.04 164 29.62
Forfeited 6 29.63 38 27.11 -- --
Exercised 9 22.94 28 25.79 -- --
Expired -- -- -- -- -- --
Ending balance 659 $29.56 456 $28.26 374 $27.25
As of October 31, 1998, the outstanding stock options had exercise
prices ranging from $22.94 to $36.53 and a remaining weighted average
contractual life of 8.42 years.
There are 317,000 options which were exercisable at October 31, 1998
(181,000 options at October 31, 1997).
51
Item 8. Financial Statements and Supplementary Data (continued)
NOTE 7 - INCOME TAXES
Income tax expense is comprised as follows (Dollars in thousands):
State
U.S. and
Federal Foreign Local Total
1998:
Current $15,755 $ 2,768 $ 3,039 $21,562
Deferred 1,763 -- (842) 921
$17,518 $ 2,768 $ 2,197 $22,483
1997:
Current $ 3,617 $ 2,097 $ 1,607 $ 7,321
Deferred 4,087 (96) 107 4,098
$ 7,704 $ 2,001 $ 1,714 $11,419
1996:
Current $11,330 $ 3,075 $ 1,630 $16,035
Deferred 7,903 (59) 1,070 8,914
$19,233 $ 3,016 $ 2,700 $24,949
[FN]
Foreign income before income taxes amounted to $6,212,000 in 1998
($5,241,000 in 1997 and $7,729,000 in 1996).
The following is a reconciliation of the U.S. Federal statutory income
tax rate to the Company's effective tax rate:
1998 1997 1996
U.S. Federal statutory tax rate 35.0% 35.0% 35.0%
State and local taxes, net of
Federal tax benefit 2.6% 3.8% 3.6%
Other 2.9% (0.1%) (1.7%)
Effective income tax rate 40.5 % 38.7% 36.9%
52
Item 8. Financial Statements and Supplementary Data (continued)
Significant components of the Company's deferred tax assets and
liabilities are as follows at October 31 (Dollars in thousands):
1998 1997
Restructuring reserve $ 8,964 $ --
Other 4,391 5,729
Current deferred tax asset $13,355 $ 5,729
Current deferred tax liability $ -- $ 10
Book basis on acquired assets $10,108 $10,159
Postretirement benefit liability 8,237 --
Other 2,496 2,249
Long-term deferred tax asset $20,841 $12,408
Property, plant and equipment $41,896 $35,448
Intangibles 8,410 78
Timber condemnation 3,868 3,557
Other 3,079 3,065
Long-term deferred tax liability $57,253 $42,148
[FN]
At October 31, 1998 and 1997, the Company has provided deferred income
taxes on all of its undistributed Canadian earnings.
[FN]
During 1998, the Company paid $22,697,000 in income taxes ($13,334,000
in 1997 and $10,318,000 in 1996).
NOTE 8 - RETIREMENT PLANS
The Company has non-contributory defined benefit pension plans that
cover most of its employees. These plans include plans self-administered
by the Company along with Union administered multi-employer plans. The
self-administered hourly and Union plans' benefits are based primarily upon
years of service. The self-administered salaried plans' benefits are based
primarily on years of service and earnings. The Company contributes an
amount that is not less than the minimum funding nor more than the maximum
tax-deductible amount to these plans. The plans' assets consist of
unallocated insurance contracts, equity securities, government obligations
and the allowable amount of the Company's stock (127,752 shares of Class A
Common Stock and 80,355 shares of Class B Common Stock at October 31, 1998
and 1997).
