Back to GetFilings.com
1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------- -------
Commission file number 0-2604
GENERAL BINDING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-0887470
- -------------------------------------------------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
ONE GBC PLAZA, NORTHBROOK, ILLINOIS 60062
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 272-3700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Name of each exchange
Title of each class on which registered
- -------------------------------------------------------------------------------
COMMON STOCK, $.125 PAR VALUE NASDAQ
CLASS B COMMON STOCK, $.125 PAR VALUE --
SENIOR SUBORDINATED NOTES, DUE 2008 --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
As of February 26, 1999, the aggregate market value of the Common Stock (based
upon the average bid and asked prices of these shares on the Over-The-Counter
Market - NASDAQ) of the company held by nonaffiliates was approximately
$134,733,892. (Estimated solely for the purpose of completing this cover page.)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS FEBRUARY 26, 1999
Common Stock, $.125 par value 13,337,698
Class B Common Stock, $.125 par value 2,398,275
DOCUMENTS INCORPORATED BY REFERENCE WHERE INCORPORATED
Definitive Proxy Statement for the Annual
Meeting of Stockholders to be held May 4, 1999. Parts III and IV
2
16
TABLE OF CONTENTS GBC AND SUBSIDIARIES
===============================================================================
CONTENTS AND CROSS REFERENCE SHEET
FURNISHED PURSUANT TO GENERAL INSTRUCTION G(4) OF FORM 10-K PAGE
PART I
Item 1. Business.........................................................17
Item 2. Properties.......................................................20
Item 3. Legal Proceedings................................................20
Item 4. Submission of Matters to a Vote of Security Holders..............20
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...........................................21
Item 6. Selected Financial Data..........................................21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................22
Item 8. Financial Statements and Supplementary Data......................29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...........................55
PART III
Item 10. Directors and Executive Officers of the Registrant...............55
Item 11. Executive Compensation...........................................55
Item 12. Security Ownership of Certain Beneficial Owners and Management...55
Item 13. Certain Relationships and Related Transactions...................55
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K...................................................55
Signatures...................................................................56
GBC 1998 Annual Report
3
17
PART I GBC AND SUBSIDIARIES
===============================================================================
- -------------------------------------------------------------------------------
ITEM 1. BUSINESS
- -------------------------------------------------------------------------------
GENERAL DEVELOPMENT AND DESCRIPTION
OF BUSINESS AND SEGMENT INFORMATION
General Binding Corporation, incorporated in 1947, and its subsidiaries (herein
referred to as "GBC" or the "Company") are engaged in the design, manufacture
and distribution of branded office equipment, related supplies and thermal
laminating films. GBC is organized into three primary business groups, with each
group comprised of similar products and services. The Office Products Group's
major products include desktop binding and laminating equipment and supplies,
document shredders, visual communications products and desktop accessories. The
Films Group's primary products include thermal films, mid-range and commercial
high-speed laminators and large-format digital print laminators. The Document
Finishing Group's major products include binding and punching equipment and
related supplies, custom binders and folders, and maintenance and repair
services. These products are either manufactured in one of GBC's 19 plants
located throughout the world or sourced from third parties. GBC products are
sold through a network of direct sales and telemarketing personnel, office
product superstores, wholesalers, contract/commercial stationers and other
retail dealers.
The following table summarizes the percentage of revenue derived from the sales
of office equipment and supplies and service for the last three fiscal years:
1998 1997 1996
===============================================================================
Office equipment (1) 48% 45% 29%
Related supplies and service (1) (2) 52% 55% 71%
===============================================================================
(1) Financial information by business group and geographical area is included in
Note 10 to the Consolidated Financial Statements.
(2) Includes ringmetal business for 1996, 1997 and the first half of 1998.
Acquisitions
GBC has made significant acquisitions during the time period covered by this
filing. For additional information, see Note 12 to the Consolidated Financial
Statements and the Acquisitions and Other Business Combinations in Management's
Discussion and Analysis.
Competition
GBC's products and services are sold in highly competitive markets. The Company
believes that the principal points of competition in its markets are product and
service quality, price, design and engineering capabilities, product
development, conformity to customer specifications, timeliness and completeness
of delivery and quality of post-sale support. Competitive conditions often
require GBC to match or better competitors' prices to retain business or market
share. Maintaining and improving GBC's competitive position will require
continued investment by the Company in manufacturing, quality standards,
marketing and customer service and support. There can be no assurance that GBC
will have sufficient resources to continue to make such investments or that it
will be successful in maintaining its competitive position. There are no
significant barriers to entry into the markets for many of GBC's products and
services. Certain of GBC's current and potential competitors may have greater
financial, marketing and research and development resources than GBC.
Dependence on Major Customers
No single customer would have accounted for more than 10% of GBC's net sales in
1998. GBC does however, have certain major customers. The loss of, or major
reduction in business from, one or more of GBC's major customers could have a
material adverse effect on GBC's financial position or results of operations.
Order Backlog and Seasonal Variations
GBC's order backlog is not considered a material factor in the Company's
business, nor is the business seasonal in any material respect.
GBC 1998 Annual Report
4
18
PART I GBC AND SUBSIDIARIES
===============================================================================
Fluctuations in Raw Material Prices
The primary materials used in the manufacturing of many of GBC's products are
polyester and polypropylene substrates, wood and aluminum. These materials are
available from a number of suppliers, and GBC is not dependent upon any single
supplier for any of these materials. In general, GBC's gross profit is affected
from time to time by fluctuations in the prices of these materials because
competitive markets for its products make it difficult to pass through price
increases to customers. Based on its experience, GBC believes that adequate
quantities of the aforementioned materials will be available in adequate
supplies in the foreseeable future. However, there can be no assurance that such
materials will continue to be available in adequate supply in the future or that
shortages in supply will not result in price increases that could have a
material adverse effect on GBC's financial position or results of operations.
Dependence on Key Personnel
GBC is dependent on the continued services of certain members of its senior
management team. Although GBC believes it could replace key personnel in an
orderly fashion should the need arise, the loss of, and inability to attract
replacements for any of such key personnel could have a material adverse effect
on GBC's financial position or results of operations.
Dependence on Certain
Manufacturing Sources
GBC relies on GMP Co. Ltd. ("GMP"), in which the Company holds a 33% equity
interest, as its sole supplier of many of the laminating machines it
distributes. GBC has a long-term supply contract with GMP, however, there can be
no assurance that GMP will be able to perform any or all of its contractual
obligations to the Company. GMP's equipment manufacturing facility is located in
the Republic of Korea and its ability to fulfill GBC's requirements for
laminating machines could be affected by economic, political and governmental
conditions in that country and in other parts of Asia. Although GBC believes
alternative suppliers could be found, changing suppliers for the laminating
machines manufactured by GMP would require lead times of a duration that could
result in a disruption of supply. There can be no assurance that GBC would be
able to find an alternative supplier or suppliers on a timely basis or on
favorable terms. Any material disruption in GBC's ability to deliver orders for
laminating machines on a timely basis could have a material adverse effect on
GBC's reputation with customers and its financial position or results of
operations.
Risks Associated with
International Operations
GBC has significant operations outside the United States. Approximately 31% of
GBC's 1998 revenues were from international sales. GBC's international
operations may be significantly affected by economic, political and governmental
conditions in the countries where GBC has manufacturing facilities or where its
products are sold. In addition, changes in economic or political conditions in
any of the countries in which GBC operates could result in unfavorable exchange
rates, new or additional currency or exchange controls, other restrictions being
imposed on the operations of GBC or expropriation of the Company's assets. GBC's
operations and financial position may also be adversely affected by significant
fluctuations in the value of the United States dollar relative to international
currencies, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
GBC 1998 Annual Report
5
19
PART I GBC AND SUBSIDIARIES
===============================================================================
Patents and Trademarks
Many of the equipment and supply products manufactured and/or sold by GBC and
certain application methods related to such products are covered by United
States and foreign patents. Although the patents owned by GBC are highly
important to its business, GBC does not consider its business to be dependent on
any of those patents.
The Company has registered the GBC, Quartet, Ibico, Pro-Tech, Shredmaster,
Sickinger, VeloBind and Bates trademarks in the United States and numerous
foreign countries and considers those trademarks material to its business. GBC
has also registered numerous other important trademarks related to specific
products in the United States and many foreign countries, however, GBC does not
consider its business dependent on any of those trademarks.
Environmental Matters
GBC and its operations, both in the U.S. and abroad, are subject to national,
state, provincial and/or local laws and regulations that impose limitations and
prohibitions on the discharge and emission of, and establish standards for the
use, disposal, and management of, certain materials and waste, and impose
liability for the costs of investigating and cleaning up, and certain damages
resulting from present and past spills, disposals, or other releases of
hazardous substances or materials (collectively, "Environmental Laws").
Environmental Laws can be complex and may change often, capital and operating
expenses to comply can be significant, and violations may result in substantial
fines and penalties. In addition, Environmental Laws such as the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA," also known as
"Superfund"), in the United States, impose liability on several grounds for the
investigation and cleanup of contaminated soil, ground water, and buildings, and
for damages to natural resources, at a wide range of properties. For example,
contamination at properties formerly owned or operated by GBC as well as at
properties the Company currently owns and operates, and properties to which
hazardous substances were sent by GBC, may result in liability for the Company
under Environmental Laws. As a manufacturer, GBC has an inherent risk of
liability under Environmental Laws both with respect to ongoing operations and
with respect to contamination that may have occurred in the past on its
properties or as a result of its operations. There can be no assurance that the
costs of complying with Environmental Laws, any claims concerning noncompliance,
or liability with respect to contamination will not in the future have a
material adverse effect on the Company's financial position or results of
operations.
Research and Development
Research and development expenditures amounted to approximately $7,834,000
in 1998, $8,031,000 in 1997, and $7,249,000 in 1996. All research is funded
by GBC.
Employees
As of December 31, 1998, GBC employed approximately 5,332 people worldwide.
Employee relations are considered to be excellent.
GBC 1998 Annual Report
6
20
PART I GBC AND SUBSIDIARIES
===============================================================================
- -------------------------------------------------------------------------------
ITEM 2. PROPERTIES
- -------------------------------------------------------------------------------
In addition to the manufacturing and distribution locations listed below, GBC
operates sales and service offices throughout the world. GBC also has a 60,000
square foot world headquarters building in Northbrook, Illinois and a 30,000
square foot business group headquarters building in Skokie, Illinois. Management
believes that the Company's manufacturing facilities are suitable and adequate
for its operations and are maintained in a good state of repair.
Major manufacturing and distribution is conducted at the following locations:
APPROXIMATE AREA IN THOUSAND SQ. FT.
LOCATION MANUFACTURING DISTRIBUTION OWNERSHIP
=========================================================================================================================
Booneville, Mississippi (3) Manufacturing/Distribution 514 256 GBC owned
Ashland, Mississippi (3) Manufacturing 180 -- GBC owned
Hanover Park, Illinois (1),(2) Distribution -- 107 Leased
Addison, Illinois (2) Manufacturing 95 -- GBC owned
Pleasant Prairie, Wisconsin (1),(3) Manufacturing 86 -- Leased
Basingstoke, England (1),(3) Manufacturing 30 30 Leased
Buffalo Grove, Illinois (1),(3) Manufacturing 68 -- Leased
Arcos de Valdevez, Portugal (3) Manufacturing 68 -- GBC owned
Lincolnshire, Illinois (1) Manufacturing 64 -- Leased
Pleasant Prairie, Wisconsin (1),(3) Manufacturing 56 -- Leased
Nuevo Laredo, Mexico (1),(3) Manufacturing 49 -- Leased
Lottstetten, Germany (3) Manufacturing 40 -- GBC owned
Kerkrade, Holland (2) Manufacturing 39 42 GBC owned
Hagerstown, Maryland (2) Manufacturing 33 -- GBC owned
Amelia, Virginia (1) Manufacturing 26 -- GBC owned
Auburn Hills, Michigan (1) Manufacturing 26 -- Leased
Madison, Wisconsin (2) Manufacturing 25 -- Leased
Tornaco, Italy (3) Manufacturing 22 -- GBC owned
Don Mills, Ontario, Canada (1) Manufacturing/Distribution 15 17 Leased
Peterborough, England (3) Manufacturing/Distribution 27 108 Leased
=========================================================================================================================
(1) Document Finishing Group, (2) Films Group, (3) Office Products Group
- -------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
- -------------------------------------------------------------------------------
GBC is not a party to any material pending legal proceedings, and neither GBC
nor any of its officers or directors are aware of any material contemplated
proceeding.
- -------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS DURING THE FOURTH
QUARTER OF 1998
- -------------------------------------------------------------------------------
None.
GBC 1998 Annual Report
7
21
PART II GBC AND SUBSIDIARIES
===============================================================================
- -------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTER
- -------------------------------------------------------------------------------
Principal Market and Price Range
The following table shows the range of closing prices for GBC's common stock as
quoted on the NASDAQ National Market System for the calendar quarters indicated
below:
SHARE PRICES
1998 1997
HIGH LOW CLOSE HIGH LOW CLOSE
===============================================================================
First Quarter $33 3/16 $29 9/16 $32 9/16 $33 1/4 $28 1/2 $ 30 1/4
Second Quarter 37 1/8 31 36 13/16 31 26 28 1/2
Third Quarter 39 15/16 32 13/16 32 13/16 33 1/4 25 1/2 29 7/8
Fourth Quarter 41 3/4 26 5/8 37 1/4 31 1/2 26 1/2 30
===============================================================================
Approximate Number of Equity Security Holders
NUMBER SHAREHOLDERS OF RECORD
TITLE OF CLASS AS OF FEBRUARY 26, 1999
===============================================================================
Common Stock, $.125 par value 697*
Class B Common Stock, $.125 par value 1
===============================================================================
* Per latest report of the Transfer Agent. Each security dealer holding shares
in a street name for one or more individuals is counted as only one
shareholder of record.
