Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and related notes filed previously with the SEC. We operate
on a 52/53-week fiscal year ending on the Sunday closest to September 30 of the
applicable year.
General
We are the leading North American manufacturer of steel containers for
paint, coffee and certain other consumer and industrial products. Over 85% of
our fiscal 2002 net sales were generated from product lines where we estimate
we have the leading market share in the United States. Our product offerings
include a wide variety of steel containers such as paint, coffee, aerosol and
specialty cans which are used by our customers to package a diverse range of
end-use products which, in addition to paint and coffee, include household and
personal care products, automotive after-market products, paint thinners and
driveway and deck sealants. We also provide our customers with metal shearing,
coating and printing services through our material center services business.
Our end-use markets have historically exhibited stable demand characteristics
and our customer base includes leading participants in these markets. For
fiscal 2002, paint cans, specialty cans, material center services, aerosol
cans, coffee cans and steel pails represented 35%, 15%, 14%, 14%, 12% and 10%
of our net sales, respectively.
Approximately 75% of our fiscal 2002 net sales were made to customers with
whom we have contractual relationships. As is common in our industry, our
contracts are generally requirements based, granting us all or a percentage of
a customer's requirements for a period of time instead of specific commitments
to unit volume.
Sales of certain of our products are to some extent seasonal, with sales
levels generally higher in the second half of our fiscal year due primarily to
higher demand for paint and related products during warmer periods. On an
aggregate basis, however, our sales have not been significantly affected by
seasonality.
Raw materials used in our products include steel, energy, various coatings
and inks and represent approximately 60% of our cost of products sold. We
purchase all raw materials we require from outside sources. Steel is the
largest component of our cost of products sold. Historically, we have generally
been able to increase the price of our products to reflect increases in the
price of steel, but we cannot assure you that we will be able to do so in the
future.
In fiscal 2000, we implemented several changes to our management team,
including the appointment of our Chairman and Chief Executive Officer,
Jean-Pierre M. Ergas. Since that time, we have increased our sales and
implemented a series of focused cost reduction and productivity initiatives.
Specifically, in this time we have: (i) reduced our cost of products sold
through improved steel utilization and by consolidating our steel purchases
among fewer suppliers; (ii) closed three under-performing manufacturing
facilities and relocated volume to other plants; (iii) implemented a
restructuring initiative, including the elimination of 30 employees, resulting
in approximately $5.0 million in annualized selling and administrative cost
reductions; and (iv) eliminated approximately $5.0 million in annualized
manufacturing cost overhead by reducing the number of our operating units from
three to one, resulting in the elimination of 59 positions.
The following are the principal initiatives relating to the restructuring
and impairment charges taken in the past three fiscal years:
Fiscal 2002. During the third quarter of fiscal 2002, an additional $1.2
million restructuring charge was recorded due to a change in our previous
estimate of the costs related to the closure
of our Elizabeth, New Jersey manufacturing facility, which is described
immediately below under "General--Fiscal 2001." Due to the weakening of both
the general economy and the real estate market in the northeastern United
States, we revised our estimate for future leasehold commitments to allow
additional time to locate a subtenant for this facility.
Fiscal 2001. During the third quarter of fiscal 2001, we recorded a $21.5
million restructuring and impairment charge related primarily to the closing of
two manufacturing facilities and the write-down of intangible assets and
equipment held for disposal as a result of that closing. The $21.5 million
charge included a $16.2 million charge for asset impairments and a $5.3 million
restructuring charge. The $16.2 million asset impairment charge included the
write-off of $0.5 million in goodwill, $3.7 million in other intangibles and
$12.0 million in redundant equipment at the manufacturing facilities that were
closed. The redundant equipment was taken out of service in the third quarter.
Facility closure costs, consisting primarily of future lease obligations,
related to the closing of our manufacturing facilities in Elizabeth, New Jersey
and Garland, Texas. All 208 of the planned employee terminations were completed
and the manufacturing facilities closed by September 30, 2001.