53
Item 8. Financial Statements and Supplementary Data (continued)
The pension expense for the plans included the following (Dollars in
thousands):
1998 1997 1996
Service cost, benefits earned during
the year $ 2,956 $ 2,714 $ 2,648
Interest cost on projected benefit
obligation 4,584 4,548 4,277
Actual return on assets (3,280) (8,986) (6,404)
Net amortization (2,721) 3,974 1,759
1,539 2,250 2,280
Multi-employer and non-U.S. pension
expense 386 370 593
Total pension expense $ 1,925 $ 2,620 $ 2,873
[FN]
The range of weighted average discount rates and expected long-term
rates of return on plan assets used in the actuarial valuation was 7.0% -
9.0% for 1998, 1997 and 1996. The rates of compensation increases for
salaried employees used in the actuarial valuation range from 4.0% - 6.5%
for 1998, 1997 and 1996.
The following table sets forth the plans' funded status and amounts
recognized in the Consolidated Financial Statements (Dollars in thousands):
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
1998 1997 1998 1997
Actuarial present value of
benefit obligations:
Vested benefit obligation $13,697 $34,190 $44,478 $10,636
Accumulated benefit
obligation $13,824 $34,569 $44,872 $12,279
Projected benefit obligation $18,785 $46,246 $57,438 $12,279
Plan assets at fair value $23,376 $59,836 $51,610 $10,718
Plan assets greater than
(less than) projected
benefit obligation $ 4,591 $13,590 $(5,828) $(1,561)
Unrecognized net (gain) loss (1,361) (8,942) 4,620 641
Prior service cost not yet
recognized in net periodic
pension cost 312 6,096 9,617 2,788
Adjustment required to
Recognize minimum liability -- -- (3,422) (1,048)
Unrecognized net (asset)
obligation from transition (352) (7,345) (6,099) (2,381)
Prepaid pension cost
(liability) $ 3,190 $ 3,399 $(1,112) $(1,561)
54
Item 8. Financial Statements and Supplementary Data (continued)
During 1998 and 1997, the Company, in accordance with the provisions
of SFAS No. 87, "Employers' Accounting for Pensions", recorded the
"adjustment required to recognize minimum liability" in other long-term
liabilities. The amount was offset in other long-term assets by an equal
amount.
In addition to the defined benefit pension plans, the Company has
several voluntary 401(k) savings plans which cover eligible employees at
least 21 years of age with one year of service. For certain plans, the
Company matches 25% of each employee's contribution, up to a maximum of 5%
or 6% of base salary. Company contributions to the 401(k) plans were
$566,000 in 1998, $350,000 in 1997 and $234,000 in 1996.
NOTE 9 - POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
On March 30, 1998, the Company acquired the industrial containers
business of Sonoco. As part of this acquisition, the Company assumed an
obligation to reimburse Sonoco for their actual costs incurred in providing
the postretirement health care benefits to certain employees.
Contributions by the Company are limited to an aggregate annual payment of
$1,350,000 ($1,012,500 in 1998) for eligible employees at the date of
purchase. Further, the Company is responsible for the cost of certain union
hourly employees who were not eligible at the date of closing. The Company
intends to fund these benefits from operations.
Cost for the postretirement benefits include the following components
(Dollars in thousands):
1998
Service cost $ 380
Interest cost 1,133
$1,513
The following table summarizes the postretirement liability (Dollars
in thousands):
1998
Accumulated postretirement
benefit obligations:
Retired participants $(19,378)
Other participants (7,879)
(27,257)
Unrecognized net loss 1,703
Postretirement benefit liability $(25,554)
55
Item 8. Financial Statements and Supplementary Data (continued)
The measurement assumes a discount rate of 6.75%. The health care
cost trend rates on gross eligible charges are as follows:
Medical Dental
Current trend rate 8.75% 6.75%
Ultimate trend rate 4.75% 4.75%
A one percentage-point increase in the assumed health care cost trend
rates would increase the accumulated postretirement benefit liability as of
October 31, 1998 by approximately $57,000 and the total of the service and
interest cost components of net postretirement health care cost for the
year then ended by approximately $122,000.