Dividends
The following table lists dividends paid per share during the calendar quarters
indicated below:
DIVIDENDS PAID
1998 1997
===============================================================================
First Quarter $.11 $.11
Second Quarter .11 .11
Third Quarter .11 .11
Fourth Quarter .12 .11
- -------------------------------------------------------------------------------
Total $.45 $.44
===============================================================================
Cash dividends have been paid each quarter commencing with the fourth quarter of
1975. The future payment of dividends and any increases therein are within the
discretion of GBC's Board of Directors and will depend, among other factors, on
working capital requirements, capital expenditures and earnings growth of the
Company. On March 22, 1999, GBC paid a quarterly dividend of $.12 per share.
- -------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------
(000 omitted, except per share and ratio data):
1998 1997 1996 1995 1994
===============================================================================
Net sales $922,414 $770,001 $536,836 $458,391 $420,449
Operating income 82,501 74,332 47,715 40,094 30,534
Net income 23,792 28,667 25,213 21,500 15,703
Net income per Common
Share (1)(2)
Basic 1.51 1.82 1.60 1.37 1.00
Diluted 1.50 1.80 1.59 1.36 .99
Cash dividends declared
per Common Share (2) .45 .44 .43 .42 .405
Capital expenditures 25,978 29,619 27,778 15,046 12,788
Current assets 398,643 327,745 237,214 180,648 171,154
Current liabilities 157,218 152,102 112,129 83,828 84,604
Working capital 241,425 175,643 125,085 96,820 86,550
Current ratio 2.5 2.2 2.1 2.2 2.0
Total assets $885,838 $692,914 $393,706 $298,872 $284,278
Long-term debt 490,591 324,070 87,029 43,890 42,020
Stockholders' equity 203,187 191,043 172,132 154,141 141,089
===============================================================================
(1) Earnings per share data for 1994-1996 has been restated for the adoption
of SFAS 128, "Earnings Per Share."
(2) Amounts represent per share amounts for both Common Stock and Class B
Common Stock.
GBC 1998 Annual Report
8
22
MANAGEMENT'S DISCUSSION AND ANALYSIS GBC AND SUBSIDIARIES
===============================================================================
- -------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
1998 COMPARED TO 1997
Sales
GBC reported sales of $922.4 million in 1998, a 19.8% increase over 1997 sales
of $770.0 million. The acquisitions of Ibico and Allfax contributed $106.2
million of the increase. Excluding the effect of acquisitions, 1998 sales
increased by 6.0%, primarily due to sales growth of the Company's Office
Products Group as a result of increased sales of laminators and related supplies
and paper shredders.
Gross Margins, Costs and Expenses
Gross profit margin improved in 1998 to 43.4% compared to 42.8% in 1997. The
most significant factors impacting the improved gross profit margins were
manufacturing efficiencies in the production of laminating films, and lower
costs associated with purchasing certain raw materials and finished product from
vendors in the Far East. GBC obtained certain price reductions as a result of
the weakening of the Korean won during 1998.
Selling, service and administrative expenses increased 24.3% in 1998 primarily
as a result of the acquisition of Ibico. Selling, service and administrative
expenses as a percentage of sales increased to 33.3% in 1998, compared to 32.1%
in 1997 due to higher rebate programs for certain customers and costs associated
with the integration of Ibico in Europe.
Interest expense increased $14.0 million ($38.6 million in 1998 compared to
$24.6 million in 1997) primarily as a result of increased borrowings under GBC's
Revolving Credit Facility and the $150 million in 9 3/8% Senior Subordinated
notes. The increased debt was used to fund the Ibico and Allfax acquisitions and
working capital requirements.
Amortization of goodwill and related intangibles increased by $2.8 million in
1998 as a result of increased amortization related to acquisitions. Other
expenses decreased by $1.1 million in 1998 compared to 1997. The most
significant factor affecting this decrease was favorable currency gains in 1998
compared to losses in 1997.
Income Taxes
GBC's worldwide effective income tax rate was 40.5% in both 1998 and 1997. An
increase in the overall effective tax rate due to non-deductible goodwill
amortization and losses in certain non-U.S. operations was offset by the benefit
received from the tax allocation agreement with Lane Industries.
Net Income
Net Income decreased by 17.0% (or $4.9 million in 1998) to $1.51 per share basic
(or $23.8 million) from $1.82 per share basic (or $28.7 million). The decrease
resulted primarily from the $3.5 million loss from the sale of US RingBinder in
the third quarter and additional costs (interest and goodwill amortization) as a
result of the acquisitions.
1997 COMPARED TO 1996
Sales
GBC reported sales of $770.0 million in 1997, a 43.4% increase over 1996 sales
of $536.8 million. The acquisitions of Quartet and Baker accounted for
approximately $183.0 million of the increase. Excluding the effect of
acquisitions, 1997 sales increased by 9.4%, primarily due to sales growth of
GBC's laminators and related supplies, shredders and binding equipment.
Gross Margins, Costs and Expenses
Gross profit margin improved in 1997 to 42.8% compared to 41.2% in 1996, as a
result of a more favorable sales mix of higher margin office products. The
improvement in gross margin was achieved despite lower gross margins from
certain film products due to competitive market pricing. Further, in 1997 GBC's
business in Europe experienced lower gross margins due to increased costs on
imported products as a result of the strength of the U.S. Dollar.
GBC 1998 Annual Report
9
23
MANAGEMENT'S DISCUSSION AND ANALYSIS GBC AND SUBSIDIARIES
===============================================================================
Selling, service and administrative expenses increased 44.2% in 1997 primarily
as a result of the acquisition of Quartet. Selling, service and administrative
expenses as a percentage of sales increased to 32.1% in 1997, compared to 31.9%
in 1996, due primarily to higher rebate programs for certain customers.
Interest expense increased to $24.6 million in 1997 from $6.2 million in 1996
primarily as a result of increased outstandings under GBC's Revolving Credit
Facility. The increased debt was used primarily to fund acquisitions.
Amortization of goodwill and related intangibles increased by $6.2 million in
1997 as a result of increased amortization related to acquisitions. The
shut-down of a manufacturing plant in Cost Rica related to GBC's non-core
ringmetals business and unfavorable currency transactions accounted for the
majority of the $2.6 million increase in other expenses from 1996 to 1997.
Income Taxes
GBC's worldwide effective income tax rate decreased to 40.5% in 1997 from 40.8%
in 1996. The 1997 rate decreased primarily as a result of the net effect of the
remission of foreign earnings, and a reduction in the tax allocation from the
agreement with Lane Industries, its majority shareholder.
Net Income
Net Income increased by 13.9% (or $3.4 million in 1997 to $1.82 per share basic
(or $28.7 million) from $1.60 per share basic (or $25.2 million). The increase
resulted primarily from sales and gross margins of Quartet and Baker and
synergies achieved as a result of the acquisitions, along with increased sales
in GBC's core businesses.
LIQUIDITY AND CAPITAL RESOURCES
Management assesses the Corporation's liquidity in terms of its overall ability
to generate cash to fund its operating and investing activities. Significant
factors affecting the management of liquidity are cash flows generated from
operating activities, capital expenditures, customer financing requirements,
adequate bank lines of credit and financial flexibility to attract long-term
capital with satisfactory terms.
GBC's primary sources of liquidity and capital resources were
internally-generated cash flows, borrowings under GBC's revolving credit
facilities, short-term borrowings from banks and the placement of $150.0 million
of the 9 3/8% Senior Subordinated notes.
Net cash provided by operating activities was $24.1 million compared to $20.7
million in 1997 and $2.3 million in 1996. The increase in operating cash flows
in 1998 was primarily due to an increase in earnings before depreciation and
amortization along with the non-cash loss on the sale of US RingBinder.
Capital expenditures during 1998 were $29.9 million compared to $29.6 million in
1997 and $27.8 million in 1996. Major projects in 1998 and 1997 included the
implementation of business information systems in Europe and the U.S. ($6.5
million in 1998 and $6.8 million in 1997), equipping and setting up three
manufacturing facilities in the U.S. ($4.9 million in 1998 and $7.3 million in
1997), facilities to support the integration of GBC's office products business
caused by the acquisition of Ibico and for tooling of new products.
GBC's acquisition investments totaled $147.9 million, $241.2 million and $28.9
million in 1998, 1997 and 1996, respectively. Acquisitions in 1998 were
primarily financed by GBC's revolving credit facility and a $60.0 million
borrowing from Lane Industries, Inc. A portion of the Revolving Credit Facility
and all of the $60 million borrowing were repaid with the proceeds of the Senior
Subordinated Notes. In 1997 acquisitions were primarily financed by borrowings
under GBC's Revolving Credit Facility. During the third quarter of 1998, GBC
received approximately $15.5 million from the sale of its US RingBinder
business.
GBC 1998 Annual Report
10
24
MANAGEMENT'S DISCUSSION AND ANALYSIS GBC AND SUBSIDIARIES
===============================================================================
Cash Dividends paid in 1998 were $7.1 million compared to $6.9 million in 1997,
or $.45 per share compared to $.44 per share in 1997.
GBC had access to various U.S. and international credit facilities including a
multicurrency revolving credit facility (the Revolving Credit Facility) with a
group of international banks providing for up to $475.0 million of unsecured
credit borrowings through January 2002. As of December 31, 1998, GBC had $320.9
million outstanding under the Revolving Credit Facility.
The terms of various financing arrangements include certain restrictive
covenants which require GBC to maintain certain ratios including current assets
and liabilities, leverage, and interest coverage ratios (see Note 5 to the
Consolidated Financial Statements).
GBC believes that cash flow from operations, together with available credit
facilities, will be sufficient to fund GBC's ongoing operational and capital
requirements.
MARKET RISK DISCLOSURES
GBC is exposed to market risk from changes in foreign currency exchange rates
and interest rates which may affect the results of its operations and financial
condition. GBC seeks to manage these risks through its regular operating and
financing activities and, when deemed appropriate, through the use of derivative
financial instruments. GBC does not use any derivative instruments for trading
or other speculative purposes and is not a party to any leveraged financial
instruments. The methods used by GBC to assess and mitigate the market risks
discussed herein should not be considered projections of future events and
exposures.
Foreign Exchange Risk Management
As a result of GBC's global activities, GBC has assets, liabilities, loans and
cash flows denominated in currencies other than the U.S. dollar. From time to
time, GBC utilizes a foreign exchange risk management program to manage its
foreign exchange exposures to help minimize the adverse impact of currency
movements. Loans and cash flows in certain countries are currently hedged
through foreign currency forward contracts. The majority of GBC's exposures to
currency movements are in Europe, the Asia/Pacific, Canada and Mexico, and the
significant hedging transactions related to these areas outstanding as of
December 31, 1998 are presented below. A majority of the outstanding contracts
have maturity dates in 1999, with a minimal amount of contracts expiring by
December 31, 2000. Increases and decreases in the fair market values of the
forward agreements are completely offset by changes in the values of the net
underlying foreign currency transaction exposures. Selected information related
to GBC's foreign exchange contracts is as follows (amounts in millions):
AVERAGE FAIR UNRECOGNIZED
EXCHANGE NOTIONAL MARKET GAIN
FORWARD CONTRACTS AS OF DECEMBER 31, 1998 RATE AMOUNT VALUE (LOSS)
=========================================================================================
Sale of Canadian dollars 1.53 $ 12.3 $ 12.4 $ .1
Sale of Dutch guilders 1.84 10.0 9.8 (.2)
Sale of Australian dollars 1.60 8.3 8.1 (.2)
Sale of British pounds .59 5.2 5.1 (.1)
Sale of Japanese yen 127 4.6 5.2 .6
Sale of Mexican pesos 11.4 2.4 2.8 .4
Sale of French francs 5.62 2.2 2.2 --
Sale of Italian lire 1645 1.5 1.5 --
Sale of Swiss francs 1.31 1.1 1.0 (.1)
Sale of New Zealand dollars 2.02 .7 .7 --
Purchase of German marks 1.71 .7 .8 .1
Sale of Japanese yen to
purchase French francs 64.84 1.2 1.3 .1
Sale of other currencies .4 .3 (.1)
- -----------------------------------------------------------------------------------------
TOTAL $ 50.6 $ 51.2 $ .6
=========================================================================================
GBC 1998 Annual Report
11
25
MANAGEMENT'S DISCUSSION AND ANALYSIS GBC AND SUBSIDIARIES
===============================================================================
Interest Rate Risk Management
As a result of GBC's funding program for its global activities, GBC has various
debt obligations that pay interest on the basis of fixed and floating rates.
From time to time, GBC utilizes an interest rate management program to reduce
its exposures to floating interest rates and achieve a desired risk profile. To
accomplish this objective, GBC currently hedges these exposures by using
interest rate swap and cap agreements.
The table below provides information about GBC's derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates, including interest rate swaps, interest rate caps and debt
obligations. For debt obligations, the table presents significant principal cash
flows and related weighted average interest rates by expected maturity dates.
For interest rate swaps, the table presents notional amounts and weighted
average interest rates by contractual maturity dates. Notional amounts are used
to calculate the contractual payments to be exchanged under the contract.