Fiscal 2000. During the second quarter of fiscal 2000, we recorded a
restructuring and impairment charge related to the closing of two
administrative offices, the termination of 89 employees and the write-down of
equipment held for disposal. The restructuring and impairment charge totaled
$5.9 million and consisted of $1.1 million related to administrative office
closings, $1.1 million related to severance, $0.7 million related to contracts
and other miscellaneous costs and $3.0 million related to impairments of
equipment held for disposal. Both administrative offices were closed and 89
employees were terminated in fiscal 2000.
Results of Operations
Year ended September 29, 2002 (fiscal 2002) compared to year ended September
30, 2001 (fiscal 2001).
Net Sales. Net sales for fiscal 2002 were $527.6 million, an increase of
$52.6 million or 11.1%, from $475.0 million in fiscal 2001. The increase in net
sales was primarily due to stronger customer demand resulting from growth in our
customers' end-use markets during fiscal 2002 compared to fiscal 2001. This
increase in net sales was also attributable to new business gained under
contractual supply agreements. We gained new business and increased our market
shares during fiscal 2002 primarily in the paint, coffee and aerosol markets.
Cost of Products Sold. Cost of products sold, excluding depreciation and
amortization, in fiscal 2002 was $456.8 million, an increase of $31.7 million
or 7.5%, from $425.1 million in fiscal 2001. Cost of products sold, excluding
depreciation and amortization, as a percent of net sales, decreased to 86.6% in
fiscal 2002 from 89.5% in fiscal 2001. The decrease in cost of products sold,
excluding depreciation and amortization, as a percentage of net sales was
primarily attributable to lower manufacturing costs, improved operating
efficiency and higher sales volumes which served to absorb fixed costs and
increase overall margins. During fiscal 2002, we also realized benefits of our
third quarter fiscal 2001 restructuring charge, which included the closing of
two manufacturing facilities, and reallocation of volume to other more
efficient manufacturing facilities. As part of this initiative, we also
implemented a continuous operating schedule at four of our key manufacturing
facilities which has increased capacity utilization and significantly lowered
unit costs. Our cost of products sold, excluding depreciation and amortization,
during fiscal 2002 also benefited from our consolidation of our steel purchases
among a smaller group of suppliers and from improved steel utilization
efficiency.
Depreciation and Amortization. Depreciation and amortization decreased to
$19.6 million in fiscal 2002 from $20.7 million in fiscal 2001. The decrease
was primarily attributable to equipment write-offs during the third quarter of
fiscal 2001 associated with our restructuring charge during that quarter. The
decrease in fiscal 2002 was partially offset by increased depreciation
associated with capital expenditures.
Selling and Administrative Expense. Selling and administrative expense
decreased by $1.4 million to $14.2 million in fiscal 2002 from $15.6 million in
fiscal 2001. The reduction results from ongoing overhead cost reduction
initiatives. Selling and administrative expense as a percent of net sales was
2.7% for fiscal 2002 compared to 3.3% for fiscal 2001.
Merger Related Transaction Costs. During the fourth quarter of fiscal 2002,
we recorded $1.5 million of merger-related transaction costs associated with
our agreement to be acquired by BCO Holding, an affiliate of Kelso & Company.
Restructuring and Impairment Charge. During the third quarter of fiscal
2001, we recorded a $21.5 million restructuring and impairment charge as
described above under "--General-Fiscal 2001."
In the third quarter of fiscal 2002, an additional $1.2 million
restructuring charge was recorded due to a change in estimate related to the
closure of our Elizabeth, New Jersey manufacturing facility. Due to the
weakening of both the general economy and the real estate market in the
northeastern United States, we revised our estimate for future leasehold
commitments to allow additional time to locate a subtenant for this facility.
Interest Expense, Net. Interest expense, net, decreased to $13.1 million in
fiscal 2002 from $15.3 million in fiscal 2001, primarily due to lower average
debt levels and lower LIBOR based interest rates under our existing credit
facility, which provides for floating interest rates. The LIBOR interest rate
margin under our existing credit facility was 2.75% as of September 29, 2002.
