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 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____ to _____.
Commission File Number: 1-6690
CONTINENTAL CAN COMPANY, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2228114
-------------------------------- ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
301 Merritt 7 Corporate Park, Norwalk, CT 06856
- ------------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (203) 750-5900
Securities registered pursuant to Section 12 (b) of the Act:
Common Stock ($.25 par value) New York Stock Exchange
- ----------------------------------- -------------------------------------------
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12 (g) of the Act: None
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) 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 {__}.
The aggregate market value of voting stock held by non-affiliates of the
Registrant based on the closing price at which such stock was sold on the New
York Stock Exchange on March 23, 1998 was $111,504,687.
The number of shares of Common Stock outstanding on March 23, 1998 was 3,387,213
shares.
ITEM 1. BUSINESS
(a) General Development of Business
Continental Can Company, Inc. (the Company) is a publicly traded
company incorporated in Delaware in 1970 under the name Viatech, Inc. The name
of the Company was changed to Continental Can Company, Inc. in October 1992. The
Company is engaged in the packaging business through a number of operating
subsidiaries. The Company's packaging business consists of (i) its 84% owned
domestic subsidiary, Plastic Containers, Inc. (PCI), which owns Continental
Plastic Containers, Inc. and Continental Caribbean Containers, Inc.
(collectively, CPC), (ii) its wholly owned German operating subsidiary, Dixie
Union GmbH & Company KG (Dixie Union) and (iii) its majority-owned European
operating subsidiary, Ferembal S.A. (Ferembal), which in turn owns 96% of
Obalex, A.S. (Obalex). PCI is a leading manufacturer of extrusion blow-molded
containers in the United States. Ferembal is a manufacturer of rigid packaging,
primarily food cans, of which it is the second largest supplier in France.
Obalex is a manufacturer of metal cans in the Czech Republic. Dixie Union
manufactures plastic films and packaging machines, primarily for the food and
pharmaceutical industries. The Company also owns Lockwood, Kessler & Bartlett,
Inc. (LKB) which provides services principally in the fields of mapping and
survey, civil and structural engineering, mechanical and electrical engineering,
and construction administration and inspection.
In January 1998, Suiza Foods Corporation signed a definitive agreement
to acquire the Company for stock and assumption of debt in a purchase
transaction. The transaction is expected to be completed during the second
quarter of 1998. Any impact of the transaction on the consolidated financial
statements of the Company has not yet been determined.
(b) Financial Information About Industry Segments
The Company has one reportable industry segment - packaging, as
determined in accordance with the Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 14.
(c) Narrative Description of Business
The Company manufactures packaging which accounted for 98.1%, 98.5%,
and 98.4% of its consolidated revenues in 1997, 1996 and 1995 respectively.
CPC - The Company's 84% owned subsidiary, PCI, acquired CPC in November
1991. CPC, headquartered in Norwalk, Connecticut, has fourteen manufacturing
plants in the continental United States and one in Puerto Rico. CPC is a leader
in the development, manufacture and sale of a wide range of extrusion
blow-molded plastic containers for household chemicals, food and beverages,
automotive products and motor oil, industrial and agricultural chemicals and
cosmetics and toiletries. CPC manufactures single and multi-layer containers,
primarily from high density polyethylene and polypropylene resins, ranging in
size from two ounces to 2.5 gallons. Some of these multi-layer containers
include a barrier layer of ethyl vinyl alcohol which renders the container
oxygen tight and makes it suitable for use in food products which are subject to
spoilage or deterioration if exposed to oxygen. CPC sells containers to national
consumer products companies, including Clorox Company, Coca-Cola Foods,
Colgate-Palmolive Company, Lever Brothers, Mobil Oil Corporation, Pennzoil
Products Company, Procter & Gamble Company, and Quaker Oats Company. CPC, in
many cases, manufactures substantially all of a customer's container
requirements for specific product categories or for particular container sizes.
CPC has long-standing relationships with most of its customers and has long-term
contracts or agreements with customers representing a substantial portion of its
dollar sales volume.
Ferembal - The Company owns 64% of Ferembal. Ferembal, headquartered in
Paris, has five manufacturing plants located in each of the main agricultural
regions of France. The Roye plant, located in Picardie, was built in 1964 and
expanded substantially in 1968. Its three main divisions include coil cutting,
printing and varnishing; the manufacture of ends and bodies; and assembly. There
are five welded lines in operation at Roye and all industrial products are
manufactured at this plant. The Moelan plant, located in Brittany, is set up
along similar lines as the Roye plant with five welded lines. The Ludres plant,
in eastern France, is Ferembal's largest facility. In addition to twelve presses
and two easy-open end manufacturing units, Ludres has nine body assembly lines.
Ferembal's research and development and technical service departments are also
located at Ludres. The Veauche plant was built in 1982 to service southern
France.
2
Approximately 90% of the output of the two welded lines is "passed through the
wall" to a customer for the canning of pet food. The Ville Neuve sur Lot plant
was built in 1991 and went into production with a three piece can line in early
1992. A two piece can line went into production at this facility in mid-1992.
Ferembal also operates a three piece can line at a customer's facility in
Locmine.
Ferembal is the second largest producer of food cans in France and also
produces cans for pet foods and industrial products. Ferembal's products include
three-piece cans for food with over two hundred sets of specifications,
two-piece cans in several different diameters, easy-open ends, "hi-white enamel"
cans, and a large number of can products for industrial end uses. Ferembal's
production for the food and pet food markets accounts for approximately 85% of
its sales with remaining sales coming from cans produced for industrial
products. Ferembal's customers are primarily vegetable and prepared food
processors, pet food processors, and paint and other industrial can users.
Obalex - The Company's subsidiary, Ferembal, owns 96% of the
outstanding stock of Obalex. Obalex is headquartered in a three building complex
on a 5 acre site in Znojmo, Czech Republic, which also serves as its sole
manufacturing facility. Obalex manufacturers both two and three-piece cans for
food which account for approximately 80% of its sales and a number of can
products for industrial end users.
Dixie Union - The Company, through wholly owned subsidiaries, owns all
of the outstanding stock of Dixie Union. Dixie Union is headquartered in
Kempten, Germany and has a subsidiary company in France. Dixie Union
manufactures three main product lines for the packaging industry: multi-layer
shrink bags, composite plastic films and packaging machines and slicers. Most of
Dixie Union's customers are in the food and pharmaceutical industries.
LKB - The Company owns 100% of LKB, a consulting engineering firm,
located in Syosset, New York. LKB provides services to clients in the fields of
transportation, site, municipal, electrical and mechanical, and environmental
engineering. Most of LKB's clients are public sector state and municipal
agencies, utilities, financial institutions and developers. Most of its projects
involve infra-structure design and rehabilitation, environmental reports and
services, and utility substation design.
Other Matters - The primary users of products manufactured by the
Company are firms in the food and snack food, pet food, household chemical,
motor oil and pharmaceutical industries.
The raw materials used in the production of plastic containers, cans
and packaging films are readily available commodity materials and chemicals
produced by a large number of manufacturers. It is the practice of the Company
to obtain these raw materials from several sources in order to ensure an
economical, adequate and timely supply.
Some of the products manufactured by the Company are manufactured
pursuant to license. With regard to composite films, a fully paid up license
from the American National Can Company is in effect. With regard to shrink bags
and film, a license from the American National Can Company is in effect. Present
patents under this license expire at various times through 2000. The license
will expire on the date the last of the licensed patents expire. This license is
non-exclusive as to manufacture and sale of shrink bags and film in Europe and
non-exclusive as to sales to the rest of the world. Sales may not be made in the
Western Hemisphere, except to certain countries in South America. The Company
does not believe these licenses are material to its packaging business taken as
a whole.
The Company's business is seasonal insofar as the sales of Ferembal and
Obalex to the vegetable packing industry are dependent on agricultural
production and occurs primarily in the second and third quarters. The Company's
remaining products are not seasonal.
The Company is not dependent upon a single customer or a few customers.
Sales to one customer exceeded 10% of the Company's consolidated revenues in
1997.
3
As of December 31, 1997, the Company's backlog was approximately $15.8
million (compared to $20.2 million at December 31, 1996). All backlog is
expected to be filled within the current fiscal year. Ferembal, Obalex, and
Plastic Containers, Inc. produce most of their products under open orders. As a
result, none of the foregoing backlog is attributable to them.
The Company's business in total is highly competitive with a large
number of competitors. The main competitors include Owens Illinois, Inc. and
Graham Packaging with regard to plastic containers, Crown, Cork & Seal, Inc.
with regard to cans, W. R. Grace & Co. with regard to barrier shrink films, and
Multi-Vac with regard to packaging machinery. The principal methods of
competition are price, quality and service.
The amount spent on research and development activities amounted to
approximately $12,509,000 in 1997, $11,495,000 in 1996 and $12,187,000 in 1995.
The number of persons employed by the Company as of December 31, 1997
and 1996 was 3,442 and 3,463 respectively.
(d) Foreign and Domestic Operations
Sales to unaffiliated customers are set out below:
1997 1996 1995
-------- -------- ------
(In thousands)
Europe $246,355 $297,491 $312,137
United States 295,682 282,703 295,470
Other 4,247 4,840 6,780
--------- ---------- ---------
Total $546,284 $585,034 $614,387
======== ======== ========
Information regarding the operating profit and the identifiable assets
attributable to the Company's foreign operations is incorporated herein by
reference to Note 16 of the Consolidated Financial Statements appearing on page
27.
ITEM 2. PROPERTIES
The Company believes its facilities are suitable, adequate, and
properly sized to provide the capacity necessary to meet its sales. The
Company's production facilities are utilized for the manufacture and storage of
the Company's products. The extent of utilization in each of the Company's
facilities varies based on a number of factors but primarily on sales and
inventory levels for specific products. The location of the customer also
affects utilization since shipment costs beyond a certain distance can make
production of some products at a remote facility uneconomic. Seasonality affects
utilization substantially at Ferembal and Obalex with very high utilization in
the pre-harvest and harvest season and substantially lower utilization during
the late fall and winter. The Company adjusts labor levels and capital
investment at each of its facilities in order to optimize their utilization.
The Company's main production facility for LKB is located in Syosset,
New York in a 25,000 square foot building owned by the Company. This steel and
concrete block building was constructed in 1955 on a 2-1/2 acre lot.
CPC is headquartered in 19,812 square feet of leased office space in
Norwalk, Connecticut. CPC also leases its technical center in Elk Grove,
Illinois (78,840 sq. ft.), its accounting office space in Omaha, NE (5,489 sq.
ft.), and sales offices in Cincinnati, Ohio (1,266 sq. ft.) and Houston, Texas
(703 sq. ft.).
4
The following table sets forth the location and square footage of CPC's
production facilities which are used for both manufacture and warehousing of
finished goods:
SIZE IN SIZE IN
PLANT LOCATION SQUARE FEET PLANT LOCATION SQUARE FEET
-------------- ----------- -------------- -----------
Santa Ana, CA 103,000 Lima, OH 123,000
Fairfield, CA 66,000 Newell, WV 50,000
Houston, TX 80,000 Oil City, PA 96,000
Kansas City, KS 173,000 Baltimore, MD 151,000
Elk Grove, IL 183,000 Lakeland, FL 218,000
DuPage, IL 104,000 Caguas, Puerto Rico 47,000
Cincinnati, OH 130,000 West Memphis, AR 60,000
Atlanta, GA 85,000
PCI owns the facilities in Santa Ana, Fairfield, Oil City, Baltimore
and Puerto Rico; all others are leased.
Ferembal is headquartered in 20,000 square feet of office space subject
to a capital lease in Clichy, a suburb of Paris. Ferembal operates five
manufacturing facilities in five locations in France. Ferembal owns a 384,000
square foot manufacturing facility on a 21 acre site in Roye for the production
of food and industrial cans. Ferembal owns a 42,000 square foot manufacturing
facility for the production of food cans at Veauche on a 5 acre site. The
facility at Veauche is located next to a customer's plant and food can
production is "passed through the wall" to the customer. Ferembal has a capital
lease with regard to several buildings totaling 229,000 square feet on a 23 acre
site in Ludres. In addition, Ferembal owns a 29,000 square foot building on a 3
acre site. These facilities are used for the manufacture of food cans and for
research and development activities. Ferembal has a capital lease with regard to
several buildings totaling 252,000 square feet on an 18 acre site in Moelan
which are used for the manufacture of food cans. Ferembal operates a
manufacturing facility for food cans in a 42,000 square foot building on a 4
acre site in Villeneuve sur Lot under a rental agreement. Each of the
manufacturing facilities utilizes a portion of its building space for
warehousing its finished goods.
Obalex is located in several buildings with approximately 182,000
square feet on an 5 acre site in Znojmo, Czech Republic. This facility is the
sole manufacturing site for Obalex which also uses the complex for the storage
of its finished goods.
Dixie Union is headquartered in a three-story, 108,000 square foot
manufacturing facility on a 5 acre site in Kempten, Germany, leased through
2004. In addition, a small facility is leased as sales and distribution center.
ITEM 3. LEGAL PROCEEDINGS
The Company's subsidiaries are defendants in a number of actions which
arose in the normal course of business. In the opinion of management, the
eventual outcome of these actions will not have a significant effect on the
Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of Continental Can Company, Inc. is traded on the New
York Stock Exchange. The following table indicates the quarterly high and low
sales prices for Continental Can Company, Inc. (CAN) common stock for the last
two years.
