Exhibit 99.1
SEALED AIR CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Page
Report of Independent Certified Public Accountants.................F-9
Consolidated Statements of Earnings for the three years
ended December 31, 1997...................................... F-10
Consolidated Balance Sheets at December 31, 1997 and 1996..........F-11
Consolidated Statements of Shareholders' Equity for the three
years ended December 31, 1997................................ F-13
Consolidated Statements of Cash Flows for the three years
ended December 31, 1997...................................... F-14
Notes to the Consolidated Financial Statements.....................F-15
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of Sealed Air Corporation:
We have audited the accompanying consolidated balance sheets of Sealed
Air Corporation and subsidiaries as of December 31, 1997 and 1996 and
the related consolidated statements of earnings, shareholders' equity, and
cash flows for each of the years in the three-year period ended December
31, 1997. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Sealed Air Corporation and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
s/KPMG Peat Marwick LLP
Short Hills, New Jersey
January 20, 1998, except
for note 2, which is as
of March 23, 1998
F-9
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
Years Ended December 31, 1997, 1996 and 1995
(In thousands of dollars except per share data)
1997 1996 1995
Net sales $842,833 $789,612 $723,120
Cost of sales 523,517 495,185 466,952
Gross profit 319,316 294,427 256,168
Marketing, administrative and
development expenses 172,795 164,355 147,288
Transaction expenses 8,405 - -
Operating profit 138,116 130,072 108,880
Other income (expense):
Interest income 1,696 1,482 1,187
Interest expense (6,950) (13,350) (19,106)
Other, net 626 (3,609) (3,807)
Other income (expense), net (4,628) (15,477) (21,726)
Earnings before income taxes 133,488 114,595 87,154
Income taxes 53,567 45,266 34,426
Net earnings $79,921 $69,329 $52,728
Basic earnings per common share $ 1.88 $ 1.63 $ 1.25
See accompanying notes to consolidated financial statements.
F-10
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(In thousands of dollars except share data)
1997 1996
Assets
Current assets:
Cash and cash equivalents $ 35,481 $ 2,985
Accounts receivable, less allowance for doubtful
accounts of $5,799 in 1997 and $5,623 in 1996 132,325 124,204
Other receivables 8,037 8,258
Inventories 58,895 57,231
Prepaid expenses 2,742 1,095
Deferred income taxes 13,285 13,193
Total current assets 250,765 206,966
Property and equipment:
Land and buildings 84,780 81,629
Machinery and equipment 204,241 199,275
Leasehold improvements 8,274 8,409
Furniture and fixtures 10,639 12,029
Construction in progress 7,307 6,139
315,241 307,481
Less accumulated depreciation and amortization 144,114 132,919
Property and equipment, net 171,127 174,562
Patents and patent rights, less accumulated
amortization of $16,636 in 1997 and $15,139 in 1996 10,430 11,998
Excess of cost over fair value of net assets acquired, less
accumulated amortization of $20,249 in 1997 and
$12,966 in 1996 42,149 47,840
Other assets 23,889 25,753
$498,360 $467,119
See accompanying notes to consolidated financial statements.
F-11
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(In thousands of dollars except share data)
1997 1996
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $23,929 $12,674
Current installments of long-term debt 2,641 2,891
Accounts payable 48,843 46,934
Accrued wages, salaries and related costs 36,235 33,448
Other accrued liabilities 39,220 36,401
Income taxes payable 12,742 15,708
Total current liabilities 163,610 148,056
Long-term debt, less current installments 48,506 99,900
Deferred income taxes 16,571 19,863
Other liabilities 12,390 12,651
Total liabilities 241,077 280,470
Commitments and contingent liabilities (notes 6, 7 and 10)
Shareholders' equity:
Preferred stock, no par value. Authorized: 1,000,000
shares; none issued in 1997 and 1996 - -
Common stock, $.01 par value. Authorized: 125,000,000
shares in 1997 and 60,000,000 shares in 1996; Issued:
42,856,704 shares in 1997 and 42,747,704 shares in 1996 429 427
Additional paid-in capital 180,512 167,801
Retained earnings 95,942 16,021
Accumulated translation adjustment (933) 8,615
275,950 192,864
Less:
Deferred compensation 9,821 5,988
Treasury stock at cost: 232,458 shares held
in 1997 and 226,758 shares held in 1996 8,846 227
Total shareholders' equity 257,283 186,649
$498,360 $467,119
F-12
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1997, 1996 and 1995
(In thousands of dollars)
1997 1996 1995
COMMON STOCK
Balance, beginning of year $427 $425 $201
Shares issued for awards of
contingent stock 1 1 2
Shares issued for non-cash compensation 1 1 1
Shares issued in acquisitions - - 9
Two-for-one stock split - - 212
Balance, end of year 429 427 425
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year 167,801 158,400 114,686
Shares issued for awards of
contingent stock 8,336 3,396 6,091
Tax benefit in excess of amortization on
stock awards 1,065 1,700 527
Contingent stock forfeited (7) (51) (48)
Shares issued for non-cash compensation 3,317 3,743 3,239
Shares issued in acquisitions - - 34,117
Shares issued related to prior year acquisition - 613 -
Two-for-one stock split - - (212)
Balance, end of year 180,512 167,801 158,400
RETAINED EARNINGS (DEFICIT)
Balance, beginning of year 16,021 (53,308) (106,036)
Net earnings 79,921 69,329 52,728
Balance, end of year 95,942 16,021 (53,308)
ACCUMULATED TRANSLATION ADJUSTMENT
Balance, beginning of year 8,615 7,279 6,126
Foreign currency translation (9,548) 1,336 1,153
Balance, end of year (933) 8,615 7,279
DEFERRED COMPENSATION
Balance, beginning of year (5,988) (6,232) (3,717)
Excess of fair value over proceeds from
awards of contingent stock (8,308) (3,305) (5,933)
Amortization 4,467 3,498 3,370
Contingent stock forfeited 8 51 48
Balance, end of year (9,821) (5,988) (6,232)
TREASURY STOCK
Balance, beginning of year (227) (226) (248)
Shares reissued for awards of
contingent stock 154 - -
Contingent stock forfeited (1) (1) (2)
Shares issued in acquisitions - - 24
Purchase of treasury shares (8,772) - -
Balance, end of year (8,846) (227) (226)
TOTAL SHAREHOLDERS' EQUITY $257,283 $186,649 $106,338
See accompanying notes to consolidated financial statements.