Weighted average variable rates are based on implied forward rates in the yield
curve at the reporting date. The information is presented in US dollar
equivalents, which is GBC's reporting currency. Significant interest rate
sensitive instruments as of December 31, 1998, were:
EXPECTED MATURITY DATE
FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
=================================================================================================
LIABILITIES
Long-term debt:
Fixed Rate ($US) $ -- $ -- $ -- $ -- $ -- $150.0 $150.0 $150.8
Average interest rate -- -- -- -- -- 9.375% 9.375% --
Variable Rate ($US) -- -- -- 320.9 -- -- 320.9 320.9
Average interest rate -- -- -- 6.1% -- -- 6.1% --
Short-term debt:
Variable Rate ($US) 27.5 -- -- -- -- -- 27.5 27.5
Average interest rate 6.7% -- -- -- -- -- 6.7% --
=================================================================================================
EXPECTED MATURITY DATE
FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
=================================================================================================
INTEREST RATE DERIVATIVES
Interest Rate Swaps:
Fixed to Variable ($US) $43.0 $37.0 $35.0 $ 35.0 $25.0 $ 25.0 $200.0 $ (3.9)
Average pay rate 6.0% 6.0% 6.4% 6.3% 5.7% 5.9% 6.1% --
Average receive rate 5.1% 5.1% 5.2% 5.3% 5.3% 5.3% 5.2% --
Interest Rate Caps:
Fixed to Variable ($US) $ -- $ -- $ 5.0 $ -- $ -- $ -- $ 5.0 $ --
Cap rate -- -- 7.5% -- -- -- 7.5% --
=================================================================================================
Refer to Notes 1, 2, 5 and 6 of the Consolidated Financial Statements for
additional discussion of GBC's foreign exchange and financial instruments.
GBC 1998 Annual Report
12
26
MANAGEMENT'S DISCUSSION AND ANALYSIS GBC AND SUBSIDIARIES
===============================================================================
YEAR 2000 COMPLIANCE
In 1997, GBC began identifying issues and formulating plans to address Year 2000
matters that might impact its operations. The Year 2000 problems consist of
shortcomings in certain electronic data processing systems that make them unable
to process year-date data accurately beyond the year 1999. Essentially, certain
systems were designed to abbreviate dates by eliminating the first two digits of
the year under the assumption that these digits would always be 19. As a result,
such applications could fail or create erroneous results if they recognize "00"
as the year 1900 rather then 2000.
GBC's State of Readiness
In early 1998, GBC established a Year 2000 Task Force which is directed by GBC's
Vice President of Business Technology. The Task Force has identified and
reviewed GBC's hardware and software systems, embedded technological systems,
GBC's product offerings, and material third party relationships. GBC's state of
readiness is as follows:
- - Substantially all of its hardware systems are Year 2000 compliant.
- - Certain software systems are being modified or replaced to become Year 2000
compliant.
- - Surveys have been sent to more than 350 material third party suppliers.
Approximately 83% of the surveys have been returned and are currently being
assessed by management of GBC's Business Units to determine if the failure
of any material supplier to have its products or services compliant could
materially adversely affect the results of GBC's business or operations.
- - The significant projects currently in process are summarized below:
OPERATING FUNCTION PROJECT CURRENT STATUS TARGET COMPLETION
===============================================================================================================================
North American Document Remediate Order Processing, Distribution Final System Test March 1999
Finishing and Films and Financial Systems
Replace Manufacturing Systems at five sites Initial Programming September 1999
North American Office Products Remediate Order Processing, Distribution and System Implementation March 1999
Financial Systems
European Document Finishing Replace Order Processing, Manufacturing, Implemented 6 of the 16 December 1999
and Office Products Distribution and Financial Systems locations
===============================================================================================================================
===============================================================================
GBC 1998 Annual Report
13
27
MANAGEMENT'S DISCUSSION AND ANALYSIS GBC AND SUBSIDIARIES
===============================================================================
Costs to Address GBC's Year 2000 Issues
The total cost of GBC's Year 2000 projects is estimated to be approximately $3.0
million (a majority of the expenditures are in North America). Such costs
include new software purchased and outside consultants hired to remediate
non-compliant systems. GBC's estimated Year 2000 costs do not include efforts to
replace certain systems, as those projects were not accelerated to ensure Year
2000 compliance; nor does GBC's estimate include the costs of company employees
that may devote a portion of their efforts towards Year 2000 remediation
projects. Approximately 40% of the costs directly related to remediation efforts
were expensed in 1998. These costs have not had, nor are expected to have, a
material effect on GBC's financial position, results of operations or cash flows
in any of the years in which spending has or will occur. This expectation
assumes that GBC will not be obligated to incur significant Year 2000 related
costs on behalf of its customers or suppliers.
The Risks of GBC's Year 2000 Issues
and Contingency Plans
GBC believes that any Year 2000 issues that could significantly impact its
operations have been identified and those replacement or remediation efforts
will be implemented on time. GBC has prioritized its European implementation
project focusing on early readiness for its most significant European
operations. GBC believes that non-compliance of any European operation on
January 1, 2000 will not cause any material disruption to its business or
operations as a whole and that, in such event, contingency plans will have been
implemented to bridge any period of non-compliance. GBC has not determined the
most likely worst case scenarios related to Year 2000 issues, but continues to
monitor the projects in process and will develop contingency plans, if
necessary, to ensure that it will be able to operate critical areas of the
business.
EURO
On January 1, 1999, a majority of the member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and adopted the Euro monetary as their new common legal currency. The Euro
trades on currency exchanges and the participating countries' own currencies
("legacy currencies") remain legal tender in the participating countries for a
transition period between January 1, 1999 and January 1, 2002. During the
transition period, parties can elect to pay for goods and services and transact
business using either the Euro or a legacy currency. Between January 1, 2002 and
July 1, 2002, the participating countries will introduce Euro notes and coins
and withdraw all legacy currencies so that these legacy currencies will no
longer be available after July 1, 2002.
The Euro conversion may affect cross-border competition by creating cross-border
price transparency. GBC has assessed its pricing/marketing strategy in order to
ensure that it remains competitive in a broader European market. GBC has also
assessed its information technology systems to allow for transactions to take
place in both the legacy currencies and the Euro, and to accommodate the
eventual elimination of the legacy currencies. GBC's currency risk and risk
management programs for operations in participating countries may be reduced as
the legacy currencies are converted to the Euro. GBC will continue to evaluate
issues involving the introduction of the Euro. Based on current information and
GBC's current assessment, management does not expect that the Euro conversion
will have a material adverse effect on GBC's results of operations, financial
condition or cash flows.
GBC 1998 Annual Report
14
28
MANAGEMENT'S DISCUSSION AND ANALYSIS GBC AND SUBSIDIARIES
===============================================================================
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
and requires GBC to recognize all derivatives as either assets or liabilities on
the balance sheet and measure them at fair value. Gains and losses resulting
from changes in fair value would be accounted for depending on the use of the
derivative and whether it is designated as a hedge and qualifies for hedge
accounting. GBC will be required to implement SFAS No. 133 for its fiscal year
2000. GBC does not believe that the adoption of SFAS No. 133 will have a
significant impact on its results of operations.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-5, "Reporting on the Costs of Start-up Activities." SOP 98-5 provides
guidance on the financial reporting on start-up costs and organization costs. It
requires costs of start-up activities and organization costs to be expensed as
incurred. The standard is effective for fiscal years beginning after December
15, 1998. Management does not believe that the adoption of SOP 98-5 will have a
material effect on GBC's results of operations.
Acquisitions and Other Business Combinations
GBC has completed a number of acquisitions and other business combinations
during the past three years. The following is a summary of transactions
completed (dollars in millions):
COMPANY OR APPROXIMATE
BUSINESS ACQUIRED ANNUAL REVENUES
DATE (PRINCIPAL LOCATION) OF ACQUIRED COMPANY (a) PRODUCTS
===================================================================================================================================
November 30, 1998 Pelikan Quartet, (Australia) Joint Venture Manufacturer of presentation boards
February 27, 1998 Ibico AG, (Switzerland) $ 113.0 Manufacturer and distributor of binding and
lamination equipment and supplies
January 22, 1998 Allfax group of companies, (U.K.) 6.0 Manufacturer and distributor of
visualcommunications products
August 27, 1997 Danka Datakey, (Australia) less than $ 1.0 Distributor and servicer of mailroom
equipment
July 25, 1997 Printing Wire Supplies Ltd., (Ireland) 2.0 Manufacturer of wire binding supplies
July 23, 1997 Jenrite, (New Zealand) 2.0 Distributor of laminating equipment and
supplies
June 13, 1997 Visucom, (Australia) 2.0 Manufacturer of presentation boards
April 23, 1997 Baker School Specialty Company (US) 17.0 Manufacturer of presentation boards
January 1, 1997 Quartet Manufacturing Company (US) 149.0 Manufacturer of visual communication products
October 10, 1996 GMP Co. Ltd., (South Korea) Joint Venture Developer and manufacturer of lamination
equipment and supplies
January 21, 1996 Fordigraph Pty. Ltd., (Australia) 21.0 Distributor of office and mailroom products
===================================================================================================================================
(a) Approximate annual revenues at time of acquisition.
See Note 12 to the Consolidated Financial Statements for additional information
on GBC's acquisitions.
GBC 1998 Annual Report
15
29
PART II GBC AND SUBSIDIARIES
===============================================================================
- -------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE
- -------------------------------------------------------------------------------
Report of Independent Public Accountants.....................................30
Consolidated Statements of Income............................................31
Consolidated Balance Sheets..................................................32
Consolidated Statements of Cash Flows........................................33
Consolidated Statements of Stockholders' Equity..............................34
Notes to Consolidated Financial Statements...................................35
GBC 1998 Annual Report
16
30
PART II GBC AND SUBSIDIARIES
===============================================================================
Report of lndependent Public Accountants
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF GENERAL BINDING CORPORATION:
We have audited the accompanying consolidated balance sheets of General Binding
Corporation ("GBC," a Delaware corporation) and Subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of income and
comprehensive income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These consolidated financial
statements are the responsibility of GBC's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of General Binding
Corporation and Subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
Schedule II is the responsibility of GBC's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
February 4, 1999.
GBC 1998 Annual Report
17
31
CONSOLIDATED STATEMENTS OF INCOME GBC AND SUBSIDIARIES
===============================================================================
YEAR ENDED DECEMBER 31
(000 omitted except per share data)
1998 1997 1996
===============================================================================
Domestic sales $618,524 $543,361 $349,809
International sales 303,890 226,640 187,027
- -------------------------------------------------------------------------------
Net sales 922,414 770,001 536,836
Cost of sales, including
development and engineering 521,936 440,625 315,949
Selling, service and
administrative 307,339 247,185 171,473
Amortization of goodwill and
related intangibles 10,638 7,859 1,699
- -------------------------------------------------------------------------------
Operating income 82,501 74,332 47,715
Interest 38,580 24,577 6,172
Loss on sale of US RingBinder 3,500 -- --
Other (income) expense, net 434 1,575 (1,011)
- -------------------------------------------------------------------------------
Income before taxes 39,987 48,180 42,554
Income taxes 16,195 19,513 17,341
- -------------------------------------------------------------------------------
NET INCOME $ 23,792 $ 28,667 $ 25,213
===============================================================================
Other comprehensive income,
net of taxes:
Foreign currency translation
adjustments (2,423) (3,073) (312)
- -------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 21,369 $ 25,594 $ 24,901
===============================================================================
Net income per common share: (1)
Basic $ 1.51 $ 1.82 $ 1.60
Diluted 1.50 1.80 1.59
Dividends declared per
common share (1) .45 .44 .43
Weighted average number of
common shares outstanding (2) 15,724 15,760 15,743
===============================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
(1) Amounts represent per share amounts for both Common Stock and Class B
Common Stock.
(2) Weighted average shares represents shares for the basic calculation and
includes both Common Stock and Class B Common Stock.