5
1997 1996
- -------------------------------------------------------------------------------------------
Quarter High Low High Low
- -------------------------------------------------------------------------------------------
First $16-3/8 12-5/8 $17 15-1/8
Second 20-1/4 14-1/2 15-1/2 13-7/8
Third 27 19-1/2 14-7/8 10-3/4
Fourth 26-9/16 20-9/16 16-3/4 11
No dividends were paid to the holders of common stock for the years
1997, 1996 and 1995. The Company has no present intention to pay dividends on
its common stock. There were 274 stockholders of record as of March 16, 1998.
6
ITEM 6. SELECTED FINANCIAL DATA(1)
1997 1996 1995 1994 1993
-------- -------- -------- -------- ------
Net sales (2) $546,284 $585,034 $614,387 $537,180 $481,842
======== ======== ======== ======== ========
Net income (loss) (2) (3) $ 7,986 $ (5,560) $ 555 $ 4,445 $ 988
======= ======== ======== ======== ========
Earnings (loss) per
common share (3)
Basic $ 2.49 $ (1.74) $ .17 $ 1.45 $ .34
======= ======== ======== ======== ========
Diluted $ 2.41 $ (1.71) $ .17 $ 1.34 $ .33
======= ======== ======== ======== ========
Weighted average
shares outstanding - Basic (4) 3,210 3,200 3,167 3,057 2,867
======= ======== ======== ======== ========
- Diluted 3,312 3,252 3,257 3,057 2,867
======= ======== ======== ======== ========
Total assets $375,406 $391,032 $445,411 $423,585 $385,907
======== ======== ======== ======== ========
Long term debt and capitalized
lease obligations $156,418 $170,750 $143,138 $142,361 $153,982
======== ======== ======== ======== ========
Total stockholders'
equity (4) $ 68,782 $ 68,624 $ 76,298 $ 70,696 $ 60,855
======== ======== ======== ======== ========
Working capital $ 69,034 $ 78,747 $ 46,195 $ 71,348 $ 66,105
========= ======== ======== ======== ========
Current ratio 1.66 1.76 1.29 1.52 1.67
==== ==== ==== ==== ====
(1) In thousands, except per share amounts and current ratio.
(2) In 1993, includes sales of $10,682 and net income of $238 related to
the purchase of Obalex.
(3) Includes an extraordinary charge of $6,136 ($1.92 per share basic and
$1.89 diluted) in 1996. Includes an extraordinary charge of $115 ($.04
per share both basic and diluted) in 1995. Includes a charge for the
cumulative effect of an accounting change of $262 ($.08 per share both
basic and diluted) and an extraordinary charge of $108 ($.04 per share
basic and $.03 diluted) in 1994.
(4) The 1994 weighted average shares outstanding include 268 shares issued
in May 1994 upon the conversion of the Company's 10-3/4% Convertible
Subordinated Debentures.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1997 VS. 1996
In 1997 net sales decreased 6.6% to $546.3 million from $585 million in
1996. This decline resulted primarily from foreign currency translation rate
differences (approximately $36 million). The decline in sales resulting from the
deconsolidation of Onena in 1996 of (approximately $20 million) was almost
completely offset by an increase in resin prices which are passed-through to
customers of PCI (approximately $14 million) and unit volume increases
(approximately $4 million).
Backlog at December 31, 1997 amounted to $15.8 million as compared to
$20.2 million at December 31, 1996. Since PCI, Ferembal and Obalex produced most
of their products under open order, none of this backlog is attributable to
them.
Gross profit in 1997 was negatively impacted by lower sales and an
increase in operating lease expense of approximately $5.3 million resulting from
the PCI refinancing in late 1996. Positive impacts on gross profit were cost
reduction efforts at PCI and Ferembal, S.A. (Ferembal). Also, in January 1997,
the Company revised its estimates of the useful lives of certain machinery and
equipment to better reflect the estimated periods during which these assets will
be in service and capitalized spare parts at Ferembal to be consistent with the
Company's other subsidiaries. Therefore, depreciation expense decreased by $4.5
million, and spare parts expense also decreased by $3 million. As a result of
these offsetting factors, gross profit increased 2.6% to $89.3 million in 1997
from $87 million in 1996. Gross profit as a percentage of sales improved to
16.3% in 1997 from 14.9% in 1996.
7
There were no restructuring charges in 1997. Restructuring charges in
1996 totalled $7.6 million and included the costs associated with two plant
closings at PCI ($6.5 million) and termination benefits for certain employees at
Ferembal ($1.1 million). Selling, general and administrative expense declined
approximately $1.7 million from 1996 to 1997. Selling, general and
administrative expense as a percentage of sales increased to 10.6% in 1997 from
10.2% in 1996 reflecting the relatively fixed cost of many of these expenses in
relation to sales. As a result of these various factors operating income
increased substantially to $31.5 million in 1997 as compared to $19.9 million in
1996. The operating income margin increased to 5.8% in 1997 as compared to 3.4%
in 1996.
Net interest expense decreased to $16 million from $19.6 million in
1996. This decline resulted from both lower weighted average rates and reduced
net debt balances during 1997 than 1996.
The Company's provision for taxes is an amalgamation of the tax charges
and tax benefits of itself and its subsidiaries. Minority interest in 1997 and
1996 reflects the interest of other shareholders in PCI, Ferembal and Obalex.
Net income amounted to $7.986 million in 1997 ($2.49 per share basic;
$2.41 per share diluted). Income before extraordinary item amounted to $576,000
in 1996 ($.18 per share basic and diluted). An extraordinary item amounting to
$6.136 million was recorded in 1996 relating to the cost of an early
extinguishment of debt. Net loss amounted to $5.560 million in 1996 ($1.74 per
share basic; $1.71 per share diluted).
1996 VS. 1995
In 1996, net sales decreased 4.8% to $585 million from $614.4 million
in 1995. This decline resulted primarily from foreign currency translation rate
differences (approximately $10 million), resin price decreases which are a
customer pass-through at PCI (approximately $9 million), and volume decreases
primarily in the Company's European flexible packaging operations (approximately
$8 million).
Backlog at December 31, 1996, amounted to $20.2 million as compared to
$22.6 million at December 31, 1995. Since PCI, Ferembal and Obalex produce most
of their products under open order, none of this backlog is attributable to
them.
Gross profit decreased 3.7% to $87 million in 1996 from $90.4 million
in 1995. Gross profit as a percentage of sales improved to 14.9% in 1996 as
compared to 14.7% in 1995. The decrease in gross profit resulted from lower
sales volume and foreign currency translation rate differences. The increase in
gross profit margin reflected the pass-through of resin price decreases, equally
reducing sales and cost.
Restructuring charges amounted to $7,624,000 and $4,905,000 in 1996 and
1995, respectively. Charges of $1,124,000 in 1996 and $5,003,000 in 1995 related
to termination benefits for certain employees of Ferembal and reflect a response
to continuing competitive pressure in Ferembal's marketplace. Restructuring
charges reflected two plant closings at PCI and amounted to $6,500,000 in 1996.
One closing had been completed by year-end while the other plant was expected to
be completed in the first quarter of 1997.
Selling, general and administrative expenses as a percentage of net
sales amounted to 10.2% in 1996 as compared to 10.6% in 1995 and reflects the
Company's continued emphasis on cost reductions. As a result of these various
factors, operating income decreased to $19,874,000 in 1996 from $20,598,000 in
1995, while operating margin remained at 3.4% in 1996 and 1995.
Net interest expense decreased slightly to $19.6 million in 1996 from
$19.9 million in 1995. Foreign currency exchange gains amounted to $115,000 in
1996 compared to losses of $299,000 in 1995.
The Company's consolidated effective tax rate is an amalgamation of the
tax charges and tax benefits of itself and its subsidiaries. This rate reflects
the offsetting nature of these items in consolidation. PCI utilized tax benefits
of $1,876,000 and $2,505,000 in 1996 and 1995, respectively.
8
Minority interest in 1996 and 1995 reflects the interest of other
shareholders in PCI, Ferembal, Onena and Obalex.
Income before extraordinary item in 1996 amounted to $576,000 ($.18 per
share both basic and diluted). An extraordinary charge in 1996, net of the
portion attributable to the minority interest, amounting to $6,136,000 ($1.92
per share basic; $1.89 diluted) related to costs associated with the early
redemption of PCI's 10.75% Senior Secured Notes due in 2001.
Net loss amounted to $5,560,000 ($1.74 per share basic; $1.71 per share
diluted) in 1996 and net income amounted to $555,000 ($.17 per share both basic
and diluted) in 1995.
FINANCIAL CONDITION
Capital Resources
The packaging business utilizes relatively large amounts of specialized
machinery and equipment which are periodically upgraded or replaced.
Capital expenditures in 1997 amounted to $21.5 million primarily for
the purchase of machinery and equipment. During 1997, major capital expenditures
included the purchase of extrusion blow-molding lines and line changes at PCI
and a can line at Ferembal. Expenditures in 1998 are expected to amount to
approximately $28 million and be similar in character to those in 1997.
The Company met its 1997 capital requirements with cash generated from
operations, from existing funds and through borrowings. It is anticipated that
such expenditures in 1998 will be financed in a similar manner.
LIQUIDITY
The Company's liquidity position at December 31, 1997 declined
slightly. Working capital decreased to $69.0 million at December 31, 1997 from
$78.7 million at December 31, 1996. The current ratio decreased to 1.66 at
December 31, 1997 from 1.76 at December 31, 1996.
The Company's cash position decreased by $9.53 million between December
31, 1997 and 1996. Cash flows from operating activities provided $31.7 million
for the Company in 1997, most of which related to depreciation and amortization.
Cash from operations was used primarily for capital expenditures. The Company
invested approximately $21.5 million in 1997 in property, plant and equipment.
In addition, investment securities increased from $1.2 million to $20.4 million.
The Company's packaging subsidiaries had available various unutilized
credit facilities of approximately $80.9 million at December 31, 1997. However,
the Company's ability to draw upon these lines for other than certain subsidiary
purposes is restricted.
The Company expects that cash from operations and its existing banking
facilities will be sufficient to meet its needs both in 1998 and on a long-term
basis.
UTILIZATION OF NET OPERATING LOSS CARRYFORWARDS
The Company and its subsidiaries account for income taxes in accordance
with SFAS No. 109, "Accounting for Income Taxes," issued in February 1992. This
statement requires, among other things, recognition of future tax benefits,
measured by enacted tax rates, attributable to deductible temporary differences
between financial statement and income tax bases of assets and liabilities and
to tax net operating loss carryforwards, to the extent that realization of such
benefits is more likely than not.
As discussed in Note 9, PCI has tax net operating loss carryforwards
(NOL's) totaling approximately $50 million which expire through 2010. SFAS No.
109 requires that the tax benefit of such NOL's be recorded as an asset to the
extent that management assesses the utilization of such NOL's to be "more likely
than not." Based upon the scheduled reversals
9
of deferred tax liabilities, projected future taxable income and tax planning
strategies, management believes it is more likely than not the Company will
realize the benefits of these deductible differences net of the existing
valuation allowances at December 31, 1997.
The NOL's available for future utilization were generated principally
by operating losses caused by increased post-acquisition depreciation and
amortization charges and additional interest expense on debt incurred in
connection with the purchase. Additionally, in the year ended December 31, 1996,
extraordinary losses were incurred due to the write-off of deferred financing
costs. The operations of the Continental Plastic Container Companies have
historically been profitable (excluding non-recurring items). In assessing the
likelihood of utilization of existing NOL's, management considered the
historical results of the Continental Plastic Container Companies' operations,
both prior to the purchase and as subsidiaries of PCI, subsequent to the
purchase and the current operating environment.
INFLATION AND CHANGING PRICES
Costs and revenues are subject to inflation and changing prices in the
packaging business. Since all competitors are similarly affected, product
selling prices generally reflect cost increases resulting from inflation. At
PCI, changes in the cost of plastic resin are passed-through to customers and
have equal and offsetting effects on sales and costs of goods sold and,
therefore, have no material effect on earnings and cash flow. Such changes can
have a substantial impact on sales. Inflation has not been a material factor in
the Company's revenues and earnings in the past three years.
YEAR 2000 DATE CONVERSION
This issue affects computer systems that have time-sensitive programs
that may not properly recognize the year 2000. Management believes it has
identified the significant computer systems which are not year 2000 compliant
and is in the process of correcting the problem. Corrections should be completed
by the end of 1998. Costs are not expected to be material. If necessary
modifications and conversions by those with which the Company does business are
not completed timely or if any of the Company's significant computer systems are
not year 2000 compliant, the year 2000 issue may have a material adverse effect
on the Company's consolidated financial position, results of operations or
liquidity.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income," effective for fiscal years beginning after December 15,
1997. This Statement requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This Statement further requires that an entity display an
amount representing total comprehensive income for the period in that financial
statement. This Statement also requires that an entity classify items of other
comprehensive income by their nature in a financial statement. For example,
other comprehensive income may include foreign currency items and unrealized
gains and losses on investments in equity securities. Reclassification of
financial statements for earlier periods, provided for comparative purposes, is
required. Based on current accounting standards, this Statement is not expected
to have a material impact on the Company's consolidated financial statements.