F-13
SEALED AIR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
(In thousands of dollars)
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 79,921 $ 69,329 $ 52,728
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization of property
and equipment 23,196 22,862 20,473
Other depreciation and amortization 22,582 17,035 14,807
Deferred tax provision (2,940) (5,297) (1,375)
Net losses on disposals of property
and equipment 105 149 273
Non-cash compensation 322 3,242 3,556
Other, net (2,860) 2,217 811
Change in operating assets and liabilities,
net of acquisitions:
Receivables (15,284) (7,798) (13,016)
Inventories (5,031) 1,164 (5,953)
Prepaid expenses (1,884) 1,644 (1,441)
Accounts payable 2,558 1,113 (9,262)
Other accrued liabilities 10,854 12,119 11,050
Income taxes payable (3,218) (1,714) 2,567
Net cash provided by operating activities 108,321 116,065 75,218
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (24,349) (17,015) (21,056)
Proceeds from sales of property and equipment 463 1,497 776
Net cash utilized in purchase of subsidiaries (10,097) (30,026) (27,713)
Net cash used in investing activities (33,983) (45,544) (47,993)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 13,162 108,131 75,271
Principal payments on long-term debt (56,342) (177,039) (114,281)
Net proceeds from (payments on) notes payable 10,724 (6,213) 8,098
Purchase of treasury shares (8,772) - -
Net cash used in financing activities (41,228) (75,121) (30,912)
Effect of exchange rate changes on cash
and cash equivalents (614) (76) 195
CASH AND CASH EQUIVALENTS:
Increase (decrease) during the period 32,496 (4,676) (3,492)
Balance, beginning of period 2,985 7,661 11,153
Balance, end of period $ 35,481 $ 2,985 $ 7,661
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 7,093 $ 14,173 $ 18,582
Income taxes $ 53,704 $ 39,991 $ 33,898
See accompanying notes to consolidated financial statements.
F-14
SEALED AIR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Sealed Air
Corporation and its subsidiaries (the "Company"). All significant
intercompany transactions and balances have been eliminated in
consolidation. Substantially all of the Company's non-U.S. subsidiaries
are included in the consolidated financial statements on a calendar year
basis while certain non-U.S. subsidiaries are included on the basis of a
fiscal year ended November 30.
Certain prior years' financial statement amounts have been reclassified
to conform with their 1997 presentation.
Foreign Currency
All balance sheet accounts are translated at year-end exchange rates,
and statement of earnings items are translated at weighted average
month-end exchange rates. Resulting translation adjustments are made
directly to a separate component of shareholders' equity.
Earnings before income taxes includes an aggregate exchange loss of
$1,951,000 for the year ended December 31, 1997 (an aggregate exchange
gain of $271,000 and an aggregate loss of $828,000 for the years ended
December 31, 1996 and 1995, respectively).
Cash and Cash Equivalents
Investments with original maturities of three months or less are
considered to be cash equivalents. The Company's policy is to invest
cash in excess of short-term operating and debt service requirements in
such cash equivalents, which amounted to $41,667,000 and $3,489,000 at
December 31, 1997 and 1996, respectively. These instruments consisted
of money market and commercial paper amounts stated at cost, which
approximates market because of the short maturity of these instruments.
Derivative Financial Instruments
The Company has limited involvement with derivative financial
instruments that have off-balance-sheet risk. These financial
instruments generally include cross currency swaps, interest rate swaps,
caps and collars and foreign exchange forwards and options relating to
the Company's borrowing and trade activities. Such financial
instruments are used to manage the Company's exposure to fluctuations
in interest rates and foreign exchange rates. The Company
does not purchase, hold or sell derivative financial instruments for
trading or speculative purposes. The Company is exposed to credit risk
in the event of the inability of the counterparties to perform under
their obligations. However, the Company seeks to minimize such risk by
entering into transactions with counterparties that are major financial
institutions with high credit ratings.