NOTE 10 - CONTINGENT LIABILITIES
Various lawsuits, claims and proceedings have been or may be
instituted or asserted against the Company, including those pertaining to
environmental, product liability, safety and health matters. While the
amounts claimed may be substantial, the ultimate liability cannot now be
determined because of the considerable uncertainties that exist.
Therefore, it is possible that results of operations or liquidity in a
particular period could be materially affected by certain contingencies.
However, based upon the facts currently available, management believes that
the disposition of matters that are pending or asserted will not have a
materially adverse affect on the financial position of the Company.
NOTE 11 - INDUSTRY SEGEMENTS
The Company operates in two industry segments, industrial shipping
containers and materials ("Industrial Shipping Containers") and
containerboard and related products ("Containerboard").
Operations in the Industrial Shipping Containers segment involve the
production and sale of fibre, steel and plastic drums, multiwall bags and
miscellaneous items. These products are manufactured and principally sold
throughout the United States, Canada and Mexico.
Operations in the Containerboard segment involve the production and
sale of containerboard, both virgin and recycled, and related corrugated
products including corrugated sheets and corrugated containers. The
products are manufactured and sold in the United States and Canada.
In computing operating profit for the two industry segments, gain on
timber sales, interest expense, other income and expense, gains on
disposals of certain facilities and income taxes have not been allocated to
such segments. Furthermore, the restructuring costs (see Note 3) have not
been allocated to the separate segments. These amounts, excluding income
taxes, comprise "general corporate other income and expense, net".
56
Item 8. Financial Statements and Supplementary Data (continued)
Each segments' operating assets are those assets used in the
manufacture and sale of Industrial Shipping Containers or Containerboard.
Corporate assets are principally cash and cash equivalents, timber
properties, corporate facilities and other.
The following segment information is presented for the three years
ended October 31, 1998, except as to asset information which is as of
October 31, 1998, 1997 and 1996 (Dollars in thousands):
1998 1997 1996
Net sales:
Industrial Shipping Containers $444,130 $333,005 $322,330
Containerboard 357,001 315,979 315,038
Total $801,131 $648,984 $637,368
Operating profit:
Industrial Shipping Containers $ 26,928 $ 10,687 $ 13,533
Containerboard 40,972 2,480 40,129
Total segment 67,900 13,167 53,662
General corporate other income
and expense, net 15,148 22,523 14,034
Restructuring costs 27,461 6,185 --
Income before income taxes 55,587 29,505 67,696
Income taxes 22,483 11,419 24,949
Net income $ 33,104 $ 18,086 $ 42,747
Identifiable assets:
Industrial Shipping Containers $439,614 $175,980 $166,235
Containerboard 324,052 309,373 290,009
Total segment 763,666 485,353 456,244
Corporate 65,697 64,736 56,094
Total $829,363 $550,089 $512,338
57
Item 8. Financial Statements and Supplementary Data (continued)
1998 1997 1996
Depreciation expense:
Industrial Shipping Containers $ 16,092 $ 11,971 $ 11,750
Containerboard 19,305 18,371 14,509
Total segment 35,397 30,342 26,259
Corporate 188 318 89
Total $ 35,585 $ 30,660 $ 26,348
Property additions:
Industrial Shipping Containers $ 22,046 $ 3,843 $ 16,588
Containerboard 8,708 22,923 56,160
Total segment 30,754 26,766 72,748
Corporate assets 7,339 9,427 1,647
Total $ 38,093 $ 36,193 $ 74,395
NOTE 12 - SUBSEQUENT EVENTS
CorrChoice Joint Venture:
On November 1, 1998, the Company entered into a Joint Venture
Agreement to form CorrChoice, Inc. ("CorrChoice"). The Joint Venture
Agreement provides for the consolidation into CorrChoice of three sheet
feeder plants of Michigan Packaging Company ("Michigan Packaging"), a
wholly-owned subsidiary of the Company, and three sheet feeder plants of
Ohio Packaging Corporation and its subsidiaries ("Ohio Packaging").