The Company will adopt this accounting standard effective January 1, 1998, as
required.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement established standards for
reporting information about operating segments, and related disclosures about
products and services, geographic areas and major customers. The Company has not
determined the impact that the adoption of this new accounting standard will
have on its consolidated financial statement disclosures. The Company will adopt
this statement effective January 1, 1998, as required. Interim information is
not required until the second year of application, at which time comparative
information is required.
10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTINENTAL CAN COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(In thousands, except share data)
1997 1996
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 5,486 $ 15,020
Investment securities 20,385 1,210
Accounts Receivable:
Trade 62,883 74,677
Other 6,958 7,217
Less allowance for doubtful accounts (5,549) (4,378)
------------- -------------
Accounts receivable, net 64,292 77,516
Inventories 79,113 82,911
Prepaid expenses and other current assets 4,788 5,938
------------- -------------
Total current assets 174,064 182,595
------------- -------------
Property, plant and equipment, at cost:
Land, building and improvements 46,405 49,788
Manufacturing machinery and equipment 212,300 216,760
Furniture, fixtures and equipment 8,683 9,434
Construction in progress 8,114 8,644
------------- -------------
275,502 284,626
Less accumulated depreciation and amortization (131,050) (132,850)
------------- -------------
Net property, plant and equipment 144,452 151,776
Goodwill, net of accumulated amortization of $3,450
and $2,645, in 1997 and 1996, respectively 28,975 31,130
Other assets, net of accumulated amortization 27,915 25,531
------------- -------------
Total assets $ 375,406 $ 391,032
============= =============
See accompanying notes to consolidated financial statements
11
CONTINENTAL CAN COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(In thousands, except share data) 1997 1996
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 11,778 $ 8,633
Accounts payable - trade 43,532 44,169
Accrued liabilities:
Employee compensation and benefits 17,330 18,421
Other accrued expenses 15,154 13,536
Current installments of long-term debt and
Obligations under capital leases 8,513 5,080
Income taxes payable 757 1,710
Other current liabilities 7,952 12,299
------------ -------------
Total current liabilities 105,016 103,848
Long-term debt, excluding current installments 144,942 156,373
Obligations under capital leases, excluding
current installments 11,476 14,377
Deferred income taxes 4,725 3,641
Other liabilities 26,408 32,179
------------ -------------
Total liabilities 292,567 310,418
Minority interest 14,057 11,990
Stockholders' Equity:
Capital stock:
First preferred stock, cumulative $25 par value.
Authorized 250,000 shares; no shares issued. - -
Second preferred stock, 4% non-cumulative,
$100 par value. Authorized 1,535 shares;
no shares issued. - -
Common stock, $.25 par value. Authorized
20,000,000 shares; outstanding 3,217,355
Shares in 1997 and 3,201,035 shares in 1996. 804 800
------------ -------------
804 800
Additional paid-in capital 44,226 43,997
Retained earnings 29,168 21,182
Cumulative foreign currency translation adjustment (5,416) 2,645
------------- -------------
Total stockholders' equity 68,782 68,624
Commitments and contingencies - -
------------- -------------
Total liabilities and stockholders' equity $ 375,406 $ 391,032
============= =============
See accompanying notes to consolidated financial statements
12
CONTINENTAL CAN COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands, except per share data)
1997 1996 1995
-------------- -------------- --------------
Net sales $ 546,284 $ 585,034 $ 614,387
Cost of sales 456,998 498,008 523,978
-------------- -------------- --------------
Gross profit 89,286 87,026 90,409
Selling, general and administrative expenses 57,799 59,528 64,906
Restructuring charges - 7,624 4,905
-------------- -------------- --------------
Operating income 31,487 19,874 20,598
Other income (expense):
Interest expense, net (15,965) (19,593) (19,917)
Foreign currency exchange gain (loss) 58 115 (299)
Other, net (496) (397) (291)
-------------- -------------- --------------
Net other expense (16,403) (19,875) (20,507)
Income (loss) before provision (recovery) for income taxes,
Minority interest and extraordinary item 15,084 (1) 91
Provision (recovery) for income taxes 3,850 1,245 (503)
-------------- -------------- --------------
Income (loss) before minority interest and
Extraordinary item 11,234 (1,246) 594
Minority interest 3,248 (1,822) (76)
-------------- -------------- --------------
Income before extraordinary item 7,986 576 670
Extraordinary item, net - (6,136) (115)
-------------- -------------- --------------
Net income (loss) $ 7,986 $ (5,560) $ 555
============== ============== ==============
Earnings (loss) per common share - basic:
Before extraordinary item $ 2.49 $ 0.18 $ 0.21
Extraordinary item, net - (1.92) (0.04)
-------------- -------------- --------------
Net earnings (loss) per common share - basic $ 2.49 $ (1.74) $ 0.17
============== ============== ==============
Earnings (loss) per common share - diluted:
Before extraordinary item $ 2.41 $ 0.18 $ 0.21
Extraordinary item - (1.89) (0.04)
-------------- -------------- --------------
Net earnings (loss) per common share - diluted $ 2.41 $ (1.71) $ 0.17
============== ============== ==============
See accompanying notes to consolidated financial statements
13
CONTINENTAL CAN COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands) 1997 1996 1995
-------------- -------------- --------------
Cash Flows From Operating Activities:
Net income (loss) $ 7,986 $ (5,560) $ 555
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 18,969 32,300 34,353
Extraordinary loss on write off of capitalized
Finance costs, net - 6,136 115
Minority interest 3,248 (1,822) (76)
Deferred income taxes 779 (2,022) (2,805)
Gain on sale of capital assets 506 722 68
Provision for doubtful accounts receivable 1,716 (769) 1,656
Changes in Assets and Liabilities:
Decrease in accounts receivable, net 6,344 10,517 14,534
(Increase) decrease in other receivables (1,020) 4,007 697
(Increase) decrease in inventories (1,933) 224 (4,215)
(Increase) decrease in prepaid expenses and
other current assets (441) (235) 245
Decrease in intangible assets - 121 -
Increase in other assets (1,933) (1,056) (1,338)
(Increase) decrease in pension asset/liability (59) 182 (11,377)
Increase (decrease) in accounts payable 2,089 (4,895) (9,144)
Increase (decrease) in accrued liabilities 1,120 2,257 (1,021)
(Decrease) increase in income taxes payable (741) 203 362
(Decrease) increase in other liabilities (4,944) 568 2,462
-------------- -------------- --------------
Net Cash Provided by Operating Activities 31,686 40,878 25,071
Cash Flows From Investing Activities:
Purchase of minority interests (159) (30,715) (1,448)
Proceeds from maturities of investment securities 25,834 70 2
Purchases of investment securities (45,009) (1,000) -
Proceeds from sale of capital assets 667 41,813 986
Capital expenditures, net of investment grants (21,472) (33,301) (42,482)
-------------- -------------- --------------
Net Cash Used in Investing Activities (40,139) (23,133) (42,942)
Cash Flows From Financing Activities:
Principal payments of long-term debt and
Obligations under capital leases (6,101) (116,265) (14,742)
Proceeds from long-term debt and obligations under
Capital leases 3,077 147,836 9,164
Common stock issued 233 131 1,007
Proceeds from (repayments of) short-term borrowings 4,287 (32,866) 22,211
Dividends paid by subsidiary to minority interest (350) (71) (49)
Financing fees paid (367) (5,514) -
Premium on repurchase of bonds - (5,382) -
-------------- -------------- --------------
Net Cash Provided by (Used in) Financing Activities 779 (12,131) 17,591
Effect of exchange rate changes on cash (1,860) 481 429
-------------- -------------- --------------
(Decrease) increase in cash and cash equivalents (9,534) 6,095 149
Cash and cash equivalents at beginning of year 15,020 8,925 8,776
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 5,486 $ 15,020 $ 8,925
============== ============== ==============
See accompanying notes to consolidated financial statements
14
CONTINENTAL CAN COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands)
Cumulative
Common Stock Foreign Total
------------- Additional Currency Stock-
Number Paid-in Retained Translation holders'
of Shares Amount Capital Earnings Adjustment Equity
---------------------------------------------------------------------------
Balances January 1, 1995 3,151 $ 788 $ 42,872 $ 26,187 $ 849 $ 70,696
Net income - - - 555 - 555
Common stock issued 45 11 996 - - 1,007
Foreign currency translation adjustment - - - - 4,040 4,040
---------------------------------------------------------------------------
Balances December 31, 1995 3,196 $ 799 $ 43,868 $ 26,742 $ 4,889 $ 76,298
Net loss - - - (5,560) - (5,560)
Common stock issued 5 1 129 - - 130
Foreign currency translation adjustment - - - - (2,244) (2,244)
---------------------------------------------------------------------------
Balances December 31, 1996 3,201 $ 800 $ 43,997 $ 21,182 $ 2,645 $ 68,624
Net income - - - 7,986 - 7,986
Common stock issued 16 4 229 - - 233
Foreign currency translation adjustment - - - - (8,061) (8,061)
===========================================================================
Balances at December 31, 1997 3,217 $ 804 $ 44,226 $ 29,168 $(5,416) $ 68,782
===========================================================================
See accompanying notes to consolidated financial statements
15
CONTINENTAL CAN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
(a) Pending Sale of Continental Can Company, Inc.
In January 1998, Suiza Foods Corporation signed a definitive agreement to
acquire the Company for stock and assumption of debt in a purchase transaction.
The transaction is expected to be completed during the second quarter of 1998.
Any impact of the transaction on the consolidated financial statements of the
Company has not yet been determined.
(b) Principles of Consolidation
Continental Can Company, Inc. (the Company) through its subsidiaries,
manufactures extrusion blow-molded plastic containers, metal cans, plastic films
and equipment for the packaging industry, and prints and laminates flexible
packaging for the food and snack food industries. The accompanying consolidated
financial statements include the accounts of the Company and its majority-owned
foreign and domestic subsidiaries.
At December 31, 1997, the Company owned the following packaging related
businesses: 64% of Ferembal S.A. (Ferembal) (see Note 2(d)), located in France
which in turn owns 96% of Obalex A.S. (Obalex) (see Note 2(c)) located in the
Czech Republic; 100% of Dixie Holding, Inc. and Dixie Union Geschaftsfuhrungs
GmbH which own 100% of Dixie Union GmbH & Company KG (Dixie Union), located in
the Federal Republic of Germany; and 84% of Plastic Containers, Inc. (PCI) (see
Note 2(a)), which in turn owns 100% of Continental Plastic Containers, Inc. and
Continental Caribbean Containers, Inc. (collectively, CPC). The Company also
owned 49% of Onena Bolsas de Papel, S.A. (Onena), located in Spain, at December
31, 1996. In addition, the Company owns 100% of an engineering firm, Lockwood,
Kessler & Bartlett, Inc. (LKB).
Minority interests reflected in consolidation represent the portions of
Ferembal, Obalex, and PCI not owned by the Company. After December 12, 1996, the
results of Onena are presented using the equity method of accounting (see Note
2(b)).
All significant intercompany balances and transactions have been eliminated in
consolidation.
(c) Investment Securities
Investment securities at December 31, 1997 consist of held-to-maturity U.S.
government obligations due within one year, certificates of deposit or
Eurodollar deposits due within one year, and highly rated commercial paper.
Investment securities are stated at amortized cost, which approximates market
value.
(d) Inventories
Inventories consist principally of packaging materials, repair parts and
supplies. The manufacturing inventories of PCI are stated at the lower of cost
applied on the last-in, first-out (LIFO) method, which is not in excess of
market. Spare parts in Ferembal were capitalized in 1997 to be consistent with
the other Company subsidiaries. For the year ended December 31, 1997, the change
had the effect of decreasing cost of sales by $3 million, and after adjusting
for taxes and minority interest, thereby increasing net income by $1.2 million
and $.37 per share basic. Inventories of the Company's other subsidiaries and
the repair parts and supplies inventories of PCI and Ferembal are stated at the
lower of cost applied on a first-in, first-out (FIFO) basis or market.
16
(e) Depreciation and Amortization
Depreciation and amortization of property, plant and equipment are computed on a
straight-line basis over the estimated useful lives of the assets, as follows:
Estimated
useful lives
(years)
------------
Building and improvements 10 to 50
Manufacturing machinery and equipment 3 to 20
Furniture, fixtures and equipment 3 to 8
Effective January 1, 1997, the Company revised its estimates of the useful lives
of certain machinery and equipment. These changes were made to better reflect
the estimated periods during which these assets remain in service. For the year
ended December 31, 1997, the change had the effect of decreasing depreciation
expense by $4,533,000, and after adjusting for taxes and minority interest,
thereby increasing net income by $2,067,000 and $.64 per share basic.
Leasehold improvements are amortized over their estimated useful lives or the
term of the lease, whichever is less.
Provision for amortization of intangible assets is based upon the estimated
useful lives of the related assets and is computed using the straight-line
method. Intangible assets resulting from the acquisitions of (a) PCI consists of
(i) goodwill (amortized on a straight-line basis over forty years), (ii) finance
costs (amortized over periods ranging from six to ten years), and (iii) customer
contracts (amortized over ten years); and (b) Ferembal consists of patents
(amortized on a straight-line basis over their estimated useful lives) and
goodwill (amortized on a straight-line basis over forty years).