GBC 1998 Annual Report
18
32
CONSOLIDATED BALANCE SHEETS GBC AND SUBSIDIARIES
===============================================================================
DECEMBER 31,
(000 omitted except per share data)
1998 1997
===============================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 6,095 $ 3,753
Receivables, less allowances for doubtful
accounts and sales returns:
1998-$9,871, 1997-$8,821 187,939 160,787
Inventories, at lower of cost or market 164,517 143,569
Deferred tax assets 12,429 9,323
Other 27,663 10,313
- -------------------------------------------------------------------------------
Total current assets 398,643 327,745
- -------------------------------------------------------------------------------
Property, plant and equipment, at cost:
Land and land improvements 5,616 6,744
Buildings and leasehold improvements 53,704 49,798
Machinery and equipment 145,339 133,899
- -------------------------------------------------------------------------------
Total property, plant and equipment, at cost 204,659 190,441
Less--accumulated depreciation (78,223) (77,020)
- -------------------------------------------------------------------------------
Net property, plant and equipment 126,436 113,421
- -------------------------------------------------------------------------------
Cost in excess of fair value of assets of
acquired companies, net of amortization 304,649 210,912
Other 56,110 40,836
- -------------------------------------------------------------------------------
TOTAL ASSETS $ 885,838 $ 692,914
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 51,669 $ 42,979
Accrued liabilities:
Salaries, wages and profit
sharing contributions 12,157 14,213
Taxes, other than income taxes 2,286 3,761
Deferred income on maintenance agreements 10,583 9,810
Accrued distribution allowances 16,049 18,239
Other 36,040 22,131
Notes payable 27,462 40,247
Current maturities of long-term debt 972 722
- -------------------------------------------------------------------------------
Total current liabilities 157,218 152,102
- -------------------------------------------------------------------------------
Long-term debt, less current maturities 490,591 324,070
Other long-term liabilities 13,760 11,368
Deferred tax liabilities 21,082 14,331
Stockholders' equity:
Common stock, $.125 par value; 40,000,000
shares authorized; 15,693,747 shares issued
and outstanding at December 31, 1998
and 1997 1,962 1,962
Class B common stock, $.125 par value;
4,796,550 shares authorized; 2,398,275
shares issued and outstanding at December
31, 1998 and 1997 300 300
Additional paid-in-capital 10,976 9,708
Retained earnings 225,112 208,394
Treasury stock--2,372,452 and 2,325,266
shares at December 31, 1998 and 1997,
respectively (26,632) (23,213)
Accumulated other comprehensive income (8,531) (6,108)
- -------------------------------------------------------------------------------
Total stockholders' equity 203,187 191,043
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 885,838 $ 692,914
===============================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
GBC 1998 Annual Report
19
33
CONSOLIDATED STATEMENTS OF CASH FLOWS GBC AND SUBSIDIARIES
===============================================================================
YEAR ENDED DECEMBER 31
(000 OMITTED)
1998 1997 1996
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 23,792 $ 28,667 $ 25,213
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation 16,750 12,637 9,366
Amortization 17,163 14,571 5,652
Provision for doubtful accounts 2,839 2,248 2,334
Provision for inventory reserves 6,200 4,252 3,855
Increase in non-current
deferred taxes 7,237 2,285 5,029
(Increase) in other long-term
assets (3,101) (5,336) (3,890)
Loss on sale of
US RingBinder, pretax 3,500 -- --
Other (1,256) 316 (2,379)
Changes in current assets
and liabilities:
(Increase) in receivables (16,450) (27,746) (36,500)
(Increase) in inventories (15,173) (27,867) (14,391)
(Increase) in other current assets (6,182) (3,256) (2,314)
(Increase) decrease in
deferred tax assets (3,432) 2,381 (1,052)
(Decrease) increase in accounts
payable and accrued liabilities (7,517) 16,807 9,982
(Decrease) increase in income
taxes payable (243) 758 1,375
- -------------------------------------------------------------------------------
Net cash provided by
operating activities 24,127 20,717 2,280
- -------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (29,926) (29,619) (27,778)
Payments for acquisitions and
investments (net of cash acquired) (147,961) (241,230) (28,881)
Proceeds from sale of US Ringbinder 15,529 -- --
Proceeds from sale of plant
and equipment 6,873 4,702 3,676
- -------------------------------------------------------------------------------
Net cash (used in) investing
activities (155,485) (266,147) (52,983)
- -------------------------------------------------------------------------------
FINANCING ACTIVITIES:
(Decrease) increase in notes payable (12,806) 4,341 14,192
Payments for debt issuance costs (8,638) -- --
Increase in long-term debt 226,257 246,528 43,733
Repayment of long-term debt (60,879) (502) (150)
Increase (reduction) in current
portion of long-term debt 206 80 (358)
Dividends paid (7,075) (6,935) (6,769)
Purchases of treasury stock (3,566) (1,011) (1,645)
Proceeds from the exercise of
stock options 1,415 942 1,463
- -------------------------------------------------------------------------------
Net cash provided by financing
activities 134,914 243,443 50,466
Effect of exchange rates on cash (1,214) (981) 94
- -------------------------------------------------------------------------------
Net (decrease) increase in cash &
cash equivalents 2,342 (2,968) (143)
Cash and cash equivalents at
beginning of the year 3,753 6,721 6,864
- -------------------------------------------------------------------------------
Cash and cash equivalents at end
of the year $ 6,095 $ 3,753 $ 6,721
===============================================================================
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 11,627 $ 13,526 $ 11,730
Interest paid 35,865 23,626 6,638
===============================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
GBC 1998 Annual Report
20
34
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY GBC AND SUBSIDIARIES
===============================================================================
(000 omitted except number of shares and per share data)
ACCUMULATED
CLASS B ADDITIONAL OTHER
COMMON COMMON PAID IN RETAINED TREASURY COMPREHENSIVE
STOCK STOCK CAPITAL EARNINGS STOCK INCOME TOTAL
====================================================================================================================
BALANCE AT DECEMBER 31, 1995 $ 1,962 $ 300 $ 7,267 $168,219 $ (20,884) $ (2,723) $154,141
1996 net income -- -- -- 25,213 -- -- 25,213
Dividends paid ($.43 per share) -- -- -- (6,769) -- -- (6,769)
Exercise of stock options -- -- 1,297 -- 207 -- 1,504
Purchase of treasury stock -- -- -- -- (1,645) -- (1,645)
1996 translation adjustment -- -- -- -- -- (312) (312)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 1,962 300 8,564 186,663 (22,322) (3,035) 172,132
1997 net income -- -- -- 28,667 -- -- 28,667
Dividends paid ($.44 per share) -- -- -- (6,936) -- -- (6,936)
Exercise of stock options -- -- 1,144 -- 120 -- 1,264
Purchase of treasury stock at cost -- -- -- -- (1,011) -- (1,011)
1997 translation adjustment -- -- -- -- -- (3,073) (3,073)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 1,962 300 9,708 208,394 (23,213) (6,108) 191,043
1998 net income -- -- -- 23,792 -- -- 23,792
Dividends paid ($.45 per share) -- -- -- (7,074) -- -- (7,074)
Exercise of stock options -- -- 1,268 -- 147 -- 1,415
Purchase of treasury stock at cost -- -- -- -- (3,566) -- (3,566)
1998 translation adjustment -- -- -- -- -- (2,423) (2,423)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ 1,962 $ 300 $10,976 $225,112 $ (26,632) $ (8,531) $203,187
====================================================================================================================
SHARES OF CAPITAL STOCK
====================================================================================================================
CLASS B
COMMON COMMON TREASURY NET
STOCK STOCK STOCK(1) SHARES
====================================================================================================================
SHARES AT DECEMBER 31, 1995 15,693,747 2,398,275 (2,357,910) 15,734,112
Exercise of stock options -- -- 87,644 87,644
Purchase of treasury stock -- -- (71,877) (71,877)
- -------------------------------------------------------------------------------------------------------------------
SHARES AT DECEMBER 31, 1996 15,693,747 2,398,275 (2,342,143) 15,749,879
Exercise of stock options -- -- 50,581 50,581
Purchase of treasury stock -- -- (33,704) (33,704)
- -------------------------------------------------------------------------------------------------------------------
SHARES AT DECEMBER 31, 1997 15,693,747 2,398,275 (2,325,266) 15,766,756
Exercise of stock options -- -- 61,863 61,863
Purchase of treasury stock -- -- (109,049) (109,049)
- -------------------------------------------------------------------------------------------------------------------
SHARES AT DECEMBER 31, 1998 15,693,747 2,398,275 (2,372,452) 15,719,570
===================================================================================================================
(1) Shares held in treasury are shares of Common Stock.
GBC 1998 Annual Report
21
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
(A) CONSOLIDATION
The consolidated financial statements include the accounts of GBC and its
domestic and international subsidiaries. All international subsidiaries have
November 30 fiscal year ends, with the exception of Canada, Mexico, and
Australia which have December 31 fiscal year ends. Intercompany accounts and
transactions have been eliminated in consolidation. Investments in significant
companies which are 20% to 50% owned are treated as equity investments and GBC's
share of earnings is included in income.
Certain amounts for prior years have been reclassified to conform to the 1998
presentation.
(B) CASH AND CASH EQUIVALENTS
Temporary cash investments with original maturities of three months or less are
classified as cash equivalents.
(C) INVENTORY VALUATION
Inventories are valued at the lower of cost or market on a first-in, first-out
basis. Inventory costs include labor, material and overhead.
(D) DEPRECIATION OF PLANT AND EQUIPMENT
Depreciation of plant and equipment for financial reporting is computed
principally using the straight-line method over the following estimated lives:
===============================================================================
Buildings 15-35 years
Machinery and equipment 2-20 years
Leasehold improvements Term of lease
===============================================================================
(E) GOODWILL AND OTHER INTANGIBLE ASSETS
For financial reporting purposes, goodwill and other intangibles are generally
amortized using the straight-line method over their estimated useful lives,
generally 20 to 40 years. Accumulated amortization of goodwill amounted to
$23,931,000 at December 31, 1998 and $13,936,000 at December 31, 1997.
(F) INCOME TAXES
GBC's policy is to provide income taxes on the earnings of its international
subsidiaries that are expected to be distributed to GBC. Prior to 1998, GBC
provided for the current earnings of all international subsidiaries other than
Canada and Mexico because it was expected that such earning would be remitted to
GBC. Beginning in 1998, income taxes are provided on the earnings of
international subsidiaries when it is determined that they will be distributed
to GBC. As of December 31, 1998, the cumulative amount of undistributed earnings
of international subsidiaries upon which income taxes have not been recorded was
approximately $26.8 million. In the opinion of management, this amount remains
indefinitely reinvested by the international subsidiaries.
(G) DEFERRED SERVICE INCOME
Income from service maintenance agreements is deferred and recognized over the
term of the agreements (generally 1 to 3 years), primarily on a straight-line
basis.
(H) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of certain estimates by management in
determining the entity's assets, liabilities, revenues and expenses. Actual
results could differ from those estimates.
GBC 1998 Annual Report
22
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
(I) FINANCIAL INSTRUMENTS
Many of GBC's financial instruments (including cash and cash equivalents,
accounts and notes receivable, notes payable, and other accrued liabilities)
carry short-term maturities. As such instruments have short-term maturities,
their fair values approximate the carrying values. Substantially all of GBC's
long-term obligations, including current maturities of long-term obligations,
have floating interest rates. The fair value of these instruments approximates
the carrying value.
Amounts currently due to or due from interest rate swap counterparties are
recorded in interest expense in the period in which they accrue. Premiums paid
to purchase interest rate caps are capitalized and amortized over the life of
the agreements. Gains and losses on hedging firm foreign currency commitments
are deferred and included as a component of the related transaction which is
being hedged.
(J) NEW ACCOUNTING STANDARDS
GBC adopted Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" effective for the year ended December 31, 1998.
This statement requires that certain items recorded directly in stockholders'
equity be classified as comprehensive income. GBC has presented the components
of comprehensive income in the consolidated statements of income. The currency
translation adjustment was GBC's only item which was classified as comprehensive
income.
GBC adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" effective for the year ended December 31, 1998. This
statement requires GBC to present information in the notes to the financial
statements regarding reportable operating segments using the same basis as is
used for internally evaluating segment performance and deciding how to allocate
resources to segments. See Note 10 for further disclosures.
- ------------------------------------------------------------------------------
(2) FOREIGN CURRENCY EXCHANGE AND TRANSLATION
- ------------------------------------------------------------------------------
Foreign currency translation adjustments are included in other comprehensive
income in the statements of consolidated income, and as a separate component of
stockholders' equity.
The accompanying Consolidated Statements of Income include net gains and losses
on foreign currency transactions. Such amounts are reported as other income
(expense) and are summarized as follows (000 omitted):
FOREIGN CURRENCY
YEAR ENDED DECEMBER 31 TRANSACTION GAIN/(LOSS)(a)
===============================================================================
1998 $178
1997 (425)
1996 668
===============================================================================
(a) Foreign currency transaction gains/losses are subject to income taxes at
the respective country's effective tax rate.
- -------------------------------------------------------------------------------
(3) INVENTORIES
- -------------------------------------------------------------------------------
Inventories are summarized as follows (000 omitted):
DECEMBER 31,
1998 1997
===============================================================================
Raw material $ 53,848 $ 38,107
Work in progress 6,533 8,470
Finished goods 104,136 96,992
- -------------------------------------------------------------------------------
Total $164,517 $143,569
===============================================================================
- -------------------------------------------------------------------------------
(4) RETIREMENT PLANS
- -------------------------------------------------------------------------------
As of January 1, 1996, GBC converted its defined contribution profit-sharing
plan to a 401(k) plan. The participants of the 401(k) plan may contribute from
1% to 15% of their eligible compensation on a pretax basis. GBC makes annual
contributions that match 100% of pretax contributions up to 4.5% of eligible
compensation. Substantially all eligible full-time domestic employees can
participate in the 401(k) plan. GBC's contributions to the plan were $2,888,000
in 1998, $2,344,000 in 1997 and $2,057,000 in 1996.
GBC 1998 Annual Report
23
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
GBC has one frozen defined benefit pension plan that provides benefits to
certain participants of the former defined contribution profit sharing plan and
certain other employees. GBC's international subsidiaries have adopted a variety
of defined benefit and defined contribution plans. These plans provide benefits
that are based upon the employee's years of credited service. The benefits
payable under these plans, for the most part, are provided by the establishment
of trust funds or the purchase of insurance annuity contracts.
GBC currently provides certain health care benefits for eligible domestic
retired employees. Employees may become eligible for those benefits if they have
fulfilled specific age and service requirements. GBC monitors the cost of the
plan, and has, from time to time, changed the benefits provided under this plan.
GBC reserves the right to make additional changes or terminate these benefits in
the future. Any changes in the plan or revisions of the assumptions affecting
expected future benefits may have a significant effect on the amount of the
obligation and annual expense.