Pursuant to the terms of the Joint Venture Agreement, the Company
contributed all of its stock of Michigan Packaging and Ohio Packaging in
exchange for a 63.24% ownership interest in CorrChoice and the minority
interest contributed all of its stock of Ohio Packaging in exchange for a
36.76% ownership interest in CorrChoice. The ownership percentages of the
Company and minority interest in CorrChoice were determined by an appraisal
of Michigan Packaging and Ohio Packaging performed by an independent third
party.
The three Michigan Packaging plants are located in Mason, Michigan,
Grand Rapids, Michigan and Concord, North Carolina. The three Ohio
Packaging plants are located in Massillon, Ohio, Louisville, Kentucky and
Cincinnati, Ohio. In addition to these locations, CorrChoice plans to
establish a sheet feeder plant in the Atlanta, Georgia area.
58
Item 8. Financial Statements and Supplementary Data (continued)
Prior to the formation of the joint venture, the Company accounted for
its investment in Ohio Packaging's non-voting stock under the cost method
of accounting since it had no significant influence over the operations of
Ohio Packaging. However, as a result of the Company's controlling interest
in the joint venture effective November 1, 1998, the results of which will
be consolidated, generally accepted accounting principles require the
Company to retroactively adjust the financial statements of prior years
using the equity method of accounting. The prior year adjustments will be
a $4.1 million, $3.5 million and $3.5 million increase to net income during
1998, 1997 and 1996, respectively, and will be reflected in all future
reports. As a result of the cumulative adjustments, the Company's
investment will be recorded as $49.1 million as of October 31, 1998. Based
on independent appraisals, as discussed above, the fair value of this
investment is $99.2 million.
As discussed above, the Company will include the results of CorrChoice
in its Consolidated Financial Statements subsequent to November 1, 1998.
The following summarized pro forma (unaudited) information assumes the
joint venture had occurred on November 1, 1997 (Dollars in thousands,
except per share amounts):
1998
Net sales $895,723
Net income $ 36,169
Basic earnings per share:
Class A Common Stock $ 1.26
Class B Common Stock $ 1.87
Diluted earnings per share:
Class A Common Stock $ 1.25
Class B Common Stock $ 1.87
[FN]
The pro forma information, as presented above, is not necessarily
indicative of the results which would have been obtained had the
transactions occurred at November 1, 1997, nor are they necessarily
indicative of future results.
Abzac Joint Venture:
During December 1998, the Company and Abzac s.a., a privately held
company in France ("Abzac"), entered into a letter of intent for the
exchange of the Company's spiral core manufacturing assets for a 49% equity
interest in Abzac's fibre drum business. The Company manufactures spiral
cores at three of its Canadian locations. Abzac, at three of its locations,
manufactures fibre drums in France. The transaction is subject to due
diligence and is anticipated to be completed during the third quarter of
1999.
59
Item 8. Financial Statements and Supplementary Data (continued)
REPORT OF MANAGEMENT'S RESPONSIBILITIES
To the Shareholders of
Greif Bros. Corporation
The Company's management is responsible for the financial and
operating information included in this Annual Report to Shareholders,
including the Consolidated Financial Statements of Greif Bros. Corporation
and its subsidiaries. These statements were prepared in accordance with
generally accepted accounting principles and, as such, include certain
estimates and judgments made by management.
The system of internal accounting control, which is designed to
provide reasonable assurance as to the integrity and reliability of
financial reporting, is established and maintained by the Company's
management. This system is continually reviewed by the internal auditors
of the Company. In addition, PricewaterhouseCoopers LLP, an independent
accounting firm, audits the financial statements of Greif Bros. Corporation
and its subsidiaries and considers the internal control structure of the
Company in planning and performing its audit. The Audit Committee of the
Board of Directors meets periodically with the internal auditors and
independent accountants to discuss the internal control structure and the
results of their audits.