(f) Goodwill
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over the expected periods
to be benefited, generally forty years. The Company assesses the recoverability
of this intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected undiscounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
(g) Income Taxes
The Company files a consolidated tax return for U.S. purposes for itself and its
domestic subsidiaries (to the extent it owns at least 80% of such subsidiaries).
Separate returns are filed for all other subsidiaries. U.S. deferred income
taxes have not been provided on the unremitted earnings of the Company's foreign
subsidiaries to the extent that such earnings have been invested in the
business, as any taxes on dividends would be substantially offset by foreign and
other tax credits.
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. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
17
(h) Foreign Currency Translation
The accounts of the Company's foreign subsidiaries have been converted to U.S.
dollars utilizing SFAS No. 52 "Foreign Currency Translation," under which assets
and liabilities are translated at the exchange rate in effect at the balance
sheet date, while revenues, costs and expenses are translated at the average
exchange rate for the reporting period. Resulting unrealized net gains or losses
are recorded as a separate component of stockholders' equity. Realized foreign
exchange gains or losses are reflected in operations.
(i) Statement of Cash Flows
Cash equivalents consist of short-term investments in government securities and
bonds. The Company considers securities purchased within three months of their
maturity date to be cash equivalents.
Cash paid for interest and income taxes was as follows:
1997 1996 1995
-----------------------------------------------------
(in thousands)
Interest $17,190 $21,265 $19,657
Income taxes $ 5,459 $ 1,955 $ 2,630
(j) Research, Development and Engineering
Expenditures for research, development and engineering are expensed as incurred.
Research, development and engineering costs amounted to $12,509,000, $11,495,000
and $12,187,000 in 1997, 1996 and 1995, respectively.
(k) Insurance
PCI purchases commercial insurance policies, but remains self-insured in certain
states for the purposes of providing workers' compensation, general liability
and property and casualty insurance coverage up to varying deductible amounts.
PCI's self-insurance reserves are included in other liabilities on the
consolidated balance sheets. Costs charged to operations for self-insurance for
the years ended December 31, 1997, 1996 and 1995 were $1,784,000, $2,629,000 and
$2,200,000, respectively.
(l) Restructuring Charges
Included in expenses in 1996 and 1995 are restructuring charges of $7,624,000
and $4,905,000, respectively. Charges relating to Ferembal amounted to
$1,124,000 and $5,003,000 in 1996 and 1995, respectively. These charges include
termination benefits for certain employees, approximately half of whom accepted
early retirement. Terminated employees at Ferembal received $3,043,000 in 1996
and $1,882,000 in 1995. Included in other current liabilities in 1997 is
$699,000 for termination benefits for the remaining employees of Ferembal,
substantially, all of which is expected to be paid in 1998.
In 1996, PCI recorded charges amounting to $6,500,000 for plant rationalization
and realignment in connection with a plan to consolidate certain manufacturing
operations. The Company closed one plant in 1996 and another plant in 1997.
Production from these plants was transferred to other existing facilities. The
components of the $6,500,000 charge included approximately $1,400,000 for
employee severance costs, approximately $1,600,000 for an impairment loss
related to fixed assets, and approximately $3,500,000 for noncancellable lease
obligations and related facility closing costs. The Company remains obligated
under a noncancellable operating lease at one of the facilities through June
1999. Payments made in 1997 against the accrued liability were approximately
$800,000 for severance benefits and approximately $1,300,000 for other accrued
charges. For the year ended December 31, 1995 a credit of $98,000 related to
prior plant consolidations at PCI.
18
(m) Use of Estimates
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 assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(n) Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share,"
which the Company adopted in the fourth quarter of 1997. Under SFAS No. 128, the
Company presents basic and diluted earnings per share (Note 11). Prior year
earnings per share data have been restated to apply the provisions of SFAS No.
128.
(o) Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles to be
held and used or disposed of for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability is measured by a comparison of the carrying amount
of an asset to future net cash flows expected to be generated by the asset.
(p) Stock Option Plans
The Company records compensation expense for employee and director stock options
and warrants only if the current market price of the underlying stock exceeds
the exercise price on the date of the grant. On January 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The company has
elected not to implement the fair value based accounting method for employee and
director stock options and warrants, but has elected to disclose the pro forma
net earnings and pro forma earnings per share for employee and director stock
option and warrant grants made beginning in 1995 as if such method had been used
to account for stock-based compensation cost.
(q) Reclassifications
Certain reclassifications have been made to conform prior year consolidated
financial statements to the 1997 presentation.
(2) ACQUISITIONS AND DISPOSALS
(a) PCI
In December 1996, the Company increased its interest in PCI to 84% by purchasing
34% of PCI from Merrywood, Inc. (Merrywood).
In August 1996, Merrywood notified the Company of its intention to put its 50%
interest in PCI to the Company for $30 million, plus interest at prime plus 1%
from November 21, 1991 pursuant to an Agreement entered into in 1992. In October
1996, the Company and Merrywood entered into a new Agreement (the "1996
Agreement") pursuant to which the Company purchased 34% of PCI in December 1996
for $30 million, plus a warrant exercisable through December 31, 2000 to
purchase 150,000 shares of Common Stock at the lesser of $20.00 per share or
book value at December 31, 1996. The 1996 Agreement also provided that the
remaining shares in PCI would be purchased by the Company prior to December 31,
2000 for approximately $15.4 million plus interest at 10%. The Company agreed to
retain one of Merrywood's designees as a director of the Company and PCI. All
prior agreements between the Company and Merrywood were terminated by the 1996
Agreement.
The acquisition of these shares was accounted for under the purchase method with
the excess of the purchase price over the fair value of the assets acquired
($17,648,000) allocated to goodwill.
19
The Company obtained the funds for such purchase from a loan of $30 million from
PCI. The loan matures on June 15, 2007 and accrues interest, payable at
maturity, at an annual rate of 6.9% compounded semi-annually. PCI obtained such
funds through a refinancing of its existing Senior Notes (see Note 8) and a
sale/leaseback financing by CPC. The sale/leaseback financing of all
manufacturing and ancillary equipment at five of its facilities generated
proceeds of $40,566,000 which approximated book value. The terms of the leases
range from 88 to 109 months subject to CPC's option to repurchase the equipment
at 78 and 83 months at a pre-established fair market value.
(b) Onena
On December 12, 1996, the Company sold 8% of its 57% interest in Onena to
SODENA, an economic development corporation owned by the Government of Navarra,
for nominal consideration. This sale reduced the Company's ownership to less
than a majority of Onena's voting stock. In addition, the Company and SODENA
entered into an amended shareholders' agreement which provides, among other
things, that SODENA will appoint a majority of Onena's directors; that the
Company's previous obligation to purchase SODENA's shares in Onena in 1999 is
eliminated; and that, for nominal consideration, SODENA will have a call, and
the Company a put, with regard to the Company's remaining shares in Onena. As a
result of these changes, effective as of December 12, 1996, the Company had
deconsolidated Onena and accounted for its investment in the common stock of
Onena under the equity method. In November 1997 the Company sold its remaining
49% interest in Onena for a nominal consideration.
(c) Obalex
During 1997, Ferembal increased its equity interest in Obalex to 96% through the
purchase of an additional 1% of Obalex for $85,000. During 1996 and 1995,
Ferembal purchased an additional 9% and 22% of Obalex for $495,000 and
$1,448,000, respectively. These transactions have been accounted for under the
purchase method with the purchase price allocated to the fair value of the net
assets acquired.
(d) Ferembal
As part of the 1989 purchase of Ferembal, a junior subordinated convertible bond
was issued which was converted in April 1997. As a result, the Company's
percentage ownership of Ferembal was reduced to 64%. In December 1997 and
January 1998 the Company entered into agreements to purchase substantially all
of the minority interests in Ferembal for approximately $21 million.
(3) ACCOUNTS RECEIVABLE AND BUSINESS/CREDIT CONCENTRATIONS
Most of the Company's customers are located in the United States and Europe.
Sales to five customers in 1997, five customers in 1996 and three customers in
1995 accounted for 40%, 35% and 23% of the Company's net sales, respectively;
accounts receivable from two customers at December 31, 1997 and five customers
at December 31, 1996 amounted to 24% and 45%, respectively, of the Company's
total accounts receivable.
During 1997, 1996 and 1995, Ferembal discounted with banks approximately
$63,133,000, $105,514,000 and $79,353,000, respectively, of trade accounts
receivable with full recourse. Of these amounts, approximately $9,097,000 and
$13,297,000 remains outstanding at December 31, 1997 and 1996, respectively.
20
The components of other accounts receivable at December 31 were as follows:
1997 1996
---- ----
(in thousands)
Recoverable value added taxes related to Ferembal $1,979 $ 983
Engineering fees billed 2,584 2,415
Cost of molds not yet billed - 588
Other taxes 387 57
Other 2,008 3,174
------- --------
$6,958 $7,217
======= ========
(4) INVENTORIES
Inventories consist principally of packaging materials. The components of
inventory at December 31 were as follows:
1997 1996
---- ----
(in thousands)
Raw materials and supplies $39,600 $40,785
Work in process 5,665 6,627
Finished goods 37,426 39,746
------- --------
82,691 87,158
LIFO reserve (3,578) (4,247)
------- --------
$79,113 $82,911
======== =======
During 1996 and 1995, LIFO inventory layers were reduced. This reduction
resulted in charging lower inventory costs prevailing in previous years to cost
of goods sold in 1996 and 1995, thus reducing cost of goods sold by
approximately $80,000 and $700,000, respectively, below the amount that would
have resulted from liquidating inventory recorded at December 31, 1996 and 1995
prices.
(5) DERIVATIVE FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. They are used to manage well-defined
interest rate and currency price risks. At December 31, 1997, Ferembal had an
option to purchase 160,000 pounds sterling at 9.61 french francs to the pound
sterling. The amount under option relates to purchase obligations of Ferembal in
pounds sterling.
At December 31, 1997, Ferembal had entered into several short-term interest rate
hedge agreements in which it has exchanged an obligation to pay variable
interest rates based on three-month Paris Inter-Bank Offering Rates (PIBOR) for
fixed rates ranging from 3.56% to 3.91%. These agreements cover the period
between March 1998 and December 1998 for principal amounts between $6.6 million
and $16.7 million. At December 31, 1997, PIBOR was between 3.81% and 3.99%.
The fair value of these agreements at December 31, 1997 was an unrecognized gain
of $35,500. This positive fair value reflects the difference between the
interest rates in effect for such agreements and the rates that could have been
obtained on December 31, 1997 based on the principal amounts over the period
covered.
21
(6) OTHER ASSETS
The components of other assets at December 31, were as follows:
1997 1996
------ -----
(in thousands)
Intangibles:
Financing and acquisition costs $ 6,228 $ 5,861
Customer contracts 7,630 7,630
Prefunded pension 5,030 4,971
Deferred tax assets 7,614 5,359
Non-current receivables, principally VAT 850 1,081
Other 7,721 5,929
------- -------
35,073 30,831
Less accumulated amortization of intangibles 7,158 5,300
------- -------
$27,915 $25,531
======= =======
(7) SHORT-TERM BORROWINGS
At December 31, 1997 and 1996, approximately $11,778,000 and $8,633,000,
respectively, were outstanding representing at December 31, 1997 amounts drawn
by (a) LKB ($650,000 at an interest rate of 9.25%) (b) Ferembal, including
Obalex, ($8,843,000 at interest rates ranging from 5.46% to 14.95%) and (c)
Dixie Union ($2,285,000 at interest rates ranging from 6.25% to 8.75%). LKB's
borrowings are pursuant to a Revolving Credit Facility which provides for
borrowings up to $2.5 million. A commitment fee of 0.5% is payable on the unused
portion of the facility. The facility is secured by the receivables of LKB and a
$1.3 million mortgage on LKB's headquarters in Syosset, NY.
At December 31, 1997, Ferembal had unutilized short-term unsecured borrowing
agreements of approximately $18.9 million. At December 31, 1997, Dixie Union had
total lines of credit available under short-term unsecured borrowing agreements
of approximately $8.6 million.
PCI has a $50 million revolving credit facility with a commercial bank with
interest on individual borrowings based on the bank's prime rate or LIBOR, at
PCI's option. Borrowings are secured by accounts receivable and inventories. At
December 31, 1997, there were no borrowings outstanding under this facility. PCI
is required to pay an annual commitment fee of 0.25% on the unused facility up
to $25 million and 0.5% on the unused amount in excess of $25 million.
Commitment fees for the years ended December 31, 1997, 1996 and 1995 were
$167,000, $104,000 and $23,000, respectively. The facility contains certain
restrictive covenants, including the maintenance of minimum levels of net worth,
fixed charge coverage and interest coverage, limitations on capital expenditures
and additional indebtedness, and restrictions on the payment of dividends. At
December 31, 1997, PCI was in compliance with these covenants. The facility also
provides for the issuance of letters of credit by the bank on PCI's behalf. At
December 31, 1997, letters of credit amounting to $4,610,000 had been issued to
guarantee obligations carried on PCI's consolidated balance sheet.
The extraordinary loss of $115,000 in 1995, which is net of the portion
attributable to minority interest, relates to the write-off of unamortized fees
for a prior revolving credit agreement.