The Company records realized and unrealized gains and losses from
foreign exchange hedging instruments (including cross currency swaps,
forwards and options) differently depending on whether the instrument
qualifies for hedge accounting. Gains and losses on those foreign
exchange instruments that qualify as hedges are deferred as part of the
cost basis of the asset or liability being hedged and are recognized in
the statement of earnings in the same period as the underlying
transaction. Realized and unrealized gains and losses on instruments
that do not qualify for hedge accounting are recognized currently in the
statement of earnings.
The Company records the net payments or receipts from interest rate
swaps, caps, collars and the interest rate component of cross currency
swaps as adjustments to interest expense on a current basis. If an
interest rate hedging instrument were terminated prior to the maturity
F-15
date, any gain or loss would be amortized into earnings over the shorter
of the original term of the derivative instrument and the underlying
transaction.
Inventories
Inventories are stated at the lower of cost or market. The majority of
U.S. inventories are valued using the last-in, first-out ("LIFO")
method; other U.S. inventories, principally parts used in packaging
systems, are valued using the first-in, first-out ("FIFO") method.
Inventories of foreign operations are valued using primarily the FIFO
method. Had the FIFO method (which approximates current cost) been used
for all inventory at December 31, 1997, inventories would have been
higher by $4,032,000 ($4,729,000 and $4,557,000 in 1996 and 1995,
respectively). The cost elements of work in process and finished goods
inventories are raw materials, direct labor and manufacturing overhead.
Property and Equipment
Property and equipment are stated at acquisition cost. Property and
equipment no longer in use or surplus to the Company's needs are carried
at the lower of cost or fair value. Depreciation of buildings and
equipment is provided over the estimated useful lives (generally periods
ranging up to 40 years and 10 years, respectively) of the related
assets. Amortization of leasehold improvements is provided over the
lesser of the term of the lease or the asset's useful life. The Company
generally uses the straight-line method of depreciation for financial
reporting purposes and accelerated methods of depreciation for income
tax purposes.
Intangibles and Other Assets
Patents and patent rights are stated at acquisition cost. Amortization
of patents and patent rights is recorded using the straight-line method
over the remaining legal lives of the patents, generally for periods
ranging up to 20 years.
The excess of cost over fair value of net assets acquired is amortized
over periods ranging up to 40 years. The carrying value of the excess
of cost over fair value of net assets acquired is periodically reviewed
by the Company. Impairments are recognized when the expected future
undiscounted operating cash flows derived from such intangible assets
are less than their carrying value.
Other intangible assets, including non-competition agreements, included
in other assets are amortized over the life of such agreements using the
straight-line method, usually ranging from 1 to 5 years.
Impairment of Long-Lived Assets
Long-lived assets, including property and equipment, certain
intangibles, and the excess of cost over fair value of net assets
acquired related to those assets, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may
not be recoverable. If the sum of the expected future undiscounted cash
flows is less than the carrying amount of the asset, a loss is
recognized for the difference between the fair value and the carrying
amount.
Employee Benefit Plans
The Company has a non-contributory profit-sharing plan covering most
U.S. employees, except those employees covered by collective bargaining
agreements that do not provide for their participation. Contributions
to this plan, which are made at the discretion of the Board of
Directors, may be made in cash, shares of the Company's common stock, or
in a combination of cash and shares of the Company's common stock. The
Company also has a thrift and Section 401(k) plan in which most U.S.
employees of the Company are eligible to participate, except those
employees who are covered by certain collective bargaining agreements
that do not provide for participation in the plan. Under this plan, the
F-16
Company matches 50% of each employee's contributions to a maximum
company contribution of 3% of the employee's compensation. Forfeitures
of non-vested interests in each of these plans remain in the respective
plans for the benefit of the remaining participants. The Company also
has pension or other retirement plans for employees of certain foreign
subsidiaries and certain U.S. employees who are covered by collective
bargaining agreements. Company contributions to or provisions for its
profit-sharing, thrift and other retirement plans, net of forfeitures,
are charged to operations and amounted to $12,009,000 in 1997
($10,903,000 and $10,069,000 in 1996 and 1995, respectively).
The Company provides various other benefit programs to active employees
including group medical, insurance and other welfare benefits. The
costs of these benefit programs are charged to operations as incurred.
Eligibility to participate in these programs generally ceases upon
retirement or other separation from service except as required by
applicable law.
Research and Development Costs
Research and development costs are charged to operations as incurred and
amounted to $15,781,000 in 1997 ($15,449,000 and $14,597,000 in 1996 and
1995, respectively).
Environmental Expenditures
Environmental expenditures that relate to ongoing business activities
are expensed or capitalized, as appropriate. Expenditures that relate
to an existing condition caused by past operations, and which do not
contribute to current or future revenues, are expensed. Liabilities are
recorded when the Company determines that environmental assessments or
remediations are probable and that the costs or a range of costs to the
Company associated therewith can be reasonably estimated.