The following tables provide a reconciliation of the changes in the plan's
benefit obligations and fair value of assets (000 omitted):
PENSION BENEFITS OTHER BENEFITS
1998 1997 1998 1997
===========================================================================================================================
Domestic International Domestic International Domestic Domestic
- ---------------------------------------------------------------------------------------------------------------------------
Reconciliation of benefit obligation:
Obligation at beginning of year $ 3,262 $ 16,307 $ 3,058 $ 15,091 $ 4,055 $ 2,990
Interest cost 83 936 245 871 324 239
Service cost -- 870 7 857 314 170
Actuarial (gain) loss 97 (863) 163 692 755 635
Acquisitions (divestitures) (1,878) -- -- -- -- 375
Benefit payments (404) (818) (211) (446) (148) (354)
Exchange rate fluctuations -- 11 -- (758) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Obligation at end of year $ 1,160 $ 16,443 $ 3,262 $ 16,307 $ 5,300 $ 4,055
===========================================================================================================================
Reconciliation of fair value of plan assets:
Fair value of plan assets at
beginning of year $ 3,602 $ 17,763 $ 3,360 $ 15,070 $ -- $ --
Actual return on plan assets 8 (203) 372 2,376 -- --
Contributions -- 1,452 81 1,217 148 354
Divestitures (1,582) -- -- -- -- --
Benefit payments (404) (818) (211) (446) (148) (354)
Exchange rate fluctuations -- (136) -- (454) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 1,624 $ 18,058 $ 3,602 $ 17,763 $ -- $ --
===========================================================================================================================
Reconciliation of funded status:
Funded status at end of year $ 464 $ 1,615 $ 340 $ 1,456 $ (5,300) $ (4,055)
Unrecognized transition
(asset) obligation- -- (630) -- (766) 1,333 1,429
Unrecognized prior service costs -- 355 88 397 -- --
Unrecognized (gain) loss 532 (162) 741 (665) 1,830 1,312
- ---------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 996 $ 1,178 $ 1,169 $ 422 $ (2,137) $ (1,314)
===========================================================================================================================
GBC 1998 Annual Report
24
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
The following table provides the amounts recognized in the consolidated balance
sheets as of December 31, 1998 and 1997 (000 omitted):
PENSION BENEFITS OTHER BENEFITS
1998 1997 1998 1997
================================================================================================================
Domestic International Domestic International Domestic Domestic
- ----------------------------------------------------------------------------------------------------------------
Prepaid benefit cost $ 996 $ 2,983 $ 948 $ 2,221 $ -- $ --
Accrued benefit liability -- (2,354) (296) (2,143) (2,137) (1,314)
Intangible asset -- -- 88 -- -- --
Accumulated other
comprehensive income -- 549 429 344 -- --
- ----------------------------------------------------------------------------------------------------------------
Net amount recognized $ 996 $ 1,178 $ 1,169 $ 422 $ (2,137) $(1,314)
================================================================================================================
The following table provides the components of net periodic pension cost for the plans for 1998, 1997, and 1996 (000
omitted):
PENSION BENEFITS
1998 1997 1996
================================================================================================================
Domestic International Domestic International Domestic International
- ----------------------------------------------------------------------------------------------------------------
Service cost $ -- $ 870 $ 7 $ 857 $ 56 $ 969
Interest cost 83 936 245 871 263 866
Expected return on
plan assets (150) (1,321) (334) (1,112) (317) (945)
Amortization of
unrecognized:
Net transition
(asset) obligation -- (117) -- (115) (4) (106)
Prior-service cost -- 33 10 33 11 31
Net (gain) loss 19 29 191 38 51 72
- ----------------------------------------------------------------------------------------------------------------
Net periodic pension
cost before curtailment (48) 430 119 572 60 887
Adjustments to expense
for curtailment:
Recognition of past
service cost -- -- -- -- 32 --
Curtailment gain -- -- -- -- (676) --
- ----------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ (48) $ 430 $ 119 $ 572 $ (584) $ 887
================================================================================================================
The following table provides the components of net periodic postretirement
benefit cost for the plans for 1998, 1997, and 1996 (000 omitted):
OTHER BENEFITS
1998 1997 1996
================================================================================================================
Domestic Domestic Domestic
- ----------------------------------------------------------------------------------------------------------------
Service cost $ 315 $ 170 $ 141
Interest cost 324 239 219
Expected return on plan assets -- -- --
Amortization of unrecognized:
Net transition (asset) obligation 95 95 95
Prior-service cost -- -- --
Net (gain) loss 44 19 13
- ----------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost 778 523 468
Acquisition of Quartet Manufacturing Company -- 375 --
- ----------------------------------------------------------------------------------------------------------------
Total recognized postretirement benefit cost $ 778 $ 898 $ 468
================================================================================================================
GBC 1998 Annual Report
25
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
The assumptions used in the measurement of the company's benefit obligation are
shown in the following table:
PENSION BENEFITS OTHER BENEFITS
1998 1997 1998 1997
==================================================================================================================
Domestic International Domestic International Domestic Domestic
- ------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions
as of December 31:
Discount rate 7.0% 2.5-8.0% 8.0% 2.5-7.5% 7.0% 8.0%
Expected return on plan assets 9.5 4.5-9.0 9.5 4.5-9.0 N/A N/A
Rate of compensation increase N/A 3.5-5.0 5.0 3.5-5.0 N/A N/A
==================================================================================================================
For measurement purposes, an 8% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1998. The rate was assumed to
decrease gradually each year to a rate of 6% during 2000 and remain at that
level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A 1% change in assumed health care cost
trend rates would have the following effects (000 omitted):
1% Increase 1% Decrease
=========================================================================
Effect on total of service and
interest cost components of
net periodic postretirement
health care benefit cost $ 70 $ (62)
Effect on the health care component
of the accumulated postretirement
benefit obligation $ 335 $ (303)
=========================================================================
GBC 1998 Annual Report
26
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
- -------------------------------------------------------------------------------
(5) DEBT AND CREDIT ARRANGEMENTS
- -------------------------------------------------------------------------------
Currently, GBC has various short-term, variable-rate credit arrangements
totaling $56.0 million. Outstanding borrowings under these arrangements totaled
$27.5 million at December 31, 1998. Interest rates on these arrangements are
primarily based on the lenders' costs of funds plus applicable margins. None of
the lenders under these credit arrangements are committed to continue to extend
credit after the maturities of outstanding borrowings or to extend the
maturities of any borrowings.
Information regarding short-term debt for the three years ended December 31,
1998, 1997 and 1996 is as follows (000 omitted):
MAXIMUM
WEIGHTED AVERAGE MONTH-END BALANCE AVERAGE AMOUNT WEIGHTED AVERAGE
BALANCE AT INTEREST RATE AT OUTSTANDING OUTSTANDING INTEREST RATE
END OF YEAR END OF YEAR DURING THE YEAR DURING THE YEAR DURING THE YEAR
==================================================================================================================
(A) (B) (C) (D) (E)
- ------------------------------------------------------------------------------------------------------------------
1998
NOTES PAYABLE TO BANKS $ 27,462 6.7% $ 83,919 $56,384 7.4%
1997
Notes payable to banks 40,247 6.0 63,161 42,893 7.2
1996
Notes payable to banks 31,700 8.3 41,757 31,272 7.1
==================================================================================================================
(A) Notes payable by GBC's foreign subsidiaries were $27,462,000 at December
31, 1998, $24,566,000 at December 31, 1997 and $13,160,000 at December 31,
1996.
(B) The weighted average interest rate is computed by dividing the annualized
interest expense for the short-term debt outstanding by the short-term debt
outstanding at December 31.
(C) The composition of GBC's short-term debt will vary by category at any point
in time during the year.
(D) Average amount outstanding during the year is computed by dividing the
total daily outstanding principal balances by 365 days in 1998 and 1997,
and by 366 days in 1996.
(E) The weighted average interest rate during the year is computed by dividing
the actual short-term interest expense by the average short-term debt
outstanding.
GBC's current multicurrency revolving credit facility (the "Revolving Credit
Facility") with a group of international banks provides for up to the equivalent
of $475 million of unsecured revolving credit borrowings through January 2002.
GBC has the option, subject to the extension of additional credit by new or
existing banks, of increasing the size of the facility by an additional $75
million. Outstanding borrowings under the Revolving Credit Facility totaled
$320.9 million at December 31, 1998. Interest and facility fees are payable at
varying rates as specified in the loan agreement, and as of December 31, 1998,
the applicable facility fee was 0.35% per annum. Amounts outstanding under the
Revolving Credit Facility are classified as long-term debt on GBC's balance
sheet.
The Revolving Credit Facility contains, among other things, certain restrictive
covenants which change from time to time as specified in the loan agreement.
Under the most restrictive of the covenants applicable as of December 31, 1998,
GBC must maintain a consolidated current ratio of not less than 1.25 to 1.00, an
interest coverage ratio of not less than 2.5 to 1.0, a leverage ratio for senior
debt to earnings before income taxes, depreciation and amortization of not more
than 3.5 to 1.0, and a leverage ratio for total debt of not more than 4.5 to
1.0. GBC was in compliance with these covenants as of December 31, 1998.
In May 1998, GBC issued $150 million of 9 3/8% Senior Subordinated notes due
November 2008. The net proceeds received from the issuance of the notes totaled
$146.1 million, which were primarily used to finance the purchase of Ibico AG.
The Senior Subordinated notes are guaranteed by certain subsidiaries of GBC. See
Note 13 to the Consolidated Financial Statements for additional information.
The book value of GBC's debt approximated the fair market value as of December
31, 1998 and 1997.
GBC 1998 Annual Report
27
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
Long-term debt consists of the following at December 31, 1998 and 1997 --
outstanding borrowings denominated in foreign currencies have been converted to
U.S. dollars (000 omitted):
DECEMBER 31,
1998 1997
===============================================================================
REVOLVING CREDIT FACILITY
U.S. Dollar Borrowings
(floating interest rate-- 6.2% at December 31,
1998 and 6.61% at December 31, 1997) $ 288,300 $ 302,400
British Pound Borrowings
(floating interest rate -- 7.8% at
December 31, 1998) 19,416 --
Swiss Franc Borrowings
(floating interest rate -- 2.33% at December
31, 1998) 7,785 --
Dutch Guilder Borrowings
(floating interest rate-- 4.3% at December 31,
1998 and 4.22% at December 31, 1997) 5,394 4,728
INTERNATIONAL CREDIT AGREEMENT
Australian Dollar Borrowings
(floating interest rate-- 6.5% at December 31,
1998 and 6.68% at December 31, 1997) 2,449 2,722
INDUSTRIAL REVENUE/DEVELOPMENT BONDS ("IRB" OR "IDB")
IDB, due March 2026
(floating interest rate-- 4.20% at December 31,
1998 and 3.95% at December 31, 1997) 7,511 7,511
IRB, due annually from July 1994 to July 2008
(floating interest rate-- 3.60% at December 31,
1998 and 4.60% at December 31, 1997) 1,750 1,900
IRB, due annually from June 2002 to June 2007
(floating interest rate-- 3.45% at December 31,
1998 and 4.20% at December 31, 1997) 1,050 1,050
NOTES PAYABLE
Senior Subordinated notes, U.S. Dollar Borrowing,
due 2008 150,000 --
(interest rate-- 9.375%)
Note payable, Dutch Guilder Borrowing, due
monthly November 1994 to October 2004
(interest rate-- 8.85%) 1,782 2,000
Note payable, Dutch Guilder Borrowing, due June 2000
(interest rate-- 7.05%) 1,701 1,634
Other Borrowings 4,425 847
- -------------------------------------------------------------------------------
Total debt 491,563 324,792
Less--current maturities 972 722
- -------------------------------------------------------------------------------
Total long-term debt $ 490,591 $ 324,070
===============================================================================
The scheduled maturities of debt for each of the five years subsequent to
December 31, 1998, are as follows (000 omitted):
YEAR ENDING DECEMBER 31 AMOUNT
===============================================================================
1999 $ 972
2000 6,002
2001 1,682
2002 321,813
2003 932
Thereafter 160,162
- -------------------------------------------------------------------------------
TOTAL $491,563
===============================================================================
GBC 1998 Annual Report
28
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
- -------------------------------------------------------------------------------
(6) DERIVATIVE FINANCIAL INSTRUMENTS
- -------------------------------------------------------------------------------
INTEREST RATE SWAPS, TREASURY RATE-LOCK AND
INTEREST RATE CAP AGREEMENTS
From time to time, GBC has entered into interest rate swap, treasury rate-lock
and interest rate cap agreements to hedge its interest rate exposures. Under
interest rate swap agreements, GBC agrees with other parties to exchange, at
specified intervals, the differences between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed-upon notional principal
amount. The fair values of the interest rate swap agreements are estimated using
quotes from brokers and represents the cash requirements if the existing
agreements had been settled at year end. Selected information related to GBC's
interest rate swap agreements is as follows (amounts in millions):
DECEMBER 31,
1998 1997
===============================================================================
Notional amount $ 200.0 $ 165.0
Fair value - net unrecognized loss (3.9) (1.3)
===============================================================================
GBC has entered into interest rate cap agreements with commercial banks, which
require the Company to pay one-time fees based upon notional principal amounts.
Interest rate cap agreements entitle GBC to receive the amounts, if any, by
which floating interest rates exceed the fixed rates stated in the agreements.
Selected information related to GBC's interest rate cap agreements is as follows
(amounts in millions):
DECEMBER 31,
1998 1997
===============================================================================
Notional amount $ 5.0 $ 25.0
Fair value - net unrecognized loss -- (.1)
===============================================================================
In 1997 and 1998, GBC entered into treasury rate-lock agreements to hedge
interest rates on a portion of its long-term debt. At December 31, 1997 the
agreements, which had a total notional principal amount of $100.0 million, had a
fair value of $101.5 million. The treasury rate-lock agreements were settled
during 1998 and were included as part of the issuance costs of the Company's
$150 million Senior Subordinated notes offering.
GBC is exposed to potential losses in the event of nonperformance by the
counterparties to the interest rate swap and interest rate cap agreements,
though the Company attempts to mitigate this risk by diversifying its counter-
parties.
FOREIGN EXCHANGE CONTRACTS
GBC enters into foreign exchange contracts to hedge foreign currency risks.