22
(8) LONG-TERM DEBT, CAPITAL LEASES AND OTHER LONG-TERM LIABILITIES
Long-term debt, and capital leases and other long term liabilities as of
December 31 are summarized as follows:
1997 1996
------- ------
(in thousands)
10% Senior Secured Notes due 2006 (a).............................................. $125,000 $125,000
Term loan payable by Ferembal through 1997 at 10.25%
(denominated in francs: 2 million at December 31, 1996)............................ - 385
Notes payable by Ferembal in installments through 1997 at PIBOR (3.43%
at December 31, 1996) plus 0.6% to 0.75%
(denominated in francs: 4.2 million at December 31, 1996).......................... - 814
Notes payable by Ferembal in installments through 2001 at
PIBOR plus 0.55% to 0.6% (denominated in francs: 70 million and 75 million
at December 31, 1997 and 1996)..................................................... 11,666 14,449
Term loans payable by Ferembal through 2001 at weighted average
interest rates of 10% and a range of 8.5% to 15.5% (denominated in
francs: 8.0 million and 11.1 million at
December 31, 1997 and 1996, respectively)......................................... 2,731 2,139
Convertible Subordinated Bond due 2000 at PIBOR (denominated
in francs: 10 million at December 31, 1996) (b).................................... - 1,927
Term loans payable through 1999 at rates of 13%
(denominated in Czech crowns: 4.9 million at December 31,1996)..................... - 184
Obligations under capital leases (c)............................................... 14,266 17,029
Notes payable by Dixie Union at 5.5% to 6.25% (denominated in
deutsch marks: 16 million for December 31, 1997 and 1996).......................... 8,939 10,390
Notes payable by Dixie Union in semi-annual installments through 2003
at rates of 7.3% to 7.78% (denominated in deutsch marks: 4.2 million
and 5.4 million at December 31, 1997
and 1996, respectively)............................................................ 2,329 3,513
-------- ---------
164,931 175,830
Less current installments.......................................................... (8,513) (5,080)
-------- ---------
$156,418 $170,750
======== =========
(a) In 1996, PCI completed an offering of 10% Senior Secured Notes due
2006, (the "Senior Secured Notes"), payable semi-annually on July 15th and
December 15th, are secured by all the issued stock of CPC and substantially all
the assets and properties owned by PCI other than inventory, receivables and
certain equipment securing capital lease obligations.
The Senior Secured Notes are not redeemable by PCI prior to December 15, 2001.
On or after that date the notes are redeemable, in whole or in part, at the
option of PCI at an initial price of 105% of par declining ratably per annum, to
par on December 15, 2004.
In the event of a change of control as defined in the indenture, PCI is
obligated to offer to purchase all outstanding Senior Secured Notes at a
redemption price of 101% of the principal amount thereof plus accrued interest.
In addition, PCI is obligated in certain instances to offer to purchase Senior
Secured Notes at a redemption price of 100% of the principal
23
amount thereof plus accrued interest with the net cash proceeds of certain sales
or dispositions of assets.
The indenture places certain restrictions on payment of dividends, additional
liens, disposition of the proceeds from asset sales, sale/leaseback transactions
and additional borrowings. At December 31, 1997, PCI was in compliance with
these restrictions.
The extraordinary loss of $6,136,000 in 1996, (which is net of the portion
attributable to minority interest) relates to the early extinguishment by PCI of
a portion of the 10-3/4% Senior Secured Notes due in 2001.
(b) In 1989, Ferembal issued a subordinated bond convertible into 100,000
shares of capital stock at the option of the holder which was converted in April
1997. As a result the Company's ownership interest in Ferembal decreased to 64%.
(c) The capital lease obligations represent lease payments due through 2004
which are capitalized.
The following is a schedule of future minimum lease payments under the
capitalized leases together with the present value of the net minimum lease
payments as of December 31, 1997:
Fiscal Year (in thousands)
-----------------------------------------
1998 $ 3,653
1999 3,320
2000 2,783
2001 2,692
2002 1,896
Thereafter 2,867
Total minimum lease payments 17,211
Less amount representing interest (2,945)
Present value of net minimum lease payments,
including current maturities, with interest rates
ranging from 5.8% to 10.6% $14,266
=======
-----------------------------------------------------------
Maturities of long-term debt are as follows:
Year Ending December 31 (in thousands)
---------------------------------------------------------------
1998 $ 5,723
1999 10,394
2000 4,284
2001 5,096
2002 84
Later Years 125,084
--------
$150,665
========
Other long-term liabilities at December 31, 1997 primarily include
pension and profit sharing amounts related to PCI and Ferembal of $3,889,000
($4,710,000 at December 31, 1996), self-insurance reserves at PCI of $8,896,000
($9,638,000 at December 31, 1996), and accrued postretirement benefits at PCI of
$6,346,000 ($6,298,000 at December 31, 1996).
24
(9) INCOME TAXES
The components of the provision (recovery) for income taxes for the years ended
December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995
------ ------ -----
(in thousands)
Current - Federal $ 400 $ - $ 145
- Foreign 2,632 3,247 2,075
- State 39 20 82
------- -------- -------
Total Current 3,071 3,267 2,302
------- -------- -------
Deferred - Federal (705) (1,746) (2,569)
- Foreign 1,779 (126) (73)
- State (295) (150) (163)
------- -------- -------
Total Deferred 779 (2,022) (2,805)
------- --------- --------
Provision (recovery) for income taxes $3,850 $ 1,245 $ (503)
======= ======== ========
The income tax provision (recovery) differed from the provision (benefit) that
would result from applying the U.S. Federal statutory income tax rate to income
before provision (recovery) for income taxes, minority interest, and
extraordinary item as a result of the following:
1997 1996 1995
---- ---- ----
(in thousands, except for percentage amounts)
AMOUNT % Amount % Amount %
------ --- ------ --- ------ ---
Provision at U.S. federal statutory
rate $5,128 34.0 $ - * $ 31 34.0
Losses not providing tax benefits - - 5,414 * - -
Change in valuation allowance
allocated to operations (2,343) (15.4) (4,154) * (383) (420.9)
State and local income taxes, net of
federal income tax benefit 170 1.1 (86) * (53) (58.2)
Differential in foreign tax rates 311 2.1 (11) * (247) (271.4)
Other 584 3.7 82 * 149 163.8
-------- ---- --------- ------ -------
Provision (recovery) for income taxes
$3,850 25.5 $1,245 * $(503) (552.7)
======== ==== ========= ====== =======
*Percentages not meaningful
The significant components of deferred income tax (recovery) expense
attributable to income from continuing operations for the years ended December
31 are as follows:
1997 1996 1995
---- ---- ----
(in thousands)
Deferred tax expense (recovery) (exclusive of the effects of
other components below) $1,413 $(2,366) $ (844)
Benefit of operating loss carryforwards - 8,643 (5,922)
Book over tax basis of principally fixed assets 988 (6,104) 109
Pension and postretirement benefits reserves 698 (450) 2,277
Prefunded pension 23 (74) 1,958
Decrease in valuation allowance for deferred tax assets (2,343) (1,671) (383)
------- --------- ---------
$ 779 $(2,022) $(2,805)
========= ======== ========
25
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31 are
presented below:
1997 1996
---- ----
Deferred tax assets: (in thousands)
Net operating loss carryforwards $18,811 $18,811
Vacation pay, due to accrual for financial reporting purposes 1,060 1,131
Restructuring 758 2,437
Self-insurance reserves 3,730 4,012
Pension and postretirement benefit reserves 3,069 3,767
Stock options, due to accrual for financial reporting purposes 349 349
Accounts Receivable principally due to allowance for
doubtful accounts 14 1,671
Other 5,296 2,747
------- ---------
Total gross deferred tax assets 33,087 34,925
Less valuation allowance (7,027) (9,370)
------- ----------
Net deferred tax assets 26,060 25,555
------- ------
Deferred tax liabilities:
Taxable gain on merger 1,423 2,169
Book over tax basis of principally fixed assets 16,595 15,607
Prefunded pension 1,907 1,884
Other 599 429
------- ---------
Total gross deferred tax liabilities 20,524 20,089
------- ---------
Net deferred tax asset $ 5,536 $ 5,466
========= ========
The valuation allowance for deferred tax assets as of January 1, 1997 and 1996
was $9,370,000 and $11,041,000, respectively. The net change in the total
valuation allowance for the years ended December 31, 1997 and 1996 was a
decrease of $2,343,000 and $1,671,000, respectively.
Due to different tax jurisdictions of the Company's subsidiaries, net deferred
tax assets of $5,536,000 and $5,466,000 at December 31, 1997 and 1996,
respectively, shown above are reflected in the consolidated balance sheets as:
1997 1996
------ -----
(in thousands)
Current deferred tax assets (included in
prepaid expenses and other current assets) $2,647 $3,748
Non-current deferred tax assets (included in other assets) 7,614 5,359
------ -------
10,261 9,107
Non-current deferred tax liabilities 4,725 3,641
------ -------
Net deferred tax asset $5,536 $5,466
======= ======
At December 31, 1997, PCI has operating loss carryforwards for Federal income
tax purposes of approximately $50 million, which are available to offset future
Federal taxable income through 2010. In addition, PCI has alternative minimum
tax credit carryforwards of approximately $132,000 which are available to reduce
future Federal regular income taxes over an indefinite period and research and
experimentation credits of approximately $342,000 available to reduce Federal
income taxes through 2010. Based upon the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies,
management believes it is more likely than not that PCI will realize the
benefits of these deductible differences, net of the existing valuation
allowances at December 31, 1997.
26
(10) COMMON STOCK
(a) Stock Options
The Company has three plans pursuant to which stock options may be granted. The
1988 Restricted Stock Option Plan, as amended (the Restricted Plan), provides
for grants of options to purchase up to 500,000 shares of authorized but
unissued common stock at an exercise price determined by the Personnel Committee
of the Board of Directors (the Committee) but not less than $1.00 per share. The
Committee may determine the exercise period of the option up to a maximum of
twenty years from the date of the grant and may determine a restricted period
during which any portion of the option may not be exercised. At December 31,
1997, there was 70,000 shares available for grant under the Restricted Plan. The
per share weighted-average fair value of stock options granted under the
Restricted Plan during 1997, 1996 and 1995 was $1.43, $7.07 and $11.02,
respectively, on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions:
1997 1996 1995
---- ---- ----
Expected dividend yield 0 0 0
Risk free interest rate 6.2% 5.5% 7.21%
Expected life 3 YEARS 5 years 5 years
Stock option activity under the Restricted Plan for the periods shown is as
follows:
WEIGHTED AVERAGE
SHARES* EXERCISE PRICE
Outstanding at 12-31-94 472,800 $19.64
Granted 25,000 $24.50
Forfeited (57,200) $23.03
Expired (1,300) $26.75
--------
Outstanding at 12-31-95 439,300 $19.45
Granted 37,500 $16.82
Forfeited (9,100) $23.18
Expired (10,800) $26.75
---------
Outstanding at 12-31-96 456,900 $18.98
Granted 197,500 $18.23
Forfeited (202,499) $23.98
Expired (19,900) $25.74
Exercised (2,000) $16.88
-------
Outstanding at 12-31-97 430,001 $15.87
========
*No options were exercised under the Restricted Plan in 1996 or 1995.
The 1988 Director Stock Option Plan, as amended (the Retainer Plan), provides
for the grant of stock options to purchase up to 50,000 shares of authorized but
unissued common stock to directors that elect to receive a stock option in lieu
of cash as an annual retainer and for attendance fees. Each electing director
will receive an option equal to the nearest number of whole shares determined by
dividing the annual retainer plus attendance fees by the fair market value of
the stock less one dollar. The option price is one dollar per share and an
option may not be exercised prior to the first anniversary of the date it was
granted nor more than ten years after such date. At December 31, 1997, there
were 29,230 shares available for grant under the Retainer Plan. The per share
weighted-average fair value of stock options granted under the Restricted Plan
during 1997, 1996 and 1995, respectively, was $0.17, $0.17 and $0.30 on the date
of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions:
27
1997 1996 1995
---- ---- ----
Expected dividend yield 0 0 0
Risk free interest rate 6.36% 6.46% 5.76%
Expected life 3 YEARS 3 years 3 years
Stock option activity under the Retainer Plan for the periods shown is as
follows:
WEIGHTED AVERAGE
SHARES* EXERCISE PRICE
Outstanding at 12-31-94 12,702 $1.00
Granted 2,791 $1.00
Exercised - $1.00
-
Outstanding at 12-31-95 15,493 $1.00
Granted 6,644 $1.00
Exercised (1,367) $1.00
-------
Outstanding at 12-31-96 20,770 $1.00
Granted 4,218 $1.00
Exercised (3,920) $1.00
-------
Outstanding at 12-31-97 21,068 $1.00
=======
*No options were forfeited or expired under the Retainer Plan in 1997, 1996 or
1995.
The 1990 Stock Option Plan for Non-Employee Directors (the Director Plan)
provides for grant of options to purchase up to 200,000 shares of authorized but
unissued common stock to directors who are not employees of the Company or its
subsidiaries. The Director Plan is administered by a Board Committee. The
Director Plan provides for the grant to each non-employee director, at the
commencement of his initial term, of an option to purchase up to 10,000 shares
of Common Stock at a price equal to the fair market value of a share of Common
Stock on the date of the grant. The options become exercisable as to one-tenth
of the shares subject to option on the date of the grant and on the nine
successive anniversaries of such date. The term of the options is ten years
provided that any option holder who ceases to be a member of the Board of
Directors forfeits any part of the option grant which has not become exercisable
as of such date. There are 125,000 shares available for grant under the Director
Plan. The per share weighted average fair value of stock options granted under
the plan during 1997 was $8.90.