Income Taxes
The Company and its domestic subsidiaries file a consolidated U.S.
federal income tax return. The Company's non-U.S. subsidiaries file
income tax returns in their respective local jurisdictions. The Company
provides for taxes on the assumed repatriation of accumulated earnings
of its foreign subsidiaries.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. A valuation
allowance is provided when it is more likely than not that all or some
portion of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to the taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Earnings Per Common Share
At December 31, 1997, the Company retroactively adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," for all
periods for which earnings per share information is presented. Under
the provisions of this statement, basic earnings per common share are
computed on the basis of the weighted average number of shares of common
stock outstanding during the year, including stock awards and
shares issued as non-cash compensation. The weighted average number of
common shares outstanding in 1997 was 42,613,000 (42,459,000 and
42,057,000 in 1996 and 1995, respectively). The Company has no
potentially dilutive securities and therefore is not subject to diluted
earnings per share presentation or disclosure requirements.
F-17
Other Matters
The Company is primarily engaged in a single line of business: the
manufacture and sale of protective and specialty packaging materials and
systems to a diverse group of customers throughout the world. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral from its customers. No
single customer or affiliated group of customers accounts for more than
10% of the Company's net sales.
In conformity with generally accepted accounting principles, management
of the Company has made a number of estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of
contingent liabilities to prepare the Company's consolidated financial
statements. Actual results could differ from these estimates.
Note 2 Pending Merger with Packaging Business of W. R. Grace & Co.
On August 14, 1997, the Company and W. R. Grace & Co. ("Grace") entered
into a definitive merger agreement to combine Grace's packaging business
("Grace Packaging") with the Company. This transaction is described in
the Company's Joint Proxy Statement/Prospectus dated February 13, 1998
(the "Joint Proxy Statement/Prospectus"), which was filed with the
Securities and Exchange Commission and distributed to the stockholders
of the Company in connection with a special meeting of the stockholders
held on March 23, 1998 at which the stockholders approved such merger
agreement. The transactions contemplated by the merger agreement are
currently expected to be completed on or about March 31, 1998. For
accounting purposes, such merger will be treated as a purchase of the
Company by Grace (after the spin-off of Grace's specialty chemicals
business). During 1997, the Company incurred transaction
expenses of $8,405,000 related to certain professional fees primarily in
connection with this merger.
Note 3 Acquisitions
During 1997, the Company made small acquisitions in Australia and Italy.
These acquisitions, which were made for cash in the aggregate amount of
approximately $10 million and were accounted for as purchases, were not
material to the Company's consolidated financial statements.
In June 1996, the Company acquired the Australian and New Zealand
protective packaging business of Southcorp Holdings Limited. During
1996, the Company also made several other small acquisitions, including
acquisitions in Canada, Finland, Germany and the United States. These
transactions, which were made for cash in the aggregate amount of
approximately $30 million and accounted for as purchases, were not
material to the Company's consolidated financial statements.
On January 10, 1995, the Company acquired Trigon Industries Limited
("Trigon"), a privately owned, New Zealand-based manufacturer of food
packaging films and systems, durable mailers and bags and specialty
adhesive products, for 882,930 newly issued shares of common stock
valued at $35.70 per share and $25,592,000 in cash primarily provided by
proceeds from borrowings under the BT Credit Agreement (note 6),
representing a purchase price of approximately $57 million. The
acquired net assets of Trigon included property and equipment of
approximately $28,400,000, intangible assets of approximately
$43,000,000 including trademarks, non-competition agreements, and the
excess of cost over the fair value of net assets acquired, $25,000,000
of net indebtedness, and working capital of approximately $12,000,000.
Such acquisition was accounted for as a purchase.
During 1995, the Company made certain other small acquisitions in the
United States. These transactions, which were effected in exchange for
shares of the Company's common stock, cash or a combination of the
Company's common stock and cash, were accounted for as purchases and
were not material to the Company's consolidated financial statements.
F-18
Note 4 Geographic Areas
The Company's operations are conducted primarily in the United States,
Europe, the Asia/Pacific region, Canada and Latin America, and its
products are distributed in these areas as well as other parts of the
world. Net sales for each major geographic area include transfers to
other geographic areas. Such transfers are made at prices intended to
provide reasonable and appropriate returns to the selling unit, and
applicable eliminations have been applied to the intergeographic
transactions.
Operating profit consists of net sales less operating expenses. Other
income (expense), net and income taxes have not been added or deducted
in the computation of operating profit for each geographic area.
Corporate expenses have been allocated to the geographic areas for whose
benefit the expenses were incurred.
Identifiable assets are those assets that are used in the Company's
operations in each geographic area.