/s/ Michael J. Gasser /s/ Joseph W. Reed
Michael J. Gasser Joseph W. Reed
Chairman and Chief Executive Chief Financial Officer
Officer and Secretary
60
Item 8. Financial Statements and Supplementary Data (continued)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the
Board of Directors of
Greif Bros. Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of changes in shareholders'
equity and of cash flows present fairly, in all material respects, the
financial position of Greif Bros. Corporation and its subsidiaries at
October 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended October 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP Columbus, Ohio
December 4, 1998
61
Item 8. Financial Statements and Supplementary Data (continued)
QUARTERLY FINANCIAL DATA (Unaudited)
The quarterly results of operations for fiscal 1998 and 1997 are shown
below (Dollars in thousands, except per share amounts):
Quarter Ended,
Jan. 31, Apr. 30, July 31, Oct. 31,
1998 1998 1998 1998
Net sales $169,697 $191,269 $218,631 $221,534
Gross profit $ 31,520 $ 37,637 $ 38,382 $ 48,700
Net income (loss) $ 9,616 $ 12,592 $ (4,467) $ 15,363
Earnings per share:
Basic:
Class A Common Stock $ .34 $ .44 $ (.15) $ .53
Class B Common Stock $ .50 $ .65 $ (.23) $ .80
Diluted:
Class A Common Stock $ .34 $ .43 $ (.15) $ .53
Class B Common Stock $ .50 $ .65 $ (.23) $ .80
Earnings per share were
calculated using the
following number of shares:
Basic:
Class A Common Stock 10,901,962 10,904,755 10,906,582 10,909,468
Class B Common Stock 12,001,793 12,001,793 12,001,793 12,001,793
Diluted:
Class A Common Stock 10,950,796 10,977,776 10,906,582 10,957,745
Class B Common Stock 12,001,793 12,001,793 12,001,793 12,001,793
62
Item 8. Financial Statements and Supplementary Data (concluded)
Quarter Ended,
Jan. 31, Apr. 30, July 31, Oct. 31,
1997 1997 1997 1997
Net sales $152,370 $152,529 $167,062 $177,023
Gross profit $ 21,041 $ 17,608 $ 22,193 $ 25,977
Net income $ 4,485 $ 3,580 $ 4,682 $ 5,339
Earnings per share:
Basic:
Class A Common Stock $ .16 $ .12 $ .16 $ .18
Class B Common Stock $ .23 $ .19 $ .24 $ .28
Diluted:
Class A Common Stock $ .16 $ .12 $ .16 $ .18
Class B Common Stock $ .23 $ .19 $ .24 $ .28
Earnings per share were
calculated using the
following number of shares:
Basic:
Class A Common Stock 10,873,172 10,873,172 10,874,038 10,892,550
Class B Common Stock 12,001,793 12,001,793 12,001,793 12,001,793
Diluted:
Class A Common Stock 10,889,792 10,886,060 10,883,518 10,925,198
Class B Common Stock 12,001,793 12,001,793 12,001,793 12,001,793
Prior quarter earnings per share amounts have been restated to reflect
the adoption of SFAS No. 128 (see Note 1 to the Consolidated Financial
Statements). The earnings per share were reported as $.39 and $.44 for the
Class A and Class B Common Stock, respectively, for the quarter ended
January 31, 1998, $.52 and $.58 for the Class A and Class B Common Stock,
respectively, for the quarter ended April 30, 1998 and $(.23) and $(.17)
for the Class A and Class B Common Stock, respectively, for the quarter
ended July 31, 1998. The amounts have been adjusted to the amounts reported
above to reflect the use of the "two-class method", as defined by SFAS No.
128, "Earnings Per Share".
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
There has not been a change in the Company's principal independent
accountants and there were no matters of disagreement on accounting and
financial disclosure.
63
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to Directors of the Company and disclosures
pursuant to Item 405 of Regulation S-K is incorporated by reference to the
Registrant's Proxy Statement, which Proxy Statement will be filed within
120 days of October 31, 1998. Information regarding the executive officers
of the Registrant may be found under the caption "Executive Officers of the
Company" in Part I, and is also incorporated by reference into this Item
10.