Stock option activity under the Director Plan for the periods shown is as
follows:
WEIGHTED AVERAGE
SHARES* EXERCISE PRICE
Outstanding at 12-31-94 95,000 $17.11
Forfeited (9,000) $17.28
Expired (5,000) $17.00
--------
Outstanding at 12-31-95 81,000 $17.09
Forfeited - -
Expired (11,000) $17.23
---------
Outstanding at 12-31-96 70,000 $17.07
Granted 10,000 $20.69
Forfeited or expired - -
Exercised (5,000) $17.00
-------
Outstanding at 12-31-97 75,000 $17.56
=======
*No options were granted or exercised under the Director Plan in 1996
or 1995.
28
Some options, which are not pursuant to any plan, have been granted. At December
31, 1997 a total of 85,000 shares were subject to such options at exercise
prices ranging from $2.94 to $25.75 per share, which represented the fair market
value of a share of the Company's stock on the date each of such options was
granted. These options expire between 2002 and 2004. In 1995, options to
purchase 10,000 shares of Common Stock at a price of $17.00 per share were
exercised.
The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized in the financial
statements for stock options which are issued at or above the fair market value
of a share of the Company's common stock on the date of the grant. Compensation
expense is charged for the difference between the option price and the fair
market value of a share of Common Stock with regard to discounted stock options.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net income
would have been reduced to the pro forma amounts indicated below:
1997 1996 1995
---- ---- ----
Net Income (Loss) As reported $7,986,000 $(5,560,000) $555,000
Pro forma $7,366,000 $(5,631,000) $484,000
Net Earnings (Loss) per Share - basic As reported $2.49 $(1.74) $ .18
- diluted Pro forma $2.29 $(1.76) $ .14
As reported $2.41 $(1.71) $ .17
Pro forma $2.22 $(1.73) $ .15
Pro forma net income (loss) reflects only options granted in 1997, 1996 and
1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income (loss)
amounts presented above because compensation cost is reflected over the options'
vesting period of one to five years and compensation cost for options granted
prior to January 1, 1995 is not considered.
(b) Stock Grants
The Company has two plans pursuant to which restricted stock grants may be made.
Pursuant to the 1992 Restricted Stock Plan for Non-Employee Directors (the "1992
Plan"), each non-employee director of the Company receives an annual award of
600 shares of Company Common Stock. Such shares are restricted from transfer
while such recipient remains a member of the Board of Directors and the shares
are subject to forfeiture under certain circumstances including failure to stand
for re-election prior to age 70. The Company issued 4,800, 3,300 and 3,900
shares under the 1992 Plan for the 1997, 1996, and 1995 plan years,
respectively. The Company has charged to expense $39,000 in 1997, $51,975 in
1996 and $93,113 in 1995 for shares which were issued.
The 1995 Restricted Stock Compensation Plan (the "1995 Plan") provides for the
issuance of restricted shares to key employees of the Company. During 1995, the
Chairman was granted 8,163 shares under the 1995 Plan in lieu of a cash bonus of
$200,000. Such amount was charged to compensation expense in 1994. Also in 1995,
the Chairman and five other employees received a total of 21,740 shares under
the 1995 Plan. All such shares vest five years after the date of the grant
subject to the continued employment of the recipients by the Company or its
subsidiaries. The amount charged to compensation expense for these shares was
$106,526 in 1997, $106,526 in 1996 and $88,772 in 1995.
29
(11) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
1997 1996 1995
---- ---- ----
IN THOUSANDS, EXCEPT SHARE PER DATA
Income Shares Income Shares Income Shares
Numerator Denominator Numerator Denominator Numerator Denominator
--------- ----------- --------- ----------- --------- -----------
Basic EPS:
Net Income (loss) $7,986 3,210 ($5,560) 3,200 $555 3,167
Effect of dilutive:
Options and warrants 102(1) 52(2) 91(3)
---------------- -------------- -----------------
Diluted EPS:
Net Income and
Assumed conversions $7,986 3,312 ($5,560) 3,252 $555 3,257
(1) Options to purchase 50,000 shares of common stock at a weighted average
price of $24.44 per share were outstanding as of December 31, 1997, but were
not included in the computation of diluted EPS because the options' exercise
prices were greater than the average market price of the shares.
(2) Options to purchase 495,900 shares of common stock at a weighted average
price of $21.10 per share were outstanding as of December 31, 1996, but were
not included in the computation of diluted EPS because the options' exercise
prices were greater than the average market price of the shares.
(3) Options to purchase 268,300 shares of common stock at a weighted average
price of $25.19 per share were outstanding as of December 31, 1995, but were
not included in the computation of diluted EPS because the options' exercise
prices were greater than the average market price of the shares.
(12) PENSION, PROFIT SHARING AND OTHER PLANS
PCI maintains a defined benefit pension plan for substantially all salaried
employees. Plan benefits are based on all years of continuous service and the
employee's compensation during the highest five continuous years of the last ten
years of employment, minus a profit-sharing annuity. The profit-sharing annuity
is based on the amount of profit-sharing contributions received for 1988 through
1992. Any employee who terminated employment prior to August 31, 1993 is
governed by the terms of the plan in effect at the time the termination
occurred.
PCI maintains a noncontributory defined benefit pension plan for substantially
all hourly workers hired prior to August 1, 1997 who have attained 21 years of
age. Plan benefits are variable by location/contract but are based primarily on
years of service and the employee's highest wage classification for twelve
consecutive months in the five years prior to retirement. "Normal" retirement is
at age 65, with at least five years of continuous service. However, employees
may retire as early as age 55 and receive reduced benefits.
Subject to the limitation on deductibility imposed by Federal income tax laws,
PCI's policy has been to contribute funds to the plans annually in amounts
required to maintain sufficient plan assets to provide for accrued benefits.
Plan assets are held in a master trust and are comprised primarily of common
stock, corporate bonds and U.S. Government and government agency obligations.
30
The following table sets forth the plans' funded status at December 31, 1997 and
1996 based primarily on January 1, 1997 participant data and plan assets:
1997 1996
----------- ----------
(in thousands)
Actuarial present value of benefit obligation, including vested benefits of
$32,167 and $22,612 in 1997 and $30,280 and $20,372 in
1996 for the salaried and hourly plans, respectively $(59,092) $(54,478)
========= =========
Projected benefit obligation (PBO) (60,921) (56,582)
Plan assets, at fair value 62,787 58,898
Unrecognized net loss 3,474 2,820
Prior service cost not yet recognized
in net periodic pension cost (310) (165)
-------- ---------
Prefunded pension asset $ 5,030 $ 4,971
======== =========
Net periodic pension costs under the above mentioned PCI plans included the
following components for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
-------- -------- ------
(in thousands)
Service cost $1,208 $1,362 $ 992
Interest cost 4,246 4,001 4,002
(Return) loss on plan assets (8,976) (8,505) (6,292)
Net amortization and deferral 3,919 3,897 2,922
------ ------- ------
Net periodic pension costs $ 397 $ 755 $1.624
====== ======= ======
PCI contributions to the plans for the years ended December 31, 1997, 1996 and
1995 were $456,000, $573,000 and $12,800,000, respectively.
Assumptions used in the accounting were: As of December 31,
------------------------------------
1997 1996 1995
---- ---- ----
Discount rates 7.35% 7.75% 7.50%
Rates of increase in compensation levels 5.00% 5.00% 5.00%
Expected long-term rate on return on assets 9.50% 9.50% 9.50%
PCI contributes to various union pension plans pursuant to its labor agreements.
Union benefit plan expense was $1,013,000, $1,083,000 and $1,080,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Ferembal provides retirement benefits pursuant to an industry-wide labor
agreement. Costs charged (income credited) to operations amounted to $267,000,
$144,110 and ($213,000) in 1997, 1996 and 1995, respectively. The liability
related to this agreement was transferred to an insurance company in 1997. Other
non-current liabilities at December 31, 1996 include $1,730,000, for this plan.
Ferembal also provides an employee profit-sharing plan, the annual contributions
to which are determined by a prescribed formula. Amounts charged to expense
amounted to $460,000, $590,000 and $86,000 in 1997, 1996 and 1995, respectively.
Amounts are paid to employees after five years with accrued interest. Other
non-current liabilities at December 31, 1997 include $2,445,000 ($2,980,000, at
December 31, 1996) for the plan.
Dixie Union provides selected managers with pension and disability benefits.
Amounts charged to expense amounted to $107,000, $183,000 and $192,000 in 1997,
1996 and 1995, respectively.
PCI maintains a defined contribution plan which covers substantially all hourly
employees who meet eligibility requirements. Provisions regarding employee and
employer contributions and the benefits provided under the plan vary between
PCI's manufacturing facilities. PCI's defined contribution plan's expense was
$302,000, $303,000 and $292,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
31
PCI maintains a contributory defined contribution 401(k) savings plan which
covers substantially all non-organized salaried employees. Employees may
contribute up to twelve and eight percent of pay on a pre-tax and after-tax
basis, respectively. However, the total employee contribution rate may not
exceed fifteen percent of pay. PCI matches up to three percent of employees'
pre-tax contributions. Employees vest in PCI's contributions at twenty-five
percent per year, becoming fully vested after four years of employment.
Employees may make withdrawals from the plan prior to attaining age 59-1/2,
subject to certain penalties. PCI's savings plan expense was $570,000, $553,000
and $518,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
(13) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS AND POSTEMPLOYMENT BENEFITS
PCI provides certain health care and life insurance benefits for retired PCI
employees. Certain of PCI's hourly and salaried employees become eligible for
these benefits when they become eligible for an immediate pension under a formal
company pension plan. In 1993, the plan was amended to eliminate health care
benefits for employees hired after January 1, 1993.
PCI's policy is to fund the cost of medical benefits in amounts determined at
the discretion of management. Summary information on PCI's plan at December 31,
1997 and 1996 is as follows:
1997 1996
---- ----
(in thousands)
Accumulated postretirement benefit obligation:
Retirees $2,730 $2,895
Fully eligible, active plan participants 816 740
Other active plan participants 1,713 1,472
------- ------
5,259 5,107
Unrecognized net gain from experience and changes in assumptions 723 793
Prior service cost in net periodic postretirement benefit cost 364 398
--------- -------
Accrued postretirement benefit obligation (included in other liabilities) $6,346 $6,298
======== ======
The components of net periodic postretirement benefit cost at December 31, 1997,
1996 and 1995 are as follows:
1997 1996 1995
---- ---- ----
(in thousands)
Service cost $ 83 $ 87 $ 52
Interest cost 380 447 480
Net amortization and deferral (53) (34) (34)
---- ------ -----
Net periodic postretirement benefit cost $410 $500 $ 498
===== ===== =====
For measurement purposes, a 8.24% annual rate of increase in the per capita cost
of covered benefits (i.e., health care cost trend rate) was assumed for 1997;
the rate was assumed to decrease gradually to 5.0% by the year 2001 and remain
at that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would increase
the accumulated postretirement benefit obligation as of December 31, 1997 by
$416,000 and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year ended December 31, 1997 by
$39,000.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.35% and 7.75% at December 31, 1997 and
1996, respectively.
PCI provides certain postemployment benefits to former and inactive employees,
their beneficiaries and covered dependents. These benefits include disability
related benefits, continuation of health care benefits and life insurance
coverage. Additional costs charged to operations for postemployment benefits in
1997, 1996 and 1995 were $57,000, $38,000 and $24,000, respectively.
32
(14) EXECUTIVE COMPENSATION
The Company entered into employment agreements with its Chairman and former
Vice-Chairman.
The Company is a party to an employment agreement with the Chairman of the
Board, which expires on May 17, 2006, pursuant to which his annual salary is to
be not less than $420,000. The employment agreement provides that in the event
of his death prior to May 17, 2006, his spouse will continue to receive one-half
of his salary until her death. In the event of a change of control of the
Company, as defined in his employment agreement, the Chairman will have the
right, for a period of five years, to deem his employment terminated and to
receive a payment equal to three times his average annual compensation during
the five preceding years.
The contract with the former Vice Chairman, who died in January 1989, provided
that in the event of his death prior to its expiration on December 31, 1998, his
spouse would receive one-half of the amounts which would otherwise have been
paid to him until her death or until December 31, 1998, whichever occurs first.
This obligation which amounted to $67,500 and $135,000 at December 31, 1997 and
1996, respectively, is included in accrued liabilities.
(15) NET INTEREST EXPENSE
The details of net interest expense are as follows:
1997 1996 1995
-------- -------- ------
(in thousands)
Interest income $ 2,358 $ 730 $ 759
Interest expense (18,323) (20,323) (20,676)
-------- --------- ---------
Interest expense, net $(15,965) $(19,593) $(19,917)
========= ========= =========
(16) FOREIGN AND DOMESTIC OPERATIONS
The Company performs services principally in the packaging industry.
Manufacturing operations are performed domestically through PCI, whereas
manufacturing operations are performed overseas in Europe through Ferembal,
Obalex and Dixie Union. Information about the Company's foreign and domestic
operations is as follows.