Information by Major Geographic Area:
(In thousands of dollars)
Net Operating Identifiable
Sales Profit Assets
1997
United States $ 540,213 $ 104,496 $ 223,650
Europe 214,311 25,840 171,347
Asia/Pacific & Other 127,027 7,780 103,363
Eliminations (38,718) - -
Consolidated $ 842,833 $ 138,116 $ 498,360
1996
United States $ 504,449 $ 95,375 $ 213,223
Europe 204,474 25,696 156,242
Asia/Pacific & Other 113,687 9,001 97,654
Eliminations (32,998) - -
Consolidated $ 789,612 $ 130,072 $ 467,119
1995
United States $ 464,820 $ 75,828 $ 213,099
Europe 188,558 24,617 153,563
Asia/Pacific & Other 94,864 8,435 76,883
Eliminations (25,122) - -
Consolidated $ 723,120 $ 108,880 $ 443,545
NOTE: Net sales shown for the United States, Europe and Asia/Pacific
and Other include transfers to other geographic areas as follows:
United States, 1997--$27,134,000; 1996 --$22,888,000; 1995 --
$18,412,000; Europe, 1997 --$7,042,000; 1996 --$4,781,000; 1995 --
$2,398,000; Asia/Pacific and Other, 1997--$4,542,000; 1996 --$5,329,000;
1995 --$4,312,000.
F-19
Note 5 Inventories
At December 31, 1997, the components of inventories, by major
classification (raw materials, work in process and finished goods) are
as follows:
(In thousands of dollars)
1997 1996
Raw materials $ 22,279 $ 23,497
Work in process 2,204 2,622
Finished goods 38,444 35,841
Subtotal 62,927 61,960
Less LIFO reserve 4,032 4,729
Total inventory $ 58,895 $ 57,231
Note 6 Debt
A summary of long-term debt at December 31, 1997 and 1996 follows:
(In thousands of dollars)
1997 1996
BT Credit Agreement $ - $ 38,228
Foreign loans 47,257 59,719
Other 3,890 4,844
Total 51,147 102,791
Less current installments 2,641 2,891
Long-term debt, less current installments $ 48,506 $ 99,900
The BT Credit Agreement is an unsecured $200 million revolving credit
facility that expires on June 30, 2001. The BT Credit Agreement has no
minimum annual paydown provision. As of December 31, 1997, there were
no outstanding borrowings under the BT Credit Agreement. At December
31, 1996, the Company's outstanding borrowings under the BT Credit
Agreement were $38,228,000. The weighted average interest rate under
the BT Credit Agreement was approximately 6.8% at December 31, 1996.
Had the Company not been a party to derivative financial instruments,
discussed below, the weighted average interest rates related to the BT
Credit Agreement would have been approximately 6.7% at December 31,
1996.
Foreign loans have been incurred for acquisitions, working capital and
other corporate purposes. Certain of such loans are secured by foreign
assets of approximately $7 million and are due in varying annual
installments through 2010 with fixed and variable interest rates. The
weighted average interest rates on such loans were 6.8% and 7.4% at
December 31, 1997 and 1996, respectively.
The Company's obligations under the BT Credit Agreement and certain
foreign and other loans and lines of credit bear interest at floating
rates. The Company utilizes certain derivative financial instruments to
manage its exposure to fluctuations in interest rates, including
interest rate swaps and collars and cross currency swaps.
The BT Credit Agreement provides for changes in borrowing margins based
on certain financial criteria and imposes certain limitations on the
operations of the Company and its subsidiaries that include restrictions
on the incurrence of additional indebtedness, the creation of liens, the
making of investments, dispositions of property or assets, certain
transactions with affiliates, and the payment by the Company of cash
dividends to its stockholders, as well as certain financial covenants
relating to interest coverage and debt leverage. The Company was in
compliance with these requirements as of December 31, 1997.
F-20
The Company had available lines of credit at December 31, 1997, under
the BT Credit Agreement and other credit facilities of approximately
$264 million, of which approximately $230 million was unused. The
Company is not subject to any material compensating balance requirements
in connection with its lines of credit.
Scheduled annual maturities of long-term debt for the five years
subsequent to December 31, 1997 are as follows: 1998 - $2,641,000; 1999
- - $29,439,000; 2000 -$1,504,000; 2001 -$13,974,000; and 2002 -
$1,120,000.
Note 7 Financial Instruments
The Company is required by generally accepted accounting principles to
disclose its estimate of the fair value of material financial
instruments, including those recorded as assets or liabilities in its
consolidated financial statements and derivative financial instruments.
The fair value estimates of the Company's various debt instruments were
derived by evaluating the nature and terms of each instrument,
considering prevailing economic and market conditions, and examining the
cost of similar debt offered at the balance sheet date.
Such estimates are subjective and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the Company's
estimates.
The carrying amounts of current assets and liabilities approximate fair
value due to their short-term maturity. The carrying amounts and
estimated fair values of the Company's material, non-current financial
instruments at December 31, 1997 and 1996 are as follows:
(In thousands of dollars)
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
On-Balance-Sheet Liabilities:
BT Credit Agreement $ - $ - $38,228 $38,228
Foreign loans 47,257 47,489 59,719 60,163
Other loans 3,890 3,681 4,844 4,565
Other liabilities 12,390 12,390 12,651 12,651
Off-Balance-Sheet Instruments (Derivatives)
Interest Rate Swaps - 167 - 324
Interest Rate Collars - 681 - 505
Cross Currency Swaps - (173) - 1,760
Foreign Exchange Forward Contracts - 23 - -
The Company utilizes derivative financial instruments to manage its
exposure to flucuations in interest rates and foreign exchange rates.