Income (Loss) Before Income Taxes and Extraordinary Item. Income (loss)
before income taxes and extraordinary item for fiscal 2002 was $21.8 million,
an increase of $44.0 million from $(22.2) million in fiscal 2001. The change
resulted from the factors described above.
Provision (Benefit) for Income Taxes. The provision for income taxes was
$9.6 million for fiscal 2002. This was an increase of $15.6 million, from a
benefit of $(6.0) million in fiscal 2002. The change was due to the increase in
income before income taxes and extraordinary item, as described above, and an
increase in our effective tax rate.
Extraordinary Loss Resulting from the Extinguishment of Debt, Net. We
recorded an extraordinary loss of $0.3 million, net of a $0.1 million related
tax benefit, in fiscal 2001, related to unamortized deferred financing fees
associated with the extinguishment of our former credit agreement. The former
credit agreement was terminated upon the execution of our existing credit
facility in May 2001.
Net Income (Loss). Net income (loss) for fiscal 2002 was $12.3 million, an
increase of $28.8 million from $(16.5) million in fiscal 2001. The change
resulted from the factors described above.
Year ended September 30, 2001 (fiscal 2001) compared to year ended October 1,
2000 (fiscal 2000).
Net Sales. Net sales for fiscal 2001 were $475.0 million, a decrease of
$4.8 million or 1.0%, from $479.8 million in fiscal 2000. The net sales
decrease was primarily due to volume declines in certain product categories
resulting from a general business slowdown and customer inventory reductions
during the first half of fiscal 2001. Net sales strengthened in the second half
of fiscal 2001 and exceeded net sales in the second half of fiscal 2000 by $8.6
million or 3.5%.
Cost of Products Sold. Cost of products sold, excluding depreciation and
amortization, in fiscal 2001 was $425.1 million, an increase of $2.3 million or
0.5%, from $422.8 million in fiscal 2000. Cost of products sold as a percent of
net sales increased to 89.5% in fiscal 2001 from 88.1% in fiscal 2000. The
increase in cost of products sold, excluding depreciation and amortization, as
percentage of net sales was primarily attributable to lower sales volumes and
resulting weaker operating performance at certain of our manufacturing
facilities during the first half of fiscal 2001.
Depreciation and Amortization. Depreciation and amortization decreased to
$20.7 million in fiscal 2001 from $22.4 million in fiscal 2000. The decrease
was partially attributable to our decision to decrease the useful lives and
fully depreciate certain computer equipment in fiscal 2000, which resulted in
additional depreciation expense in fiscal 2000 of $2.5 million, and to
reductions in depreciation in fiscal 2001 resulting from equipment write-offs
associated with our fiscal 2001 plant restructuring initiatives. The decrease
in fiscal 2001 was partially offset by increased depreciation associated with
capital expenditures in fiscal 2001.
Selling and Administrative Expense. Selling and administrative expense
decreased to $15.6 million in fiscal 2001 from $17.1 million in fiscal 2000,
primarily due to the elimination of costs resulting from a full year
realization of the benefits of our fiscal 2000 restructuring.
Restructuring and Impairment Charge. During the third quarter of fiscal
2001, we recorded the $21.5 million restructuring and impairment charge
described above under "--General-Fiscal 2001."
Interest Expense, Net. Interest expense, net, decreased to $15.3 million in
fiscal 2001 from $16.7 million in fiscal 2000, primarily due to lower average
debt levels and lower interest rates under our existing credit facility, which
provides for floating interest rates.
Income (Loss) Before Income Taxes and Extraordinary Item. Income (loss)
before income taxes and extraordinary item for fiscal 2001 was $(22.2) million,
a decrease of $18.9 million from $(3.3) million in fiscal 2000. The change
resulted from the factors described above.