Item 11. Executive Compensation
Information with respect to Executive Compensation is incorporated
herein by reference to the Registrant's Proxy Statement, which Proxy
Statement will be filed within 120 days of October 31, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information with respect to Security Ownership of Certain Beneficial
Owners and Management is incorporated herein by reference to the
Registrant's Proxy Statement, which Proxy Statement will be filed within
120 days of October 31, 1998.
Item 13. Certain Relationships and Related Transactions
Information with respect to Certain Relationships and Related
Transactions is incorporated herein by reference to the Registrant's Proxy
Statement, which Proxy Statement will be filed within 120 days of October
31, 1998.
64
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K
(a) The following documents are filed as part of this Report:
Page
(1) Financial Statements:
Consolidated Statements of Income for the three
years ended October 31, 1998 33
Consolidated Balance Sheets at October 31,
1998 and 1997 34-35
Consolidated Statements of Cash Flows
for the three years ended October 31, 1998 36
Consolidated Statements of Changes in
Shareholders' Equity for the three years
ended October 31, 1998 37
Notes to Consolidated Financial Statements 38-58
Report of Management's Responsibilities 59
Report of Independent Accountants 60
Quarterly Financial Data (Unaudited) 61-62
(2) Financial Statement Schedules:
Report of Independent Accountants on
Financial Statement Schedules 70
Consolidated Valuation and Qualifying Accounts
and Reserves (Schedule II) 71
65
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K (continued)
(3) Exhibits:
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
2(a) Stock Purchase Agreement Current Report on Form 8-K dated
dated March 30, 1998, April 14, 1998, File No. 1-566
between Greif Bros. (see Exhibit 2 therein).
Corporation and Sonoco
Products Company.
2(b) Joint Venture Agreement Current Report on Form 8-K dated
dated as of November 1, November 13, 1998, File No. 1-566
1998, among CorrChoice, (see Ehibit 2 therein).
Inc., Greif Bros.
Corporation, Geoffrey A.
Jollay and R. Dean Jollay,
and John J. McLaughlin.
3(a) Amended and Restated Annual Report on Form 10-K for
Certificate of Incorporation the fiscal year ended October 31,
of Greif Bros. Corporation. 1997, File No. 1-566 (see Exhibit
3(a) therein).
3(b) Amended and Restated By-Laws Annual Report on Form 10-K for
of Greif Bros. Corporation. the fiscal year ended October 31,
1997, File No. 1-566 (see Exhibit
3(b) therein).
3(c) Amendment to Amended and Included herein.
Restated By-Laws of Greif
Bros. Corporation.
10(a) Greif Bros. Corporation 1996 Registration Statement on Form S-
Directors Stock Option Plan. 8, File No. 333-26977 (see
Exhibit 4(b) therein).
10(b) Greif Bros. Corporation Annual Report on Form 10-K for
Incentive Stock Option Plan, fiscal year ended October 31,
as Amended and Restated. 1997, File No. 1-566 (see Exhibit
10(b) therein).
10(c) Greif Bros. Corporation Included herein.
Directors Deferred
Compensation Plan.
10(d) Employment Agreement between Included herein.
Michael J. Gasser and Greif
Bros. Corporation.
66
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K (continued)
If Incorporated be Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
10(e) Employment Agreement between Included herein.
William B. Sparks and Greif
Bros. Corporation.
10(f) Employment Agreement, as Included herein.
amended, between Charles R.
Chandler and Greif Bros.
Corporation.
10(g) Employment Agreement, as Included herein.
amended, between Joseph W.
Reed and Greif Bros.
Corporation.
10(h) Credit Agreement dated as of Current Report on Form 8-K for
March 30, 1998, among Greif April 14, 1998, File No. 1-566
Bros. Corporation, as (see Exhibit 99(b) therein).