1997 1996 1995
---- ---- ----
(in thousands)
Net sales to unaffiliated customers:
Foreign $250,602 $302,331 $318,917
Domestic 295,682 282,703 295,470
------- -------- --------
Total $546,284 $585,034 $614,387
======== ======== ========
Income (loss) before provision (recovery) for income taxes,
minority interest and extraordinary item:
Foreign $11,573 $ 6,616 $ 3,937
Domestic 3,511 (6,617) (3,846)
-------- -------- --------
Total $15,084 $ (1) $ 91
======= ======== ========
Identifiable assets:
Foreign $164,763 $179,833 $220,740
Domestic 210,643 211,199 224,671
--------- -------- --------
Total $375,406 $391,032 $445,411
======== ======== ========
The above income (loss) includes restructuring charges of $7,624,000 and
$4,905,000 for 1996 and 1995 (see Note 1(l)).
33
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, investment securities,
derivative financial instruments, accounts receivable, other current assets,
accounts payable and short-term borrowings approximate fair value because of the
short maturity of these instruments. The fair value of the Company's long-term
debt is estimated, based on the quoted market prices for the same or similar
issues, or on the current rates offered to the Company for debt of the same
remaining maturities, and approximates the carrying amount.
(18) COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries occupy offices and use equipment under various
lease arrangements. The rent expense under non-cancellable long-term operating
leases for the years ended December 31, 1997, 1996 and 1995 was approximately
$13,932,000, $8,681,000 and $7,131,000, respectively. Total commitments under
such arrangements are payable in annual installments of $14,112,000 in 1998,
$13,579,000 in 1999, $12,963,000 in 2000, $11,860,000 in 2001, $31,557,000 in
2002 and thereafter.
The Company also rents certain equipment and facilities on a month-to-month
basis or through short-term leases. The rent expense under such arrangements
amounted to approximately $1,201,000 in 1997, $1,321,000 in 1996 and $1,277,000
in 1995.
The Company's subsidiaries are defendants in several actions which arose in the
normal course of business and, in the opinion of management, the eventual
outcome of these actions will not have a material adverse effect on the
Company's consolidated financial statements.
(19) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1997 and 1996 (in thousands, except per
share amounts) is as follows:
1st 2nd 3rd 4th
1997 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
Net Sales $122,610 $138,461 $153,294 $131,919
Gross Profit 19,848 23,624 23,763 22,051
Net Income 1,080 2,527 3,746 633
Net Earnings Per
Common Share - Basic .34 .79 1.17 .20
- Diluted $ .33 $ .77 $ 1.12 $ .19
1st 2nd 3rd 4th
1996 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
Net Sales $131,382 $141,263 $170,882 $141,507
Gross Profit 18,861 21,525 28,160 18,480
(Loss) Income Before
Extraordinary Item (441) 181 2,642 (1,806)
Net (Loss) Income (441) 181 2,642 (7,942)
(Loss) Earnings Per Share Before
Extraordinary Item - Basic (.14) .06 .83 (.56)
- Diluted (.14) .06 .81 (.56)
Net (Loss) Earnings Per
Common Share - Basic (.14) .06 .83 (2.48)
- Diluted $ (.14) $ .06 $ .81 $ (2.44)
Since per share information is computed independently for each quarter and the
full year, based on the respective average number of common and common
equivalent shares outstanding, the sum of the quarterly per share amounts does
not necessarily equal the per share amounts for each year.
34
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
CONTINENTAL CAN COMPANY, INC.
We have audited the consolidated balance sheets of Continental Can Company, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' 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. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Continental Can
Company, Inc. 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
Jericho, New York
March 5, 1998
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in nor disagreements with the Company's
accountants on accounting and financial disclosure during the twenty-four month
period ended December 31, 1997.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Year First
Became
Name and Age Employment Experience a Director
- ------------ --------------------- -----------
Donald J. Bainton(1) Chairman of the Board of Directors and Chief Executive Officer of the 1983
66 Company. Mr. Bainton is also a director of Plastic Containers, Inc. ("PCI"), a
subsidiary of the Company.
Robert L. Bainton(1) Vice Chairman of the Board of Directors. Prior to his retirement in 1991, Mr. 1988
70 Bainton was President and sole shareholder of B & B Beverage Company, a
wholesale distributor of wine and malt alcoholic beverages in New Jersey.
Kenneth O. Bainton(1) Partner of The Kouzmanoff Partnership, Architects, in New York City. 1990
41
Nils E. Benson Prior to his retirement in 1989, Mr. Benson was President of Penn Elastic 1989
74 Company, a manufacturer of apparel textiles.
Charles DiGiovanna Chief Executive Officer and President of Continental Plastic Containers, Inc. 1995
57 and Continental Caribbean Containers, Inc., subsidiaries of PCI, since 1992.
Mr. DiGiovanna is a director of PCI and Home Port Bancorp, Inc.
Rainer N. Greeven Partner of the law firm of Greeven & Ercklentz, New York, N.Y. Mr. Greeven 1972
61 is a director of Smith Barney World Funds, Inc. and Smith Barney/Travelers
Series Funds, Inc.
V. Henry O'Neill Private investor. 1987(2)
73
John J. Serrell Prior to his retirement, Mr. Serrell was President of Kinetic Development, 1981
82 Inc., an engineering development company. During the last five years, Mr.
Serrell has also devoted a portion of his time to
activities as an independent business consultant.
Robert A. Utting President of R.A. Utting & Associates, Inc., a business consulting firm. 1983
74 Prior to his retirement, in 1986, Mr. Utting served as Vice Chairman of The
Royal Bank of Canada.
Alexander E. Watson Chairman of the Padiham Group Ltd., John Hampden Press Ltd., and a 1997
60 director of Thomas Lockes plc. and R.H. Lowe plc.
Abdo Yazgi Executive Vice President, Chief Administrative Officer and Assistant 1991(3)
45 Secretary of the Company. Mr. Yazgi is a director of PCI.
Jose Luis Zapata Director of Corporate Finance of Taenza, S.A. de C.V., since 1989. Mr. 1992
38 Zapata is a director of Plastic Containers, Inc.
(1) Donald and Robert Bainton are brothers and Kenneth Bainton is their
nephew.
(2) Mr. O'Neill previously served as a director of the Company from 1982 to
1986.
(3) Mr. Yazgi previously served as a director of the Company from 1980 to
1984.
36
On November 15, 1995, Mr. D. Bainton settled a civil enforcement
proceeding commenced by the Securities and Exchange Commission in the U.S.
District Court for the Southern District of New York. This proceeding arose out
of the sale by a business associate of Mr. Bainton of shares of the Company's
common stock. Without admitting or denying the Commission's allegations, Mr.
Bainton agreed to pay a civil penalty of $30,000 and consented to the entry of
an order permanently enjoining him from violating the federal securities laws.
The Board of Directors of the Company met five times in 1997. Mr.
Zapata attended fewer than 75% of the Board and committee meetings held in 1997.
The Board of Directors has a standing Personnel Committee which
determines the compensation of the Company's officers and other matters relating
to executive personnel. The members of the Personnel Committee are Messrs.
O'Neill (Chairman), R. Bainton and Serrell. The Personnel Committee met twice in
1997.
The Board of Directors has a standing Audit Committee which consults
with the Company's independent auditors, and reviews the audit report and the
adequacy of internal financial controls. The members of the Audit Committee are
Messrs. Greeven, (Chairman), Benson and Zapata. The Audit Committee met once in
1997.
The Board of Directors has a standing Nominating Committee which
recommends to the Board nominees for Board membership, including committee
assignments, organization and composition. The members of the Nominating
Committee are Messrs. D. Bainton (Chairman), K. Bainton, Yazgi and Utting. The
Nominating Committee will not consider nominees recommended by security holders.
Executive officers of the registrant include Messrs. Donald J. Bainton
and Abdo Yazgi who are also directors of the registrant and for whom information
required by this item is included above.
Information for other executive officers, is as follows:
Term of Year First
Name and Age Position Held Office Became Officer
- ------------ ------------- ------- --------------
John H. Andreas Vice President- (1) 1992
64 Manufacturing
(1) The term of office of all executive officers is indefinite, at the
pleasure of the Board of Directors.
The business experience of each executive officer is as follows:
Mr. Andreas has served as Vice President of Manufacturing since April
1992. Prior to that time, he was an independent business consultant. Prior to
his retirement in 1988, Mr. Andreas was employed by the former Continental Can
Company, Inc. for 33 years, most recently as General Manager.
ITEM 11. EXECUTIVE COMPENSATION
The table below shows the compensation paid or credited by the Company
and its subsidiaries during the past three fiscal years to the Chief Executive
Officer and each other executive officer of the Company whose cash compensation
(paid or deferred) in 1997 exceeded $100,000 (the "named executive officers").
37
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------- ------------------------------------------
Common Shares
Name and Restricted Stock Underlying All Other
Principal Position Year Salary Bonus Awards (1) Options Compensation
- ---------------------------- ---------- ------------- -------------- ------------------- ---------------------- -----------------
Donald J. Bainton 1997 $420,000 $315,000 - 30,000 -
Chairman of the Board 1996 $420,000 - - - -
and CEO 1995 $415,813 - $269,500 - -
Abdo Yazgi, 1997 $280,000 $210,000 - 20,000 -
Executive VP & 1996 $280,000 - - - -
Treasurer 1995 $276,924 - $117,600 - -
John H. Andreas 1997 $110,000 $82,500 - 10,000 -
VP-Manufacturing 1996 $110,000 - - - -
1995 $108,170 - $19,110 - -
(1) A holder of restricted Common Stock is entitled to receive dividends paid on
such shares. The number and market value of the named executive officers'
aggregate restricted stock holdings at the end of the Company's last fiscal year
(December 31, 1997) were as follows: Mr. Bainton-102,383 shares ($2,572,373) Mr.
Yazgi-4,800 shares ($120,600) and Mr. Andreas-780 shares ($19,598).
STOCK OPTIONS
The tables below show the total number and values of options to
purchase common shares granted in 1997 and held by named executive officers at
December 31, 1997. No options were exercised by such individuals during 1997.
OPTION GRANTS
Number of Shares % of Total Exercise Price Expiration Grant Date
Name Underlying Options Option Grants Per Share Date Value
- ----------------------- ------------------------- ------------------- ------------------ ------------------- ------------------
Donald J. Bainton 30,000 15% $18.00 1-22-04 $37,605
Abdo Yazgi 20,000 10% $18.00 1-22-04 $25,070
John H. Andreas 10,000 5% $18.00 1-22-04 $12,535
FISCAL YEAR-END OPTION VALUES
Number of Common Shares Underlying Value of Unexercised In-the-Money
Unexercised Options at Fiscal Year-End Options at Fiscal Year-End (1)
-------------------------------------------- ---------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- -------------------- ------------------------- ------------------------ --------------------------
Donald J. Bainton 200,000 20,000 $2,672,400 $142,500
Abdo Yazgi 72,666 13,334 $ 847,250 $ 95,000
John H. Andreas 3,333 6,667 $ 23,748 $ 47,502
(1) The value of unexercised options is the difference between the aggregate
value of the underlying common shares ($25.125 per share on December 31, 1997)
and the aggregate exercise price of the options.
38
EMPLOYMENT AGREEMENT
The Company is a party to an employment agreement with Donald J.
Bainton, which expires on May 17, 2006, pursuant to which Mr. Bainton's annual
salary is to be not less than $420,000. Mr. Bainton's employment agreement
provides that in the event of his death prior to May 17, 2006, Mrs. Bainton will
continue to receive one-half of his salary until her death. In the event of a
change of control of the Company, as defined in his employment agreement, Mr.
Bainton will have the right, for a period of five years, to deem his employment
terminated and to receive a payment equal to three times his average annual
compensation during the five preceding years.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 16, 1998, the following were the only persons known by the
Company to be the beneficial owners of more than 5% of the Common Stock. Donald
J. Bainton is Chairman and Chief Executive Officer of the Company.
Name and address Amount and nature
of beneficial owner of beneficial ownership (1) Percent of class
- ------------------- --------------------------- ----------------
Donald J. Bainton 453,445 (2) 13.3%
One Aerial Way
Syosset, New York
Aileen Moody Bainton 184,018 (2) 5.4%
Edgewater Drive
Nassau, Bahamas
Dimensional Fund Advisors, Inc. 170,300 (3) 5.0%
1299 Ocean Avenue
11th Floor
Santa Monica, CA
Montgomery Asset Management, LLC 173,000 5.1%
101 California Street
San Francisco, CA 94111
The following table sets forth information concerning the beneficial
ownership of Common Stock as of the March 16, 1998 by each director, nominee and
named executive officer and by all directors, nominees and executive officers as
a group:
Shares underlying Total amount of Percent
Name of beneficial owner (1) stock options (4) beneficial ownership (5) of class
- ------------------------ ------------- -------------------- --------
Donald J. Bainton 180,000 473,445(2) 13.3%
Kenneth Bainton 10,000 76,241(2) 2.2%
Robert L. Bainton 3,028 17,244(2) *
Nils E. Benson 13,841 16,814 *
Charles DiGiovanna 65,000 76,200 2.2%
Rainer N. Greeven 13,508 42,282 1.2%
V. Henry O'Neill 2,966 51,876 1.5%
John J. Serrell 3,562 17,022 *
Robert A. Utting ---- 55,118 1.6%
Alexander E. Watson 10,000 11,200 *
Abdo Yazgi 86,000 146,043 4.2%
Jose Luis Zapata ---- 12,700 *
John H. Andreas 10,000 13,415 *
All directors and executive officers as
a group (13 individuals) 397,905 1,009,600 28.9%
* Less than 1%
39
(1) Beneficial ownership means direct ownership with sole voting and
dispositive power unless otherwise indicated.