Provision (Benefit) for Income Taxes. The provision (benefit) for income
taxes increased to a benefit of $(6.0) million in fiscal 2001 from a benefit of
$(0.3) million in fiscal 2000. The change was due to the decrease in income
(loss) before income taxes and extraordinary item, as described above, and an
increase in our effective tax rate.
Extraordinary Loss Resulting from the Extinguishment of Debt, Net. We
recorded an extraordinary loss of $0.3 million, net of a $0.1 million related
tax benefit, in fiscal 2001 related to unamortized deferred financing fees
associated with the extinguishment of our former credit agreement. The former
credit agreement was terminated upon the execution of our existing credit
facility in May 2001.
Net Income (Loss). Net income (loss) for fiscal 2001 was $(16.5) million, a
decrease of $13.6 million from $(2.9) million in fiscal 2000. The change
resulted from the factors described above.
Seasonality
Sales of certain of our products are to some extent seasonal, with sales
levels generally higher in the second half of our fiscal year due primarily to
higher demand for paint and related products during warmer periods. On an
aggregate basis, however, our sales have not been significantly affected by
seasonality.
Liquidity and Capital Resources
After our Merger with BCO Holding
We expect that the transactions associated with our merger with BCO
Holding, an affiliate of Kelso & Company (hereafter, the "transaction") will
require total cash of approximately $309.9 million, which will be used to fund
the cash consideration payable to our stockholders and option holders under the
merger agreement with BCO Holding, repay our existing debt and pay fees and
expenses associated with the transactions. We expect the cash requirements of
the transactions to be financed through an equity financing of approximately
$79.9 million by equity investors, borrowings of up to $40.0 million from our
new credit facility and $190 million of proceeds from an offering of new
senior subordinated notes. In addition, in connection with the transactions,
certain of our existing stockholders and option holders will exchange stock and
options in BWAY valued at $20.3 million for stock and options in BCO Holding.
Upon completion of the transactions, we intend to fund our ongoing
obligations from cash flow from operations and borrowings under our new credit
facility.
Interest payments on the new senior subordinated notes and on borrowings
under our new credit facility will significantly increase our liquidity
requirements. Our new credit facility is expected to provide for up to $90.0
million of borrowings under the revolving facility. We expect to use $40.0
million of the facility to finance a portion of the transactions. The balance
will be available for working capital, general corporate purposes and
acquisitions. Borrowings under the revolving facility are expected to bear
interest at variable rates plus an applicable margin.
Borrowings under our new credit facility are expected to be subject to
certain conditions and limitations, including a borrowing base formula. The
indenture governing the new senior subordinated notes will, and our new credit
facility is expected to, contain significant financial and operating covenants,
including prohibitions on our ability to incur certain additional indebtedness
or to pay dividends, and restrictions on our ability to make capital
expenditures. Our new credit facility is also expected to require that we
maintain certain financial ratios and will also contain borrowing conditions and
customary events of default, including nonpayment of principal or interest,
violation of covenants, inaccuracy of representations and warranties,
cross-defaults to other indebtedness, bankruptcy and other insolvency events.
We expect that our total capital expenditures will be approximately $14.8
million during the fiscal year ending September 28, 2003, which we refer to as
fiscal 2003.
We expect that cash provided from operations and available borrowings under
our new credit facility will provide sufficient working capital to operate our
business, to make expected capital expenditures and to meet foreseeable
liquidity requirements, including debt service on the new senior subordinated
notes. We cannot assure you, however, that our business will generate sufficient
cash flows or that future borrowings will be available in an amount sufficient
to enable us to service our debt, including the new senior subordinated notes,
or to fund our other liquidity needs.
Before the Transactions
Our cash requirements for operations and capital expenditures during fiscal
2002 and fiscal 2001 were primarily financed through internally generated cash
flows and borrowings under our existing credit facility. During fiscal 2002,
cash and cash equivalents increased $19.2 million and net credit facility
borrowings decreased $12.8 million. We had no borrowings outstanding under our
existing credit facility at September 29, 2002. During fiscal 2001, cash and
cash equivalents decreased $0.7 million and net borrowings under our existing
credit facility decreased by $13.4 million to $12.8 million.