These contracts hedge firmly committed transactions such as inventory purchases,
royalties and management fees, and intercompany loans. Gains and losses on
foreign exchange contracts are recorded in a comparable manner to the underlying
transaction being hedged (e.g., costs related to inventory purchases are
recorded to inventory and recognized in cost of sales). Obligations under
foreign exchange contracts are valued at the spot rates at the respective
balance sheet date. Selected information related to GBC's foreign exchange
contracts is as follows (amounts in millions):
DECEMBER 31,
1998 1997
===============================================================================
Notional amount:
Obligations to purchase U.S. dollars $ 48.6 $ 47.6
Obligations to purchase foreign currencies 2.0 71.5
- -------------------------------------------------------------------------------
50.6 119.1
Fair market value
Obligations to purchase U.S. dollars 49.1 46.9
Obligations to purchase foreign currencies 2.1 70.6
- -------------------------------------------------------------------------------
51.2 117.5
- -------------------------------------------------------------------------------
Net unrecognized gain (loss) $ .6 $ (1.6)
===============================================================================
Foreign exchange contracts as of December 31, 1998 had various maturities
through December 29, 2000. The unrealized gains and losses are substantially
offset by changes in the valuation of the underlying items being hedged.>>
GBC 1998 Annual Report
29
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
- -------------------------------------------------------------------------------
(7) RENTS AND LEASES
- -------------------------------------------------------------------------------
Future minimum rental payments and guaranteed residual payments required for all
non-cancelable lease terms in excess of one year as of December 31, 1998 are as
follows (000 omitted):
YEAR ENDING OPERATING
DECEMBER 31 LEASE PAYMENTS
===============================================================================
1999 $15,814
2000 14,171
2001 11,095
2002 8,217
2003 5,832
After 2003 29,590
- -------------------------------------------------------------------------------
Total minimum lease payments $84,719
===============================================================================
Total rental expense for the years ended December 31, 1998, 1997 and 1996 was
$10,624,000 $9,356,000 and $8,253,000, respectively.
- -------------------------------------------------------------------------------
(8) COMMON STOCK AND STOCK OPTIONS
- -------------------------------------------------------------------------------
GBC's Certificate of Incorporation provides for 40,000,000 authorized shares of
common stock, $.125 par value per share, and 4,796,550 shares of Class B common
stock, $.125 par value per share. Each Class B share is entitled to 15 votes and
is to be automatically converted into one share of common stock upon transfer
thereof. All of the Class B shares are owned by Lane Industries, Inc., GBC's
majority stockholder.
As of December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share",
which requires the presentation of basic and diluted earnings per share. The
following table illustrates the computation of basic and diluted earnings per
share (000 omitted):
YEAR ENDED DECEMBER 31,
1998 1997 1996
===============================================================================
Numerator:
Net Income $23,792 $28,667 $25,213
Denominator:
Denominator for basic
earnings per share -- weighted
average shares 15,724 15,760 15,743
Effect of dilutive securities:
Employee stock options 157 130 66
- -------------------------------------------------------------------------------
Denominator for diluted
earnings per share -- adjusted
weighted-average shares
and assumed conversions 15,881 15,890 15,809
- -------------------------------------------------------------------------------
Earnings per share-- basic $ 1.51 $ 1.82 $ 1.60
- -------------------------------------------------------------------------------
Earnings per share-- diluted 1.50 1.80 1.59
===============================================================================
GBC has a non-qualified stock option plan for officers, including officers who
are directors and other key employees of the Company. Options may be granted
during a ten-year period at a purchase price of not less than 85% of the fair
market value on the date of the grant. Options granted may be exercised in four
equal parts over a period not to exceed eight years from the date of grant,
except that no part of an option may be exercised until at least one year from
the date of grant has elapsed. GBC accounts for this plan under APB Opinion No.
25, "Accounting for Stock Issued to Employees," under which no compensation cost
has been recognized. Had compensation cost for this plan been determined as
defined in FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
GBC's net income and earnings per share would have been reduced to the following
pro forma amounts (000 omitted, except per share data):
YEAR ENDED DECEMBER 31,
1998 1997
===============================================================================
Net Income: As Reported $ 23,792 $28,667
Pro Forma 21,674 28,200
Earnings per share -- basic:
As Reported $ 1.51 $ 1.82
Pro Forma 1.38 1.79
Earnings per share -- diluted:
As Reported $ 1.50 $ 1.80
Pro Forma 1.36 1.77
===============================================================================
GBC 1998 Annual Report
30
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
A summary of the stock option activity is as follows (000 omitted):
YEAR ENDED DECEMBER 31,
1998 1997
WTD. AVG. WTD. AVG.
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
===============================================================================
Shares under option
at beginning of year 462 $22 435 $20
Options granted 266 30 84 30
Options exercised (63) 19 (51) 18
Options expired/canceled (12) 21 (6) 20
- -------------------------------------------------------------------------------
Shares under option
at end of year 653 26 462 22
- -------------------------------------------------------------------------------
Options exercisable 52 22 48 18
- -------------------------------------------------------------------------------
Weighted average fair
value of options granted $13.41 $13.72
===============================================================================
The 653,470 options outstanding at December 31, 1998 have exercise prices
between $14.50 and $30.50 per share, with a weighted average exercise price of
$25.64 per share and a weighted average remaining contractual life of 3.9 years.
The fair value of each option granted is estimated on the grant date using the
Black-Scholes option pricing model. The following assumptions were made in
estimating fair value:
DECEMBER 31,
1998 1997
Assumption WTD. AVG. WTD. AVG.
===============================================================================
Dividend yield 1.4% 1.51%
Risk-free interest rate 5.6% 6.5%
Expected life 8 years 8 years
Expected volatility 37.45% 37.17%
===============================================================================
- -------------------------------------------------------------------------------
(9) INCOME TAXES
- -------------------------------------------------------------------------------
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. Future tax benefits, such as net operating loss carryforwards, are
recognized to the extent that realization of such benefits is more likely than
not.
The provision for income taxes was as follows (000 omitted):
YEAR ENDED DECEMBER 31,
1998 1997 1996
===============================================================================
Currently payable:
Federal $ 7,290 $11,000 $ 7,988
State 2,042 2,759 1,672
Foreign 4,060 3,927 5,250
- -------------------------------------------------------------------------------
Total current 13,392 17,686 14,910
- -------------------------------------------------------------------------------
Deferred payable:
Federal 904 2,797 1,918
Foreign 1,899 (970) 513
- -------------------------------------------------------------------------------
Total deferred 2,803 1,827 2,431
- -------------------------------------------------------------------------------
Total provision $16,195 $19,513 $17,341
===============================================================================
GBC 1998 Annual Report
31
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
GBC's effective income tax rate varies from the statutory Federal income tax
rate as a result of the following factors:
YEAR ENDED DECEMBER 31,
1998 1997 1996
===============================================================================
U.S. Statutory rate 35.0% 35.0% 35.0%
Tax allocation (benefit) charge(1) (3.0) (0.5) 0.5
State income taxes, net of
federal income tax benefit 3.3 3.7 2.6
Net effect of international
subsidiaries' foreign tax
rates after balance sheet
translation gains and losses 2.0 5.2 (0.3)
Net effect of remission of
foreign earnings 1.8 (2.0) 0.3
Non-tax deductible items,
principally goodwill 2.2 0.6 0.6
Other, net (.8) (1.5) 2.1
- -------------------------------------------------------------------------------
Effective tax rate 40.5% 40.5% 40.8%
===============================================================================
(1) The (benefit) charge results from a tax allocation agreement between GBC and
Lane Industries, Inc. entered into in 1978. Under the terms of the
agreement, Lane Industries, Inc. has agreed to share with GBC a portion of
the Federal income tax savings or additional costs, if any, resulting from
filing consolidated income tax returns. Lane Industries, Inc. is GBC's
majority stockholder.
Income before taxes was as follows (000 omitted):
YEAR ENDED DECEMBER 31,
1998 1997 1996
===============================================================================
United States $ 25,267 $ 46,897 $ 26,489
Foreign 14,720 1,283 16,065
- -------------------------------------------------------------------------------
Total income
before taxes $ 39,987 $ 48,180 $ 42,554
===============================================================================
Deferred income tax assets and liabilities reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of GBC's deferred tax assets and liabilities are as
follows (000 omitted):
YEAR ENDED DECEMBER 31,
1998 1997
===============================================================================
Items creating deferred tax assets:
Foreign tax credits $ 5,672 $ 4,872
Net operating loss carryovers 5,132 3,139
Inventory valuation 4,259 2,353
Foreign deferred tax assets 2,160 2,806
Vacation pay 1,031 840
Worker's compensation 632 813
Restructuring reserves 441 1,053
Capital loss carryovers 75 313
Other 3,906 1,458
- -------------------------------------------------------------------------------
Gross deferred tax assets 23,308 17,647
- -------------------------------------------------------------------------------
Valuation allowance (10,879) (8,324)
- -------------------------------------------------------------------------------
Total deferred tax assets 12,429 9,323
- -------------------------------------------------------------------------------
Items creating deferred tax liabilities:
Depreciation 4,692 3,310
Amortization of intangible assets 10,358 6,114
Foreign deferred tax liabilities 4,692 3,438
Withholding taxes 1,237 1,253
Other 103 216
- -------------------------------------------------------------------------------
Total deferred tax liabilities 21,082 14,331
- -------------------------------------------------------------------------------
Net deferred tax (liability) $ (8,653) $ (5,008)
===============================================================================
GBC 1998 Annual Report
32
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
A valuation allowance is provided to reduce the deferred tax assets to a level
which, more likely than not, will be realized. The net deferred tax assets
reflects management's estimate of the amount which will be realized from future
profitability which can be predicted with reasonable accuracy.
At December 31, 1998, the Company has $5,132,000 of net operating loss
carryforwards available to reduce future taxable income of certain international
subsidiaries. These loss carryforwards expire in the years 1999 through 2004 or
have an unlimited carryover period. A valuation allowance has been provided for
a portion of the deferred tax assets related to those loss carryforwards which
may expire unutilized.
- -------------------------------------------------------------------------------
(10) BUSINESS SEGMENTS AND FOREIGN OPERATIONS
- -------------------------------------------------------------------------------
Effective January 1, 1998, GBC adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement requires that public
business enterprises report certain financial information in a similar manner as
reported to the chief operating decision makers of the company for the purposes
of evaluating performance and allocating resources to the various operating
segments. For the purposes of this disclosure, GBC has identified three
reportable operating segments based on the amount of revenues and operating
income of these segments. GBC's operating segments are based on the organization
of GBC into business groups comprised of similar products and services. The
Document Finishing Group's revenues are primarily derived from sales of binding
and punching equipment and related supplies, custom binders and folders, and
maintenance and repair services. The Films Group's revenues are primarily
derived through sales of thermal films, mid-range and commercial high-speed
laminators, large-format digital print laminators. The Document Finishing Group
and the Films Group's products and services are sold through direct channels to
the general office markets, commercial reprographic centers, educational and
training markets, commercial printers, and to government agencies. The Office
Products Group's revenues are primarily derived from the sale of binding and
laminating equipment and supplies, document shredders, visual communications
products and desktop accessories through indirect channels including office
product superstores, contract/commercial stationers, wholesalers, mail order
companies and retail dealers. Expenses incurred by the three reportable segments
described above relate to costs incurred to manufacture or purchase products and
selling, general and administrative costs. The All Others category presented
below primarily represents expenses of a corporate nature and revenues and
expenses for certain entities not assigned to one of the other three reportable
segments.
GBC's balance sheet is managed on a consolidated basis due to similarities
between the business groups. Assets and liabilities by business group are not
reported to the chief operating decision makers as they do not represent a
measure of the true assets and liabilities of the business groups. In addition,
GBC does not separately identify interest income or expense, amortization, or
income taxes for its operating segments. Sales between business groups are
recorded at cost for domestic business units, and cost plus a normal profit
margin for sales between domestic and international business units. GBC's
business groups record expense for certain services provided and expense
allocations, however, the charges and allocations between business groups are
not significant. Segment data is provided below for the years ended December 31,
1998 and 1997. Similar data for the year ended December 31, 1996 is not
presented as this information was not reported in a similar format, and was not
comparable due to significant acquisitions which occurred during 1997 and 1998.
No single customer would have accounted for more than 10% of GBC's net sales in
1998. GBC does however, have certain major customers. The loss of, or major
reduction in business from, one or more of GBC's major customers could have a
material adverse effect on GBC's financial position or results of operations.
GBC 1998 Annual Report
33
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
YEAR ENDED DECEMBER 31, 1998
(000 omitted)
DOCUMENT OFFICE
FINISHING FILMS PRODUCTS ALL
GROUP GROUP GROUP OTHERS ELIMINATIONS TOTAL
===============================================================================================
SALES:
UNAFFILIATED CUSTOMERS $243,748 $160,685 $461,812 $ 56,169 $ -- $922,414
AFFILIATED ENTITIES 64,021 33,033 8,047 2,473 (107,574) --
OPERATING INCOME 25,849 33,937 57,992 (35,277) -- 82,501
===============================================================================================
YEAR ENDED DECEMBER 31, 1997
(000 omitted)
DOCUMENT OFFICE
FINISHING FILMS PRODUCTS ALL
GROUP GROUP GROUP OTHERS ELIMINATIONS TOTAL
===============================================================================================
Sales:
Unaffiliated customers $227,032 $158,612 $304,653 $ 79,704 $ -- $770,001
Affiliated entities 46,594 37,589 4,101 6,245 (94,529) --
Operating income 27,451 31,977 44,710 (29,806) -- 74,332
===============================================================================================
GBC's products are sold primarily in North America, Europe, Japan and Australia
to office products resellers and directly to end-users in the business,
education, commercial/professional and government markets. GBC has a large base
of customers and is not dependent on any single customer for a significant
portion of its business.