(2) Pursuant to the regulations of the Securities and Exchange Commission
relating to beneficial ownership, Donald, Robert, Kenneth and Aileen
Moody Bainton may be deemed to be a group for purposes of determining
beneficial ownership. On this basis, each would be deemed the
beneficial owner of 750,948 shares of Common Stock (21.0%). Each of the
Messrs. Bainton and Mrs. Bainton disclaims beneficial ownership of
shares beneficially owned by the others.
(3) Dimensional Fund Advisors, Inc. ("Dimensional"), a registered
investment advisor, is deemed to have beneficial ownership of 5.0%
shares of Common Stock as of December 31, 1997. All such shares are
held in portfolios of DFA Investment Dimensions Group, Inc., a
registered open-end investment company, or in series of the DFA
Investment Trust Company, a Delaware business trust, or the DFA Group
Trust and DFA Participation Group Trust, investment vehicles for
qualified employee benefit plans, for all of which Dimensional serves
as investment manager. Dimensional disclaims beneficial ownership of
all such shares.
(4) Stock options which were exercisable on March 16, 1998 or which will
become exercisable within 60 days of such date.
(5) Includes the shares underlying the stock options in the column to the
left.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PCI has outstanding an aggregate of 100 shares of common stock (the
"PCI Shares"). Prior to December 17, 1996, 50 PCI Shares were owned by the
Company, and 50 PCI Shares were owned by Merrywood, Inc. ("Merrywood"), in which
Mr. Zapata has an ownership interest. In July 1996, Merrywood exercised its
right to put its 50 PCI Shares to the Company for $30 million, plus interest of
approximately $15.4 million, pursuant to an Agreement entered into in 1992. In
October 1996, the Company and Merrywood entered into a new Agreement (the "1996
Agreement") pursuant to which the Company purchased 34 PCI Shares in December
1996 for $30 million, plus a warrant exercisable through December 31, 2000 to
purchase 150,000 shares of Common Stock at the lesser of $20.00 per share or
book value at December 31, 1996. The 1996 Agreement also provided that the
remaining 16 PCI Shares would be purchased by the Company prior to December 31,
2000 for approximately $15.4 million plus interest at 10%. Until such shares are
purchased, the Company has agreed to cause one of Merrywood's designees to be
nominated as a director of the Company and PCI. Mr. Zapata is the designee of
Merrywood. All prior agreements between the Company and Merrywood were
terminated by the 1996 Agreement. Merrywood, with the Company's consent, has
since assigned its rights under the 1996 Agreement to a related corporation in
which Mr. Zapata does not have an interest.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31,
1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements for the years ended December
31, 1997, 1996 and 1995
Independent Auditors' Report
The above financial statements are included under Item 8 of Part II of
this report.
40
2. Financial Statement Schedules:
II Valuation & Qualifying Accounts................................................................p.44
III Condensed Financial Information of Registrant..................................................p.45
All other schedules are omitted because they are not applicable, not required,
or the information is given in the financial statements or the notes thereto.
3. Exhibits Required:
2.1 Agreement and Plan of Merger dated as of January 14, 1998 among Suiza Foods
Corporation, CC Acquisition Corporation and the Company..........................................(3)
3.1 Articles of Incorporation, as amended............................................................(2)
3.2 By-Laws, as amended..............................................................................(2)
4.1 Indenture dated as of December 17, 1996, among PCI, as Issuer, CPC and
Caribbean, as Guarantors, and United States Trust Company of New York,
as Trustee, providing for 10% Senior Secured Notes due 2006, Series A and
Series B (including the definitive forms of the Notes)...........................................(1)
4.2 Registration Rights Agreement dated as of December 17, 1996, by and among
PCI , CPC and Caribbean, and Donaldson, Lufkin & Jenrette Securities Corporation,
Lehman Brothers Inc. and Societe Generale Securities Corporation.................................(1)
10.1 Amended and Restated Financing Agreement dated December 17, 1996, between
The CIT Group/Business Credit, Inc. (as Lender) and PCI (as Borrower)............................(1)
10.2 Master Lease Agreement, dated as of May 20, 1994, between General Electric
Capital Corporation and CPC......................................................................(1)
10.3 Schedules A-1 through A-6, each dated December 17, 1986, to the Master Lease
Agreement (Exhibit 10.2).........................................................................(1)
10.4 Corporate Guaranty dated May 20, 1994, from PCI to General Electric Capital
Corporation, and Amendments Nos. 1 and 2 thereto, both made as of December 17, 1996..............(1)
10.5 1988 Restricted Stock Option Plan, as amended....................................................(2)*
10.6 1988 Director Stock Option Plan..................................................................(2)*
10.7 1990 Stock Option Plan for Non-Employee Directors................................................(2)*
10.8 Shareholders' Agreement dated July 7, 1989, among Viatech, Inc., Le Fer Blac S.A.,
Citicorp Capital Investors Europe Limited and Citibank S.A.......................................(2)
10.9 Revolving Credit and Term Loan Agreement dated as of December 1, 1992............................(2)
10.10 Stock Purchase Agreement dated November 2, 1991..................................................(2)
10.11 1992 Restricted Stock Plan for Non-Employee Directors, as amended................................(2)*
10.12 Agreement Among PCI Stockholders, dated October 22, 1996.........................................(2)
10.13 Employment Contract with Donald J. Bainton, as amended...........................................(2)*
10.14 1995 Restricted Stock Compensation Plan .........................................................(2)*
10.15 Amendment No. 2 to Revolving Credit and Term Loan Agreement......................................(2)
10.16 Investment Certificate Transfer Agreement between the Company and Citicorp
Capital Investors Europe Limited (with a schedule of substantially identical agreements.)......p.48
10.17 Employment Agreement with Abdo Yazgi (with a schedule of substantially identical
agreements.)...................................................................................p.53*
11.1 Statement re computation of per share earnings (See Note 11)...................................p.30
21 Subsidiaries of the Registrant.................................................................p.57
23.1 Independent Auditors' Report on Schedules......................................................p.58
23.2 Consent of Independent Auditors................................................................p.59
27 Financial Data Schedule........................................................................p.60
* Management contract or compensatory plan or arrangement.
(1) These documents have been previously filed with the Commission by Plastic Containers, Inc.
(2) These documents have previously been filed with the Commission.
(3) This document was filed with the Commission by Suiza Foods Corporation as an appendix to Form S-4 on
February 18, 1998.
41
All other items for which provision is made in the applicable
regulations of the Securities and Exchange Commission have been
omitted as they are not required under the related instructions or
they are inapplicable.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONTINENTAL CAN COMPANY, INC.
By: /s/ Abdo Yazgi Date: March 23, 1998
- ----------------------------------------------------- --------------------------
Abdo Yazgi, Executive Vice President
(Principal Financial & Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Donald J. Bainton Date: March 23, 1998
- ----------------------------------------- ---------------------
Donald J. Bainton, Chairman of the Board
of Directors and Chief Executive Officer
(Principal Executive Officer)
/s/ Kenneth O. Bainton Date: March 23, 1998
- ------------------------------------ ---------------------
Kenneth O. Bainton, Director
/s/ Robert L. Bainton Date: March 23, 1998
- ------------------------------------ ---------------------
Robert L. Bainton, Director
/s/ Nils E. Benson Date: March 23, 1998
- ------------------------------------ ---------------------
Nils E. Benson, Director
/s/ Charles DiGiovanna Date: March 23, 1998
- ------------------------------------ ---------------------
Charles DiGiovanna, Director
/s/ Rainer N. Greeven Date: March 23, 1998
- ------------------------------------ ---------------------
Rainer N. Greeven, Director
/s/ V. Henry O'Neill Date: March 23, 1998
- ------------------------------------ ---------------------
V. Henry O'Neill, Director
/s/ John J. Serrell Date: March 23, 1998
- ------------------------------------ ---------------------
John J. Serrell, Director
/s/ Robert A. Utting Date: March 23, 1998
- ------------------------------------ ---------------------
Robert A. Utting, Director
/s/ Alexander E. Watson Date: March 23, 1998
- ------------------------------------ ---------------------
Alexander E. Watson, Director
/s/ Abdo Yazgi Date: March 23, 1998
- ------------------------------------ ---------------------
Abdo Yazgi, Director
Date:
- ------------------------------------ ---------------------
Jose Luis Zapata, Director
43
Continental Can Company, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
Years Ended December 31, 1997, 1996 and 1995
(in thousands)
Balance at Balance
beginning at end of
Description of period Additions Deductions Period
- ----------------------------------------------------------------------------------
December 31, 1997
LIFO reserve $ 4,247 $ - $ 669(1) $ 3,578
Allowance for doubtful
accounts and accrued
rebates $ 4,378 $ 2,762(3) $ 1,591(4) $ 5,549
December 31, 1996:
LIFO reserve $ 2,025 $ 2,298(1) $ 76(2) $ 4,247
Allowance for doubtful $ 1,484(5)
accounts and accrued
rebates $ 6,144 $ 1,878(3) $ 2,160(4) $ 4,378
December 31, 1995:
$ 704(2)
LIFO reserve $ 3,924 $ - $ 1,195(1) $ 2,025
Allowance for doubtful
accounts and accrued
rebates $ 5,316 $ 1,909(3) $ 1,081(4) $ 6,144
(1) Charged/credited to costs - inventory repricing.
(2) Credited to cost of sales - reduction in inventory quantities.
(3) Charged to expense - accruals for customer rebates and doubtful receivables.
(4) Represents uncollectible accounts written-off.
(5) Represents $1,484 from deconsolidation of subsidiary in 1996.
44
Schedule III - Condensed Financial Information of Registrant
Continental Can Company, Inc.
Balance Sheets
Years Ended December 31, 1997 and 1996
1997 1996
---- ----
(in thousands)
ASSETS:
Cash $ 14 $ 24
Investments in Subsidiaries at Equity 102,929 101,356
Other Assets 1,047 1,436
-------- --------
Total Assets $103,990 $102,816
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities (a) $ 5,208 $ 4,192
Long Term Debt (a) 30,000 30,000
-------- --------
Total Liabilities 35,208 34,192
Stockholders' Equity 68,782 68,624
-------- --------
$103,990 $102,816
======== ========
(a) See Note 8, Items (a) and (b) of Notes to Consolidated Financial Statements
of Continental Can Company, Inc. and Subsidiaries.
Continental Can Company, Inc.
Statements of Operations
Years Ended December 31, 1997, 1996 and 1995
(in thousands) 1997 1996 1995
------ ------ -----
Management Fees $ 2,061 $ 2,103 $2,247
Selling, General and
Administrative Expenses 3,808 2,917 3,817
-------- --------- ------
(1,747) (814) (1,570)
Equity (Deficit) in Net Income (Loss) of
Subsidiaries (b) 10,109 ( 4,361) 2,402
------- --------- ------
8,362 (5,175) 832
Other (376) (385) (277)
--------- ---------- -------
Net Income $ 7,986 $(5,560) $ 555
========= ======== ======
(b) Includes for 1996 and 1995 extraordinary charges of $6,136 and $115
respectively, relating to the extinguishment of debt.
45
Schedule III - Condensed Financial Information of Registrant (Continued)
Continental Can Company, Inc.
Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
(in thousands) 1997 1996 1995
-------- -------- ------
Cash Flows from Operating Activities:
Net Income (Loss) $7,986 $(5,560) $ 555
Adjustments to Reconcile Net Income (Loss)
to Net Cash Used in Operating Activities:
Dividends Received From Affiliates 350 311 344
Deficit (Equity) in Net Income (Loss)
of Subsidiaries (10,109) 4,361 (2,402)
(Decrease) Increase in Due to Affiliates (634) (1,590) 1,281
Other 2,164 669 51
--------- --------- -------
Net Cash Used in Operating Activities (243) (1,809) (171)
Cash Flows From Investing Activities:
Increase Investment in Subsidiaries - (29,163) -
--------- --------- ---------
Net Cash Used in Investing Activities - (29,163) -
Cash Flows From Financing Activities:
Common Stock Issued Upon Conversion of
Debentures and Warrants 233 131 849
Proceeds from Short-Term Borrowings - 1,300 -
Proceeds from (Repayment of)
Long-Term Financing - 29,575 (767)
--------- --------- ---------
Net Cash Provided by Financing Activities 233 31,006 82
--------- --------- ---------
Net (Decrease) Increase in Cash (10) 34 (89)
Cash at Beginning of Year 24 (10) 79
--------- --------- ---------
Cash at End of Year $ 14 $ 24 (10)
========= ========= =========
Cash paid for interest and income taxes was as follows:
1997 1996 1995
-------- -------- ------
Interest $124 $111 $ 76
Income Taxes $108 $ 76 $105
46
EXHIBIT INDEX:
10.16 Investment Certificate Transfer Agreement between the Company and
Citicorp Capital Investors Europe Limited (with a schedule of
substantially identical agreements.)
10.17 Employment Agreement with Abdo Yazgi (with a schedule of
substantially identical agreements.)
11.1 Statement re computation of per share earnings
21 Subsidiaries of the Registrant
23.1 Independent Auditors' Report on Schedules
23.2 Consent of Independent Auditors
27 Financial Data Schedule
47