At September 29, 2002, we had a $90.0 million credit facility with an
available borrowing limit of $75.3 million under borrowing base limitations and
excess availability of $72.1 million. The $3.2 million difference between the
available borrowing limit and excess availability relates to standby letters of
credit and lockbox receipts in transit. Our existing credit facility limits
available borrowings based on a fixed asset sub-limit and percentages of
eligible accounts receivable and inventories. We were in compliance with all
our existing credit facility covenants at September 29, 2002.
Credit facility interest rates are currently based on interest rate margins
for either the prime rate (as determined by Deutsche Bank AG, New York branch)
or LIBOR. The interest rate margin on prime borrowings is fixed for the term of
the agreement at 1.00% and the LIBOR interest rate margin was fixed at 2.75%
during fiscal year 2002. Beginning in fiscal 2003, and continuing through the
completion of our merger with BCO Acquisition, the LIBOR rate margin shall be
determined quarterly based on our ratio of total indebtedness to earnings
before interest, taxes, depreciation and amortization. For the first quarter of
fiscal 2003, the LIBOR rate margin is 2.00%.
During fiscal 2002, net cash provided by operating activities was $46.1
million. Of this amount, net income contributed $12.3 million, depreciation and
amortization contributed $19.6 million, the restructuring and impairment charge
contributed $1.2 million and changes in provision for doubtful accounts,
deferred income taxes, accounts payable, accrued and other current liabilities
and income taxes, net, contributed $18.6 million. We used our net cash during
fiscal 2002 primarily to increase accounts receivable by $7.0 million.
During fiscal 2001, net cash provided by operating activities was $22.1
million. Of this amount, net loss contributed $16.5 million, depreciation and
amortization contributed $20.7 million, the restructuring and impairment charge
contributed $21.5 million and changes in other assets, inventories, accounts
payable and income taxes receivable contributed $6.7 million. We used our net
cash during fiscal 2001 primarily for changes in accounts receivable and
accrued liabilities of $5.0 million and changes in deferred taxes of $6.5
million.
During fiscal 2002, net cash used in investing activities was $9.5 million.
We used $10.6 million for capital expenditures in fiscal 2002. We received $0.6
million in proceeds from the disposition of property, plant and equipment and
$0.4 million in proceeds from the sale of stock received from an insurance
company demutualization.
During fiscal 2001, net cash used in investing activities was $4.0 million.
We used $9.4 million for capital expenditures in fiscal 2001. We received $5.4
million in proceeds from the disposition of property, plant and equipment in
fiscal 2001, primarily from the sale of the Chicago, Illinois material center
services facility, which was recorded in Assets Held for Sale at October 1,
2000.
During fiscal 2002, net cash used by financing activities was $17.3 million.
During fiscal 2002, net repayments under our existing credit agreement were
$12.8 million. We also used approximately $4.4 million to decrease unpresented
bank drafts.
During fiscal 2001, net cash used by financing activities was $18.8 million.
During fiscal 2001, net repayments under our credit existing agreement were
$13.4 million. We also used approximately $2.0 million of cash for the
repurchase of our common stock in fiscal 2001 and approximately $2.5 million
for financing costs.
At September 29, 2002, covenants under our existing credit agreement
prohibited us from paying stockholder dividends, making other restrictive
payments or incurring certain additional indebtedness. The existing indenture
governing our outstanding 101/4% senior subordinated notes due 2007 also
contains certain restrictive covenants, including limitations on asset sales
and incurrence of certain additional indebtedness. Covenants in the indenture
restricted our ability to pay stockholder dividends and other restricted
payments in an amount greater than $21.0 million at September 29, 2002.
Contractual Obligations and Commercial Commitments
The following chart describes our material contractual cash obligations as
of September 29, 2002.