The Company does not purchase, hold or sell derivative financial
instruments for trading or speculative purposes.
Interest rate swaps are used to reduce the Company's exposure to
fluctuations in interest rates by fixing the rate of interest the
Company pays on the notional amount of debt. At December 31, 1997 and
1996, the Company was party to interest rate swaps with an aggregate
notional amount of approximately $14 million. These swaps fix the rate
of interest paid on the notional amount of certain non-U.S. dollar
denominated long-term debt at rates which ranged from 8.55% to 8.60% in
1997 and 1996. Such swaps expire through September 1999.
Interest rate collars are used to reduce the Company's exposure to
fluctuations in interest rates by limiting fluctuations in the rate of
interest the Company pays on a notional amount of debt. At December 31,
1997 and 1996, the Company was party to interest rate collars with an
aggregate notional amount of approximately $8 million. These collars
limit the rate of interest paid on the notional amount of certain non-
U.S. dollar denominated long-term debt to between 7.28% and 11.0%
F-21
through June 1999 and between 8.27% and 11.0% from June 1999 through
June 2001.
Cross currency swaps allow the Company to gain access to additional
sources of international financing while limiting foreign exchange
exposure and adjusting or limiting interest rate exposure by swapping
borrowings in U.S. dollars for borrowings denominated in the functional
currencies of the borrowers. At December 31, 1997, the Company was
party to cross currency swaps with an aggregate notional amount of
approximately $25 million with various expiration dates through
May 2002. At December 31, 1996, the Company was party to cross
currency swaps with an aggregate notional amount of $30 million
with various expiration dates through May 2002.
Foreign exchange forwards and options are generally used to reduce the
Company's exposure to the risk that the eventual cash outflows resulting
from firm commitments or anticipated transactions will be adversely
affected by changes in exchange rates. At December 31, 1997, the
Company was not party to any foreign currency options but was party to
two foreign currency forward contracts with an aggregate notional amount
of $4 million. Such forward contracts expire through December 1998. At
December 31, 1996, the Company was not party to any material foreign
currency options or forwards.
The fair values of the Company's various derivative instruments, as
advised by the Company's bankers, generally reflect the estimated
amounts that the Company would receive or pay to terminate the contracts
at the reporting date. The notional amounts referred to above represent
agreed-upon amounts on which calculations of cash to be exchanged are
based. The notional amounts are not a measure of the Company's exposure
to credit or market risk.
Realized and unrealized gains and losses on the Company's financial
instruments and derivatives were not material to the consolidated
financial statements in 1997, 1996, and 1995.
The Company is exposed to credit losses in the event of the inability of
the counterparties to perform under their obligations, but it does not
expect any counterparties to fail to do so given their high credit
ratings and financial strength. The Company believes that off-balance-
sheet risk in conjunction with its derivative contracts would not be
material in the case of non-performance on the part of the
counterparties to such agreements.
Note 8 Shareholders' Equity
The Company's shareholders' equity increased to $257,283,000 at December
31, 1997 from $186,649,000 at December 31, 1996 primarily as a result of
the Company's net earnings in 1997 partially offset by a net reduction
in the Company's accumulated translation adjustment due to the effect of
foreign currency fluctuations. During 1997, the Company
purchased 159,200 of its common shares in the approximate aggregate
amount of $8,772,000 for use in the Company's employee benefit
plans.
On September 29, 1995, the Company distributed a two-for-one stock split
in the nature of a 100% stock dividend to the holders of record of the
Company's common stock at the close of business on September 15, 1995
(the "1995 stock split"). All per share data and share information in
the consolidated financial statements and notes thereto have been
adjusted to give retroactive effect to the 1995 stock split where
appropriate.
F-22
A summary of changes in issued and outstanding shares of common stock and shares of treasury stock of the
Company follows:
1997 1996 1995
Changes in common stock:
Number of shares issued, beginning of year 42,747,704 42,506,573 20,111,618
Non-cash compensation 80,100 127,590 80,400
Awards of contingent stock 28,900 92,850 157,550
Shares issued related to acquisitions - 20,691 957,335
1995 stock split - - 21,199,670
Number of shares issued, end of year 42,856,704 42,747,704 42,506,573
Changes in treasury stock:
Number of shares held, beginning of year 226,758 224,758 122,306
Shares issued in acquisition - - (11,927)
Awards of contingent stock (153,800) - -
Purchase of treasury shares 159,200 - -
Contingent stock forfeited 300 2,000 2,000
1995 stock split - - 112,379
Number of shares held, end of year 232,458 226,758 224,758
Non-cash compensation in each year includes the shares, if any, issued
as all or a portion of the Company's contribution to its profit-sharing
plan as determined by the Board of Directors of the Company, for the
respective preceding year and shares issued each year to non-employee
directors under the restricted stock plan for non-employee directors
(the "Directors Stock Plan"), discussed below. The amount charged to
operations related to these shares issued was $322,000 in 1997
($3,242,000 in 1996 and $3,556,000 in 1995). Non-cash compensation in
1997 included only the amount charged to operations for shares issued
under the Directors Stock Plan, as the Company's 1997 profit-sharing
plan contribution was made entirely in cash.