Financial information for the three years ended December 31, 1998, 1997 and
1996, by geographical area is summarized below. Export sales to foreign
customers ($16,585,000 in 1998, $19,763,000 in 1997 and $14,781,000 in 1996)
have been classified in the following tables as part of the United States sales.
YEAR ENDED DECEMBER 31, 1998
(000 omitted)
UNITED OTHER
STATES EUROPE INTERNATIONAL ELIMINATIONS TOTAL
===============================================================================================
SALES TO UNAFFILIATED CUSTOMERS $635,109 $176,170 $111,135 $ -- $922,414
LONG-LIVED ASSETS 566,423 43,199 16,452 (140,402) 485,672
===============================================================================================
YEAR ENDED DECEMBER 31, 1997
(000 omitted)
UNITED OTHER
STATES EUROPE INTERNATIONAL ELIMINATIONS TOTAL
===============================================================================================
Sales to unaffiliated customers $563,127 $103,231 $103,643 $ -- $770,001
Long-lived assets 343,117 15,812 13,458 (8,213) 364,174
===============================================================================================
YEAR ENDED DECEMBER 31, 1996
(000 omitted)
UNITED OTHER
STATES EUROPE INTERNATIONAL ELIMINATIONS TOTAL
===============================================================================================
Sales to unaffiliated customers $364,581 $ 92,622 $ 79,633 $ -- $536,836
Long-lived assets 135,643 14,544 11,403 (5,608) 155,982
===============================================================================================
GBC 1998 Annual Report
34
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
- -------------------------------------------------------------------------------
(11) QUARTERLY FINANCIAL DATA (UNAUDITED)
- -------------------------------------------------------------------------------
Summarized quarterly financial data for 1998 and 1997 was as follows (000
omitted except per share data):
THREE MONTHS ENDED
1998 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
===============================================================================
SALES $213,944 $230,708 $233,058 $244,704
GROSS PROFIT 91,940 99,525 102,049 107,257
INCOME BEFORE TAXES 11,825 6,589 12,501 9,071
NET INCOME 7,095 3,717 7,269 5,710
NET INCOME PER COMMON SHARE:
BASIC $ .45 $ .24 $ .46 $ .36
DILUTED .45 .23 .46 .36
===============================================================================
THREE MONTHS ENDED
1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
===============================================================================
Sales $180,505 $187,436 $196,613 $ 205,447
Gross profit 75,936 81,147 84,155 88,138
Income before taxes 11,286 12,018 12,038 12,838
Net income 6,772 7,211 6,855 7,829
Net income per common share:
Basic $ .43 $ .46 $ .44 $ .50
Diluted .43 .45 .43 .50
===============================================================================
- -------------------------------------------------------------------------------
(12) ACQUISITIONS AND BUSINESS COMBINATIONS
- -------------------------------------------------------------------------------
IBICO ACQUISITION (1997 INFORMATION IS UNAUDITED)
On February 27, 1998, GBC acquired Ibico AG, in a transaction accounted for as a
purchase. Ibico manufactures and markets binding and laminating machines and
related supplies. Cash consideration paid and debt assumed approximated $138.8
million. The final purchase price is subject to adjustment based upon Ibico's
1997 results and working capital at the date of acquisition. It is expected that
the purchase price will be reduced. GBC and the seller are currently negotiating
and attempting to reach a settlement. It is not expected that any settlement
will have a material impact on GBC's financial condition. The unallocated
purchase cost exceeded the estimated net assets of Ibico by approximately $95.0
million. The purchase price has been preliminarily allocated to the assets and
liabilities of Ibico based upon fair market values. Valuations and studies to
determine the fair market value of assets are currently being finalized.
Intangible assets related to the Ibico acquisition will be amortized over their
estimated lives on a straight-line basis. The results of operations of Ibico
have been included with the results of GBC from March 1, 1998. For the year
ended December 31, 1997, Ibico had net sales of 163.4 million Swiss francs, and
operating income of 5.7 million Swiss francs.
ALLFAX ACQUISITION
On January 22, 1998, GBC acquired the Allfax group of companies, a
privately-held office products manufacturer and marketer of visual
communications products headquartered in Peterborough, England. The total
purchase price for the Allfax companies was approximately $6.5 million.
1997 ACQUISITIONS
Effective January 1, 1997, GBC completed the purchase of the assets and business
of Quartet Manufacturing Company. Located in Skokie, Illinois, Quartet
manufactures and distributes visual communications products including marker
boards, bulletin boards, and easels. The total consideration paid for Quartet
was approximately $216.0 million.
On April 23, 1997, GBC completed the purchase of all of the capital stock of
Baker School Specialty, a manufacturer of presentation boards. The total
purchase price for Baker, including assumption of debt, was $19.2 million.
GBC 1998 Annual Report
35
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
During 1997, GBC made several smaller acquisitions acquiring the assets of
Visucom, Danka Datakey, Jenrite and Printing Wire Supplies. These companies
enhance and expand GBC's product offerings and services in Australia, New
Zealand and Europe. Total consideration paid for these acquisitions was
approximately $5.3 million.
1996 ACQUISITIONS
On October 10, 1996, GBC entered into an agreement with GMP Co., Ltd. of South
Korea to jointly develop and market lamination equipment and supplies. With the
agreement, GBC became a 33% equity shareholder in GMP, a leading worldwide
supplier of laminating systems. The total consideration paid for the investment
in GMP was $9.9 million.
On January 19, 1996, GBC acquired the business and certain assets of the T.A.C.
Group, which operated under the name of Fordigraph. The business, located in
Australia, is a distributor of paper shredders, mail room equipment, laminating
machines, presentation products, binding systems and supplies. The total
consideration paid for Fordigraph was $12.1 million.
All acquisitions have been accounted for as purchase transactions, with the
results of operations included in the financial statements since the date of the
acquisition. The excess of the purchase price over the net assets acquired is
estimated to be approximately $103.3 million in 1998, $169.0 million in 1997 and
$8.0 million in 1996.
- --------------------------------------------------------------------------------
(13) CONDENSED CONSOLIDATING FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
During 1998 GBC issued $150 million of 9 3/8% Senior Subordinated notes due 2008
in order to finance the Ibico acquisition. Each of GBC's domestic restricted
subsidiaries have jointly and severally, and fully and unconditionally
guaranteed the Senior Subordinated notes (see Note 5) of GBC. Rather than filing
separate financial statements for each guarantor subsidiary with the Securities
and Exchange Commission, GBC has elected to present consolidating financial
statements which detail the results of operations, financial position and cash
flows of the Parent, Guarantors, and Non-Guarantors (in each case carrying
investments under the equity method), and the eliminations necessary to arrive
at the information for GBC on a consolidated basis.
GBC 1998 Annual Report
36
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
CONSOLIDATING BALANCE SHEETS (000 omitted)
DECEMBER 31, 1998
PARENT GUARANTORS (a) NON-GUARANTORS ELIMINATIONS CONSOLIDATED
====================================================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 4,049 $ (650) $ 2,696 $ -- $ 6,095
Receivables, net 118,477 1,609 67,853 -- 187,939
Inventories, at lower of cost or market 79,657 7,033 77,760 67 164,517
Deferred tax assets 9,386 957 2,160 (74) 12,429
Other 18,667 559 8,437 -- 27,663
Due from affiliates 84,457 53,169 2,465 (140,091) --
- --------------------------------------------------------------------------------------------------------------------
Total current assets 314,693 62,677 161,371 (140,098) 398,643
Net property, plant and equipment 85,589 11,307 29,540 -- 126,436
Cost in excess of fair value of
assets of acquired companies, net
of amortization 191,511 31,264 82,073 (199) 304,649
Other 45,732 1,622 10,460 (1,704) 56,110
Investment in subsidiaries 168,617 152,006 -- (320,623) --
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 806,142 $ 258,876 $ 283,444 $ (462,624) $ 885,838
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30,775 $ 3,187 $ 17,707 $ -- $ 51,669
Accrued liabilities:
Salaries wages and profit
sharing contributions 8,021 258 3,878 -- 12,157
Taxes, other than income 928 133 1,225 -- 2,286
Deferred income on maintenance
agreements 7,348 -- 3,235 -- 10,583
Other 37,460 (644) 15,273 -- 52,089
Notes payable -- -- 27,462 -- 27,462
Current maturities of long-term debt 413 15 544 -- 972
Due to affiliates 21,910 58,956 60,057 (140,923) --
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 106,855 61,905 129,381 (140,923) 157,218
- --------------------------------------------------------------------------------------------------------------------
Long-term debt-- affiliated 1,704 -- -- (1,704) --
Long-term debt, less current maturities 473,559 1,050 15,982 -- 490,591
Other long-term liabilities 7,901 226 5,633 -- 13,760
Deferred tax liabilities 12,936 3,454 4,692 -- 21,082
Stockholders equity:
Common stock 1,962 5 5,171 (5,176) 1,962
Class B common stock 300 -- -- -- 300
Additional paid-in capital 10,976 53,421 102,788 (156,209) 10,976
Retained earnings 225,112 143,616 27,847 (171,463) 225,112
Treasury stock (26,632) -- -- -- (26,632)
Accumulated other comprehensive
income (8,531) (4,801) (8,050) 12,851 (8,531)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 203,187 192,241 127,756 (319,997) 203,187
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 806,142 $ 258,876 $ 283,444 $ (462,624) $ 885,838
====================================================================================================================
(a) Effective June 30, 1998, GBC sold its US RingBinder business (USRB). As of
December 31, 1997, USRB had stockholder's equity of $11.8 million.
GBC 1998 Annual Report
37
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
CONSOLIDATING BALANCE SHEETS (000 omitted)
DECEMBER 31, 1997
PARENT GUARANTORS (a) NON-GUARANTORS ELIMINATIONS CONSOLIDATED
===================================================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 1,098 $ (26) $ 2,681 $ -- $ 3,753
Receivables, net 100,939 9,224 50,624 -- 160,787
Inventories, at lower of cost or market 86,418 17,875 39,276 -- 143,569
Deferred tax assets 5,889 855 2,806 (227) 9,323
Other 5,689 1,311 3,313 -- 10,313
Due from affiliates 31,181 140,614 2,856 (174,651) --
- -------------------------------------------------------------------------------------------------------------------
Total current assets 231,214 169,853 101,556 (174,878) 327,745
Net property, plant and equipment 85,319 10,598 17,504 -- 113,421
Cost in excess of fair value of
assets of acquired companies,
net of amortization 163,564 32,425 8,554 -- 204,543
Other 45,716 4,472 3,525 (6,508) 47,205
Investment in subsidiaries 194,295 27,062 -- (221,357) --
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 720,108 $ 244,410 $ 131,139 $(402,743) $ 692,914
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 28,139 $ 5,727 $ 9,113 $ -- $ 42,979
Accrued liabilities:
Salaries wages and profit
sharing contributions 9,850 921 3,442 -- 14,213
Taxes, other than income 1,923 410 1,428 -- 3,761
Deferred income on maintenance
agreements 6,249 433 3,128 -- 9,810
Other 28,007 3,245 9,118 -- 40,370
Notes payable 14,968 -- 25,279 -- 40,247
Current maturities of long-term debt 350 -- 372 -- 722
Due to affiliates 113,467 39,515 26,450 (179,432) --
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 202,953 50,251 78,330 (179,432) 152,102
- -------------------------------------------------------------------------------------------------------------------
Long-term debt-- affiliated -- -- 6,558 (6,558) --
Long-term debt, less current maturities 311,860 1,050 11,160 -- 324,070
Other long-term liabilities 6,710 338 4,320 -- 11,368
Deferred tax liabilities 7,542 3,351 3,438 -- 14,331
Stockholders equity:
Common stock 1,962 26 5,164 (5,190) 1,962
Class B common stock 300 -- -- -- 300
Additional paid-in capital 9,708 67,024 8,105 (75,129) 9,708
Retained earnings 208,394 126,000 20,095 (146,095) 208,394
Treasury stock (23,213) -- -- -- (23,213)
Accumulated other
comprehensive income (6,108) (3,630) (6,031) 9,661 (6,108)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 191,043 189,420 27,333 (216,753) 191,043
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 720,108 $ 244,410 $ 131,139 $(402,743) $ 692,914
===================================================================================================================
(a) Effective June 30, 1998, GBC sold its US RingBinder business (USRB). As of
December 31, 1997, USRB had stockholder's equity of $11.8 million.