Payments Due by Period
-------------------------------------
Less than 1-3 4-5 After 5
Contractual Obligations Total 1 year years years years
----------------------- ------ --------- ----- ------ -------
(Dollars in millions)
Long-term debt(1)(2).............. $100.0 $ -- $ -- $100.0 $ --
Operating and capital leases...... 35.0 5.1 8.5 5.8 15.6
Other long-term obligations(3).... 10.2 0.1 0.6 1.1 8.4
------ ---- ---- ------ -----
Total contractual cash obligations $145.2 $5.2 $9.1 $106.9 $24.0
====== ==== ==== ====== =====
- --------
(1) No borrowings were outstanding under our existing credit agreement at
September 29, 2002. Our existing credit agreement will be amended and
restated or refinanced in connection with our merger with BCO Acquisition.
(2) $100.0 million in principal was outstanding at September 29, 2002. In
connection with our merger with BCO Acquisition, we will make a tender
offer for all of the outstanding 101/4% senior subordinated notes due 2007
under our existing indenture.
(3) Other long-term obligations include certain future payments related to
supplemental executive retirement benefit obligations for certain of our
current and retired executives. The amounts shown in the table are the
maximum future benefit payments subject to certain actuarial assumptions
regarding life expectancy, which will differ from the actuarially
determined liability related to these obligations. The actuarially
determined amounts are included in our consolidated balance sheet in "Other
Long-Term Liabilities" as of September 29, 2002.
The following chart describes our material contractual cash obligations on a
pro forma basis to give effect to the transactions.
Payments Due by Period
------------------------------------
Less than 1-3 4-5 After 5
Contractual Obligations Total 1 year years years years
----------------------- ------ --------- ----- ----- -------
(Dollars in millions)
Long-term debt(1)................. $230.0 $ -- $ -- $40.0 $190.0
Operating and capital leases...... 35.0 5.1 8.5 5.8 15.6
Other long-term obligations(2).... 10.2 0.1 0.6 1.1 8.4
------ ---- ---- ----- ------
Total contractual cash obligations $275.2 $5.2 $9.1 $46.9 $214.0
====== ==== ==== ===== ======
- --------
(1) Includes $190.0 million relating to the new senior subordinated notes and
$40.0 million relating to the portion of our new credit facility, which is
expected to be drawn at the closing of the transactions.
(2) Other long-term obligations include certain future payments related to
supplemental executive retirement benefit obligations for certain of our
current and retired executives. The amounts shown in the table are the
maximum future benefit payments subject to certain actuarial assumptions
regarding life expectancy, which will differ from the actuarially
determined liability related to these obligations.
At September 29, 2002, we had letters of credit in the aggregate amount of
approximately $3.2 million in favor of our workers' compensation insurer and
purchasing card vendor. The letters of credit expire in less than one year.
Commitments and Contingencies
On January 22, 2002, the SEC issued an interpretive release on disclosures
related to liquidity and capital resources, including off-balance sheet
arrangements. We do not have any off-balance sheet arrangements. Except as
described elsewhere in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section, we are not aware of factors that
are reasonably likely to adversely affect liquidity trends.
Effect of Inflation
Historically, with the exception of steel, we have not been able to pass
through price increases in our raw materials to our customers. Although
historically, we have generally been able to increase the price of our products
to reflect increases in the price of steel, we cannot assure you that we will
be able to do so in the future. We believe that inflation will not have a
material adverse impact on us.
Recent Accounting Pronouncements
The EITF reached a consensus in September 2000 regarding Issue No. 00-10,
Accounting for Shipping and Handling Fees and Costs, which requires companies
to report shipping and handling fees and costs as a component of cost of sales.
We adopted this consensus in the fourth quarter of fiscal 2001, the effect of
which was offsetting increases in net sales and cost of sales in the
consolidated statements of operations for all reported periods.
Reclassifications of $19.1 million and $19.2 million for fiscal 2001 and 2000,
respectively, were reflected for all periods shown for comparative purposes.