Borrower, Various Financial
Institutions, as Banks, and
KeyBank National
Association, As Agent.
21 Subsidiaries of the Contained herein.
Registrant.
23 Consent of Contained herein.
PriceWaterhouseCoopers LLP.
24(a) Powers of Attorney for Annual Report on Form 10-K for
Michael J. Gasser, Charles the fiscal year ended October 31,
R. Chandler, Michael H. 1997, File No. 1-566 (see Exhibit
Dempsey, Naomi C. Dempsey, 24(a) therein).
Daniel J. Gunsett, Robert C.
Macauley, David J. Olderman,
William B. Sparks, Jr., and
J Maurice Struchen.
27 Financial Data Schedule Contained herein.
67
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(concluded)
(b) Reports on Form 8-K
(1) No reports on Form 8-K have been filed during
the last quarter of fiscal 1998.
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
The individual financial statements of the Registrant have been
omitted since the Registrant is primarily an operating company and all
subsidiaries included in the consolidated financial statements, in the
aggregate, do not have minority equity interests and/or indebtedness to any
person other than the Registrant or its consolidated subsidiaries in
amounts which exceed 5% of total consolidated assets at October 31, 1998.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Greif Bros. Corporation
(Registrant)
Date January 25, 1999 By /s/ Michael J. Gasser
Michael J. Gasser
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Michael J. Gasser /s/ Joseph W. Reed
Michael J. Gasser Joseph W. Reed
Chairman of the Board of Directors Chief Financial Officer and
Chief Executive Officer Secretary
(principal executive officer) (principal financial officer)
/s/ John K. Dieker Charles R. Chandler *
John K. Dieker Charles R. Chandler
Corporate Controller Member of the Board of Directors
(principal accounting officer)
Michael H. Dempsey * Naomi C. Dempsey *
Michael H. Dempsey Naomi C. Dempsey
Member of the Board of Directors Member of the Board of Directors
Daniel J. Gunsett * Robert C. Macauley *
Daniel J. Gunsett Robert C. Macauley
Member of the Board of Directors Member of the Board of Directors
David J. Olderman * William B. Sparks, Jr. *
David J. Olderman William B. Sparks, Jr.
Member of the Board of Directors Member of the Board of Directors
J Maurice Struchen *
J Maurice Struchen
Member of the Board of Directors
[Signatures continued on the next page]
69
SIGNATURES (concluded)
* The undersigned, Michael J. Gasser, by signing his name hereto, does
hereby execute this Annual Report on Form 10-K on behalf of each of the
above-named persons pursuant to powers of attorney duly executed by such
persons and filed as an exhibit to this Annual Report on Form 10-K.
By /s/ Michael J. Gasser
Michael J. Gasser
Chairman of the Board of Directors
Chief Executive Officer
Each of the above signatures is affixed as of January 25, 1999.
70
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of Greif Bros. Corporation
Our audits of the consolidated financial statements referred to in our
report dated December 4, 1998, appearing on page 60 of this Form 10-K also
included an audit of the Financial Statement Schedules listed in Item
14(a)(2) of this Form 10-K. In our opinion, these Financial Statement
Schedules present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated
financial statements.