The Directors Stock Plan, as mentioned above, provides annual grants of
shares to non-employee directors, and interim grants of shares to
eligible directors elected at other than an annual meeting, for less
than 100% of fair value at date of grant in lieu of cash payments for
certain directors' fees. Shares issued under this plan are restricted
as to disposition by the holders as long as such holders remain
directors of the Company. The excess of fair value over the granting
price of shares issued under this plan is charged to operations at the
date of such grant.
The Company's contingent stock plan provides for the granting to
employees of awards to purchase common stock (during the succeeding
60-day period) for less than 100% of fair market value at the date of
award. Shares issued under the contingent stock plan ("Contingent
Stock") are restricted as to disposition by the holders for a period of
at least three years after issue. In the event of termination of
employment prior to lapse of the restriction, the shares are subject to
an option to repurchase by the Company at the price at which the shares
were issued. Such restriction will lapse prior to the expiration of the
vesting period if certain events occur which affect the existence or
control of the Company. On August 14, 1997, the Board of Directors
amended the contingent stock plan to provide that the Grace Packaging
merger would not constitute such an event.
The excess of fair value over the award price of Contingent Stock is
charged to operations as compensation over a three-year period. In
1997, such charges amounted to $4,467,000 ($3,498,000 and $3,370,000 in
1996 and 1995, respectively). The aggregate fair value of Contingent
Stock issued is credited to common stock and additional paid-in capital
accounts, and the unamortized portion of the compensation is deducted
from shareholders' equity.
F-23
A summary of the changes in shares available for the Directors Stock Plan and the Contingent Stock Plan
follows:
Changes in the Directors Stock Plan shares: 1997 1996 1995
Number of shares available, beginning of year 29,200 161,400 82,200
Shares issued for new awards (1) (7,200) (7,200) (1,500)
1995 stock split - - 80,700
Reduction in shares authorized during year - (125,000) -
Number of shares available, end of year 22,000 29,200 161,400
Weighted average per share market value
of stock on grant date (2) $45.75 $35.13 $21.50
Changes in the Contingent Stock Plan shares: 1997 1996 1995
Number of shares available, beginning of year 646,150 737,000 505,900
Shares issued for new awards (1) (182,700) (92,850) (157,550)
Contingent stock forfeited 300 2,000 2,000
1995 stock split - - 386,650
Number of shares available, end of year 463,750 646,150 737,000
Weighted average per share market value
of stock on grant date (2) $46.47 $36.59 $21.97
<FN>
(1) For the Directors Stock Plan during 1995, all 1,500 shares were issued before the 1995 stock split. For
the Contingent Stock Plan during 1995, 119,050 shares were issued before such stock split and the remaining
38,500 shares were issued after such stock split.
(2) Per share data adjusted to reflect the effect of the 1995 stock split.
</FN>
The Company has adopted only the disclosure provisions of FASB Statement
No. 123, "Accounting for Stock-Based Compensation," but applies
Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its stock-based compensation plans. The compensation
cost that has been charged against income for the Company's stock-based
compensation was noted above. Since such compensation cost is
consistent with the compensation cost that would have been recognized
for the Company's stock plans under the provisions of FASB Statement No.
123, the pro forma disclosure requirements under such statement are not
applicable.
The Company currently has the authority to issue 1,000,000 shares of
preferred stock, without par value, none of which were issued at
December 31, 1997.
Note 9 Income Taxes
The Company's method of accounting for income taxes is the asset and
liability method, under which deferred tax assets and liabilities are
recognized for temporary differences and are measured using enacted tax
rates and laws applicable to the periods in which the taxes become
payable.