GBC 1998 Annual Report
38
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
CONSOLIDATING INCOME STATEMENTS (000 omitted)
YEAR ENDED DECEMBER 31, 1998
PARENT GUARANTORS (a) NON-GUARANTORS ELIMINATIONS CONSOLIDATED
======================================================================================================================
Unaffiliated sales $ 620,271 $ 14,838 $ 287,305 $ -- $ 922,414
Affiliated sales 87,564 27,906 5,842 (121,312) --
- ----------------------------------------------------------------------------------------------------------------------
Net sales 707,835 42,744 293,147 (121,312) 922,414
Cost of sales, including development
and engineering 423,319 41,644 179,390 (122,417) 521,936
Selling, service and administrative 205,352 7,696 94,291 -- 307,339
Amortization of goodwill and
related intangibles 7,031 1,323 2,284 -- 10,638
- ----------------------------------------------------------------------------------------------------------------------
Operating income 72,133 (7,919) 17,182 1,105 82,501
Interest 37,953 1,273 4,328 (4,974) 38,580
Loss on sale of US RingBinder -- 3,500 -- -- 3,500
Other (income) expense, net 329 (21,716) (560) 22,381 434
- ----------------------------------------------------------------------------------------------------------------------
Income before taxes and
undistributed earnings of
wholly-owned subsidiaries 33,851 9,024 13,414 (16,302) 39,987
Income taxes 9,727 61 5,960 447 16,195
Income before undistributed earnings of
wholly-owned subsidiaries 24,124 8,963 7,454 (16,749) 23,792
Undistributed earnings (loss)
of wholly-owned subsidiaries (332) 15,472 -- (15,140) --
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 23,792 $ 24,435 $ 7,454 $( 31,889) $ 23,792
======================================================================================================================
YEAR ENDED DECEMBER 31, 1997
PARENT GUARANTORS (a) NON-GUARANTORS ELIMINATIONS CONSOLIDATED
======================================================================================================================
Unaffiliated sales $ 517,143 $ 45,983 $ 206,875 $ -- $ 770,001
Affiliated sales 33,657 27,377 6,256 (67,290) --
- ----------------------------------------------------------------------------------------------------------------------
Net sales 550,800 73,360 213,131 (67,290) 770,001
Cost of sales, including development
and engineering 317,364 62,316 128,556 (67,611) 440,625
Selling, service and administrative 167,229 9,561 70,395 -- 247,185
Amortization of goodwill and related
intangibles 6,180 1,290 389 -- 7,859
- ----------------------------------------------------------------------------------------------------------------------
Operating income 60,027 193 13,791 321 74,332
Interest 32,564 1,392 3,042 (12,421) 24,577
Other (income) expense, net (14,993) (14,812) 8,800 22,580 1,575
- ----------------------------------------------------------------------------------------------------------------------
Income before taxes and
undistributed earnings of
wholly-owned subsidiaries 42,456 13,613 1,949 (9,838) 48,180
Income taxes 13,203 3,369 2,810 131 19,513
Income before undistributed earnings of
wholly-owned subsidiaries 29,253 10,244 (861) (9,969) 28,667
Undistributed earnings (loss) of
wholly-owned subsidiaries (586) (8,471) -- 9,057 --
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 28,667 $ 1,773 $ (861) $ (912) $ 28,667
======================================================================================================================
(a) Effective June 30, 1998, GBC sold its US RingBinder business (USRB).
For the year ended December 31, 1997, USRB had net income of $590,000.
GBC 1998 Annual Report
39
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
==============================================================================
CONSOLIDATING INCOME STATEMENTS (000 omitted)
YEAR ENDED DECEMBER 31, 1996
PARENT GUARANTORS (a) NON-GUARANTORS ELIMINATIONS CONSOLIDATED
==================================================================================================================
Unaffiliated sales $ 307,453 $ 57,138 $ 172,245 $ -- $ 536,836
Affiliated sales 47,763 11,296 3,696 (62,755) --
- ------------------------------------------------------------------------------------------------------------------
Net sales 355,216 68,434 175,941 (62,755) 536,836
Cost of sales, including development
and engineering 225,509 52,707 99,770 (62,037) 315,949
Selling, service and administrative 103,220 10,191 58,062 -- 171,473
Amortization of goodwill and related
intangibles 95 1,295 309 -- 1,699
- ------------------------------------------------------------------------------------------------------------------
Operating income 26,392 4,241 17,800 (718) 47,715
Interest 13,967 1,401 2,705 (11,901) 6,172
Other (income) expense, net (4,031) (10,225) (1,774) 15,019 (1,011)
- ------------------------------------------------------------------------------------------------------------------
Income before taxes and
undistributed earnings of
wholly-owned subsidiaries 16,456 13,065 16,869 (3,836) 42,554
Income taxes 8,033 3,736 5,859 (287) 17,341
Income before undistributed earnings
of wholly-owned subsidiaries 8,423 9,329 11,010 (3,549) 25,213
Undistributed earnings (loss) of wholly-
owned subsidiaries 16,788 7,301 -- (24,089) --
- ------------------------------------------------------------------------------------------------------------------
Net income $ 25,211 $ 16,630 $ 11,010 $ (27,638) $ 25,213
==================================================================================================================
CONSOLIDATING STATEMENT OF CASH FLOWS (000 omitted)
YEAR ENDED DECEMBER 31, 1998
PARENT GUARANTORS (a) NON-GUARANTORS ELIMINATIONS CONSOLIDATED
==================================================================================================================
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 39,637 $ (493) $ (14,258) $ (759) $ 24,127
- ------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (16,455) (4,938) (8,533) -- (29,926)
Payments for acquisitions and
investments, net of cash acquired (31,147) (110,451) (6,363) -- (147,961)
Proceeds from sale of US RingBinder -- 15,529 -- -- 15,529
Proceeds from sale of plant
and equipment 3,886 2,879 108 -- 6,873
Intercompany sale of subsidiaries -- (6,018) 6,018 -- --
Capital contributions to subsidiaries (971) (6,657) -- 7,628 --
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing
activities (44,687) (109,656) (8,770) 7,628 (155,485)
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase (reduction) in notes payable/
intercompany balances (138,180) 109,457 15,917 -- (12,806)
Payments for debt issuance costs (8,638) -- -- -- (8,638)
(Repayment) of long-term debt (60,000) -- (1,522) 643 (60,879)
Increase in long-term debt 224,045 -- 2,212 -- 226,257
Increase in current portion of
long-term debt -- 68 138 -- 206
Dividends paid (7,075) -- (156) 156 (7,075)
Purchase of treasury stock (3,566) -- -- -- (3,566)
Proceeds from the exercise of
stock options 1,415 -- -- -- 1,415
Capital contributions from
parent company -- -- 7,668 (7,668) --
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing
activities 8,001 109,525 24,257 (6,869) 134,914
Effect of exchange rates on cash -- -- (1,214) -- (1,214)
- ------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH
& CASH EQUIVALENTS 2,951 (624) 15 -- 2,342
Cash and cash equivalents at the
beginning of year 1,098 (26) 2,681 -- 3,753
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE
END OF THE YEAR $ 4,049 $ (650) $ 2,696 $ -- $ 6,095
==================================================================================================================
(a) Effective June 30, 1998, GBC sold its US RingBinder business (USRB).
For the year ended December 31, 1996, USRB had net income of $1.3 million.
GBC 1998 Annual Report
40
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GBC AND SUBSIDIARIES
===============================================================================
CONSOLIDATING STATEMENT OF CASH FLOWS (000 omitted)
YEAR ENDED DECEMBER 31, 1997
PARENT GUARANTORS (a) NON-GUARANTORS ELIMINATIONS CONSOLIDATED
==================================================================================================================
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 30,686 $ 6,119 $ (3,137) $ (12,951) $ 20,717
- ------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (20,502) (4,035) (5,082) -- (29,619)
Payments for acquisitions and
investments, net of cash acquired (238,762) (1,711) (757) -- (241,230)
Proceeds from sale of plant
and equipment 3,402 606 694 -- 4,702
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing
activities (255,862) (5,140) (5,145) -- (266,147)
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase (reduction) in notes payable/
intercompany balances (9,571) -- 13,912 -- 4,341
(Repayment) of long-term debt -- -- (502) -- (502)
Increase in long-term debt 240,950 -- 2,786 2,792 246,528
(Reduction) increase in current
portion of long-term debt -- -- 80 -- 80
Dividends paid (6,935) -- (10,159) 10,159 (6,935)
Purchase of treasury stock (1,011) -- -- -- (1,011)
Proceeds from the exercise of
stock options 942 -- -- -- 942
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing
activities 224,375 -- 6,117 12,951 243,443
Effect of exchange rates on cash -- -- (981) -- (981)
- ------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH
& CASH EQUIVALENTS (801) 979 (3,146) -- (2,968)
Cash and cash equivalents at the
beginning of year 1,899 (1,005) 5,827 -- 6,721
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE END
OF THE YEAR $ 1,098 $ (26) $ 2,681 $ -- $ 3,753
==================================================================================================================
YEAR ENDED DECEMBER 31, 1996
PARENT GUARANTORS (a) NON-GUARANTORS ELIMINATIONS CONSOLIDATED
==================================================================================================================
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 395 $ 868 $ 4,136 $ (3,119) $ 2,280
- ------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (21,639) (1,576) (4,563) -- (27,778)
Payments for acquisitions and
investments, net of cash acquired (17,097) -- (11,784) -- (28,881)
Proceeds from sale of plant
and equipment -- -- 3,676 -- 3,676
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing
activities (38,736) (1,576) (12,671) -- (52,983)
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase (reduction) in notes payable/
intercompany balances 10,700 -- 3,492 -- 14,192
(Repayment) of long-term debt -- -- -- -- --
Increase in long-term debt 32,874 -- 10,709 -- 43,583
(Reduction) increase in current
portion of long-term debt -- -- (358) -- (358)
Dividends paid (6,769) -- (3,119) 3,119 (6,769)
Purchase of treasury stock (1,645) -- -- -- (1,645)
Proceeds from the exercise of
stock options 1,463 -- -- -- 1,463
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing
activities 36,623 -- 10,724 3,119 50,466
Effect of exchange rates on cash -- -- 94 -- 94
- ------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH &
CASH EQUIVALENTS (1,718) (708) 2,283 -- (143)
Cash and cash equivalents at the
beginning of year 3,617 (297) 3,544 -- 6,864
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE
END OF THE YEAR $ 1,899 $ (1,005) $ 5,827 $ -- $ 6,721
==================================================================================================================
(a) Effective June 30, 1998, GBC sold its US RingBinder business (USRB).
For the year ended December 31, 1996, USRB had net income of $1.3 million.
GBC 1998 Annual Report
41
55
GBC AND SUBSIDIARIES
===============================================================================
PART II
===============================================================================
- -------------------------------------------------------------------------------
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- -------------------------------------------------------------------------------
None.
PART III
===============================================================================
- -------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------------------------------------------------------------------------------
Information required under this Item is contained in the Registrant's 1999
Definitive Proxy Statement, which is incorporated herein by reference.
- -------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------------------------------------------------------
Information required under this Item is contained in the Registrant's 1999
Definitive Proxy Statement, which is incorporated herein by reference.
- -------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------------------------------------------------------------------------------
Information required under this Item is contained in the Registrant's 1999
Definitive Proxy Statement, which is incorporated herein by reference.
- -------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------------------------------
Information required under this Item is contained in the Registrant's 1999
Definitive Proxy Statement, which is incorporated herein by reference.
PART IV
===============================================================================
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
The following consolidated statements, schedules and exhibits of General
Binding Corporation and its subsidiaries are filed as part of this report:
(1) FINANCIAL STATEMENTS
The financial statements and notes thereto are located in Part II, Item 8 of
this report.
(2) FINANCIAL STATEMENT SCHEDULE
The financial schedule required by Item 14 (d), Valuation and Qualifying
Accounts is located on page 57 of this report.
All other financial statements and schedules not listed have been omitted
because they are not applicable, not required, or because the required
information is included in the consolidated financial statements or notes
thereto.
(3) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
No. 3: Certificate of Incorporation, as amended May 11, 1988. Incorporated
by reference to Exhibit 3 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993.
No. 21: Subsidiaries of the Registrant.
No. 23: Consent of Arthur Andersen.
No. 27: Financial Data Schedule.
(B) REPORTS ON FORM 8-K
None.
42
56
SIGNATURES GBC AND SUBSIDIARIES
===============================================================================
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GENERAL BINDING CORPORATION
By: /s/ GOVI C. REDDY
---------------------------------
Govi C. Reddy
President and Chief
Executive Officer
By: /s/ WILLIAM R. CHAMBERS JR.
---------------------------------
William R. Chambers Jr.
Vice President and Chief
Financial Officer
Dated: March 25, 1999
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/ WILLIAM N. LANE III Chairman of the Board March 25, 1999
- ------------------------------ and Director
William N. Lane III
/s/ GOVI C. REDDY President, Chief Executive March 25, 1999
- ------------------------------ Officer and Director
Govi C. Reddy
/s/ ARTHUR C. NIELSEN, JR. Director March 25, 1999
- ------------------------------
Arthur C. Nielsen, Jr.
/s/ THOMAS V. KALEBIC Director March 25, 1999
- ------------------------------
Thomas V. Kalebic
/s/ WARREN R. ROTHWELL Director March 25, 1999
- ------------------------------
Warren R. Rothwell
GBC 1998 Annual Report
43
57
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS GBC AND SUBSIDIARIES
===============================================================================
ALLOWANCES FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
Changes in the allowances for doubtful accounts and sales returns were as
follows (000 omitted):
YEAR ENDED DECEMBER 31,
1998 1997 1996
===============================================================================
Balance at beginning of year $ 8,821 $ 6,424 $ 5,186
Additions charged to expense 4,636 3,530 3,118
Deductions-- write offs (5,545) (1,843) (1,788)
Other(1) 1,959 710 (92)
- -------------------------------------------------------------------------------
Balance at end of year $ 9,871 $ 8,821 $ 6,424
===============================================================================
INVENTORY RESERVES
Changes in the inventory reserve accounts were as follows (000 omitted):
YEAR ENDED DECEMBER 31,
1998 1997 1996
===============================================================================
Balance at beginning of year $ 4,906 $ 5,472 $ 5,009
Additions charged to expense 6,200 4,252 3,855
Deductions--write offs. (6,962) (4,296) (3,393)
Other(1) 5,228 (522) 1
- -------------------------------------------------------------------------------
Balance at end of year $ 9,372 $ 4,906 $ 5,472
===============================================================================
(1) Amounts primarily relate to the effects of foreign currency exchange rate
changes as well as the acquisition of Ibico in 1998, Quartet in 1997, and
Pro-Tech in 1996.
GBC 1998 Annual Report