/s/ PricewaterhouseCoopers LLP Columbus, Ohio
December 4, 1998
71
SCHEDULE II
GREIF BROS. CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN $000)
Charged Charged Balance
Balance at to to at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
Year ended
October 31, 1996:
Reserves deducted from
applicable assets:
For doubtful items-
trade accounts
receivables $ 789 $201 $22 B $186 C $ 826
For doubtful items-
other notes and
accounts receivable 697 -0- -0- -0- 697
Total reserves
deducted from
applicable assets $1,486 $201 $22 $186 $1,523
Year ended
October 31, 1997:
Reserves deducted from
applicable assets:
For doubtful items-
trade accounts
receivables $ 826 $431 $11 B $421 C $847
For doubtful items-
other notes and
accounts receivable 697 -0- -0- -0- 697
Total reserves deducted
from applicable
assets $1,523 $431 $11 $421 $1,544
Year ended
October 31, 1998:
Reserves deducted from
applicable assets:
For doubtful items-
trade accounts
receivables $1,652 A $1,489 $142 B $365 C $2,918
For doubtful items-
other notes and
accounts
receivable 697 -0- -0- -0- 697
Total reserves
deducted from
applicable assets $2,349 $1,489 $142 $365 $3,615
[FN]
(A) Includes an $805,000 adjustment related to the industrial containers
business of Sonoco Products Company which was acquired on March 30, 1998.
[FN]
(B) Collections of accounts previously written-off.
[FN]
(C) Accounts written-off.
72
EXHIBIT INDEX
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
2(a) Stock Purchase Agreement Current Report on Form 8-K dated
dated March 30, 1998, April 14, 1998, File No. 1-566
between Greif Bros. (see Exhibit 2 therein).
Corporation and Sonoco
Products Company.
2(b) Joint Venture Agreement Current Report on Form 8-K dated
dated as of November 1, November 13, 1998, File No. 1-566
1998, among CorrChoice, (see Exhibit 2 therein).
Inc., Greif Bros.
Corporation, Geoffrey A.
Jollay and R. Dean Jollay,
and John J. McLaughlin.
3(a) Amended and Restated Annual Report on Form 10-K for
Certificate of Incorporation the fiscal year ended October 31,
of Greif Bros. Corporation. 1997, File No. 1-566 (see Exhibit
3(b) therein).
3(b) Amended and Restated By-Laws Annual Report on Form 10-K for
of Greif Bros. Corporation. the fiscal year ended October 31,
1997, File No. 1-566 (see Exhibit
3(b) therein).
3(c) Amendment to Amended and Included herein.
Restated By-Laws of Greif
Bros. Corporation.
10(a) Greif Bros. Corporation 1996 Registration Statement on Form S-
Directors Stock Option Plan. 8, File No. 333-26977 (see
Exhibit 4(b) therein).
10(b) Greif Bros. Corporation Annual Report on Form 10-K for
Incentive Stock Option Plan, the fiscal year ended October 31,
as Amended and Restated. 1997, File No. 1-566 (see Exhibit
10(b) therein).
10(c) Greif Bros. Corporation Included herein.
Directors Deferred
Compensation Plan.
10(d) Employment Agreement between Included herein.
Michael J. Gasser and Greif
Bros. Corporation.
73
EXHIBIT INDEX (concluded)
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
10(e) Employment Agreement between Included herein.
William B. Sparks and Greif
Bros. Corporation.
10(f) Employment Agreement, as Included herein.
amended, between Charles R.
Chandler and Greif Bros.
Corporation
10(g) Employment Agreement, as Included herein.
amended, between Joseph W.
Reed and Greif Bros.
Corporation.
10(h) Credit Agreement dated as of Current Report on Form 8-K dated
March 30, 1998, among Greif April 14, 1998, File No. 1-566
Bros. Corporation, as (see Exhibit 99(b) therein).
Borrower, Various Financial
Institutions, as Banks, and
KeyBank National
Association, As Agent.
21 Subsidiaries of the Contained herein.
Registrant.
23 Consent of Contained herein.
PriceWaterhouseCoopers LLP.
24(a) Powers of Attorney for Annual Report on Form 10-K for
Michael J. Gasser, Charles the fiscal year ended october 31,
R. Chandler, Michael H. 1997, File No. 1-566 (see Ehxibit
Dempsey, Naomi C. Dempsey, 24(a) therein).
Daniel J. Gunsett, Robert C.
Macauley, David J. Olderman,
William B. Sparks, Jr., and
J Maurice Struchen.
27 Financial Data Schedule Contained herein.