F-24
The components of earnings before income taxes follow:
(In thousands of dollars)
1997 1996 1995
__________________________________________________________________
Domestic $107,261 $ 91,055 $ 61,007
Foreign 26,227 23,540 26,147
$133,488 $114,595 $ 87,154
The components of the provision for income taxes on earnings follow:
(In thousands of dollars)
1997 1996 1995
__________________________________________________________________
Current tax provision:
U.S. federal $36,409 $31,888 $20,624
U.S. state and local 9,345 8,085 5,830
Foreign 10,753 10,590 9,347
56,507 50,563 35,801
Deferred tax provision (benefit):
Domestic (2,396) (4,067) (2,589)
Foreign (544) (1,230) 1,214
(2,940) (5,297) (1,375)
Provision for income taxes $53,567 $45,266 $34,426
The Company's deferred tax liability, net of deferred tax assets, at
December 31, 1997 and 1996 amounted to $2,973,000 and $6,014,000,
respectively. The principal components of the Company's deferred tax
assets and liabilities at December 31, 1997 and 1996 are as follows:
(In thousands of dollars)
1997 1996
_____________________________________________________________________
Deferred tax assets:
Accrued liabilities $ 5,924 $ 7,970
Patents and other intangibles 5,396 2,830
Facilities consolidation and integration 3,364 3,801
Inventory 2,736 824
Deferred compensation 1,561 1,121
Bad debts 1,423 732
Property and equipment 1,217 1,169
Deferred revenue 729 1,128
Other 6,735 5,159
29,085 24,734
Valuation allowance (810) (277)
Deferred tax asset $28,275 $24,457
Deferred tax liabilities:
Property and equipment $24,706 $24,944
Deferred revenue 1,011 855
Patents and other intangibles 434 598
Other 5,097 4,074
Deferred tax liability $31,248 $30,471
F-25
The Company expects that it is more likely than not that the net
deferred tax assets of $28,275,000 at December 31, 1997 will be realized
based on the future reversals of existing deferred tax liabilities and
the continuation of earnings, which may be affected by factors outside
the Company's control. The valuation allowance of $810,000 is
maintained for certain foreign deferred tax assets primarily relating to
insignificant net operating losses. The net change in the valuation
allowance for deferred tax assets was an increase of $533,000 in 1997
related to additional foreign net operating losses in 1997.
An explanation of the difference between the effective income tax rate and the statutory U.S. federal income
income tax rate expressed as a percentage of earnings before income taxes for the years ended December 31,
1997, 1996 and 1995 follows:
1997 1996 1995
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
Provision for foreign withholding taxes
and additional U.S. taxes on
repatriated and accumulated earnings of
foreign subsidiaries 0.6 0.1 0.1
Tax effect of expenses not subject
to tax benefit 2.4 1.4 1.7
State income taxes, net of U.S. federal income tax benefit 4.4 4.5 4.0
Taxes on foreign earnings at other than the
statutory U.S. federal income tax rate (0.6) (0.6) (0.4)
Other miscellaneous items (1.7) (0.9) (0.9)
Effective income tax rate 40.1% 39.5% 39.5%
The Company's tax provisions for 1997, 1996 and 1995 give effect to
foreign withholding taxes on the repatriation of accumulated earnings
from the Company's foreign subsidiaries and additional U.S. taxes, if
any, on such accumulated earnings. The Company has provided U.S. and
foreign income taxes on the accumulated earnings of the Company's
foreign subsidiaries through December 31, 1997.
The Company's Dutch subsidiary is entitled to certain tax incentives to
manufacture certain product lines under agreements with local tax
authorities. The total amount of such incentives is dependent on the
profitability of such product lines over a period extending through
1999.
Note 10 Commitments and Contingent Liabilities
The Company is obligated under the terms of various leases covering many
of the facilities occupied by the Company. The Company accounts for
substantially all of its leases as operating leases. Net rental expense
for 1997 was $11,209,000 ($10,939,000 and $10,228,000 in 1996 and 1995,
respectively). Estimated future minimum annual rental commitments under
noncancelable real property leases expiring through 2023 are as follows:
1998 - $9,374,000; 1999 - $6,424,000; 2000 - $5,204,000; 2001 -
$3,925,000; 2002 - $3,050,000; and subsequent years - $7,560,000.
F-26
The Company's worldwide operations are subject to environmental laws and
regulations which, among other things, impose limitations on the
discharge of pollutants into the air and water and establish standards
for the treatment, storage and disposal of solid and hazardous wastes.
The Company reviews the effects of environmental laws and regulations on
its operations and believes that it is in substantial compliance with
all material applicable environmental laws and regulations.
At December 31, 1997, the Company was a party to, or otherwise involved
in, several federal and state government environmental proceedings and
private environmental claims for the cleanup of Superfund or other
sites. The Company may have potential liability for investigation and
cleanup of certain of such sites. At most of such sites, numerous
companies, including either the Company or one of its predecessor
companies, have been identified as potentially responsible parties
("PRPs") under Superfund or related laws. It is the Company's policy to
provide for environmental cleanup costs if it is probable that a
liability has been incurred and if an amount which is within the
estimated range of the costs associated with various alternative
remediation strategies is reasonably estimable, without giving effect to
any possible future insurance proceeds. As assessments and cleanups
proceed, these liabilities are reviewed periodically and adjusted as
additional information becomes available. At December 31, 1997 and
1996, such environmental related provisions are not material. While it
is often difficult to estimate potential liabilities and the future
impact of environmental matters, based upon the information currently
available to the Company and its experience in dealing with such
matters, the Company believes that its potential liability with respect
to such sites is not material to the Company's consolidated financial
position. Environmental liabilities may be paid over an extended
period, and the timing of such payments cannot be predicted with
certainty.
The Company is also involved in various legal actions incidental to its
business. Company management believes, after consulting with counsel,
that the disposition of its litigation and other legal proceedings and
matters, including environmental matters, will not have a material
effect on the Company's consolidated financial position.
F-27