In June 2001, the FASB issued SFAS 141, Business Combinations, and SFAS 142,
Goodwill and Other Intangible Assets. SFAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting. SFAS 142 changes
the accounting for goodwill and other intangible assets. Upon adoption,
goodwill will no longer be subject to amortization over its estimated useful
life. Rather, goodwill will be subject to at least annual assessments by
reporting units for goodwill impairment based on fair value measurements. All
other acquired intangibles will be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed or exchanged,
regardless of our intent to do so. Other intangibles will be amortized over
their useful lives.
SFAS 142 became effective for us at the beginning of fiscal 2003 (the
implementation date). SFAS 142 requires a transitional impairment test as of
the implementation date, which involves (1) identifying reporting units, (2)
determining carrying value of each reporting unit by assigning assets and
liabilities, including existing goodwill and intangible assets, to those
reporting units, and (3) determining the fair value of each reporting unit. If
the carrying value of any reporting unit exceeds its fair value, then the
amount of any goodwill impairment will be determined through a fair value
analysis of each of the assigned assets (excluding goodwill) and liabilities.
We have begun the initial assessment required under SFAS 142 and do not
expect a material impact on our financial position and results of operations
related to accounting for goodwill and intangible assets as a result of such
assessment.
At September 29, 2002, the carrying value of goodwill was $68.0 million and
annual amortization expense associated with goodwill was approximately $2.3
million.
We must finalize the transitional impairment test before March 30, 2003.
Following the transitional impairment test, our goodwill balances will be
subject to annual impairment tests using the same process described above. If
any impairment were indicated as a result of the annual test, an impairment
charge would be recorded as part of income from operations.
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The adoption of this statement is effective for us for
fiscal 2003. We believe the adoption of this statement will not have an impact
on our financial position and results of operations.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The adoption of
this statement is effective for us for fiscal 2003. We believe the adoption of
this statement will not have an impact on our financial position and results of
operations.
In April 2002, the FASB issued SFAS 145, Recission of FASB Statements No. 4,
44, and 46, Amendment of FASB Statement No. 13, and Technical Corrections. This
statement eliminates the current requirement that gains and losses on
extinguishment of debt must be classified as extraordinary items in the
statement of operations. Instead, the statement requires that gains and losses
on extinguishment of debt be evaluated against the criteria in APB Opinion 30
to determine whether or not it should be classified as an extraordinary item.
Additionally, the statement contains other corrections to authoritative
accounting literature in SFAS 4, 44 and 46. The changes in SFAS 145 related to
debt extinguishment become effective for us in fiscal 2003 and the other
changes were effective for all financial statements issued on or after May 15,
2002.
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities. This statement is effective for exit or disposal
activities initiated after
December 31, 2002, and requires these costs to be recognized as liabilities are
incurred in periods following a commitment to an exit or disposal plan.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, or
GAAP, which often require the judgment of management in the selection and
application of certain accounting principles and methods. We believe that the
quality and reasonableness of our most critical policies enable the fair
presentation of our financial position and results of operations. However,
investors are cautioned that the sensitivity of financial statements to these
methods, assumptions and estimates could create materially different results
under different conditions or using different assumptions.
In response to the SEC's Release No. 33-8040, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies, we have identified the following
as the most critical accounting policies upon which our financial status
depends. These critical policies were determined by considering accounting
policies that involve the most complex or subjective decisions or assessments.
Our most critical accounting policies are as follows:
Revenue Recognition. We recognize revenue when products are shipped and
title and risk of loss pass to our customers. Provisions for discounts,
returns, allowances, customer rebates and other adjustments are provided for in
the same period as the related revenues are recorded. We estimate allowances
based on the aging of accounts receivable and customer creditworthiness.
Allowances are also provided for amounts in dispute with customers. Our
estimate of the allowance amounts that are necessary includes amounts for
specifically identified losses and a general amount for estimated losses. The
determination of the amount of the allowance accounts is subject to significant
levels of judgment and estimation by management. If circumstances change or
economic conditions deteriorate, we may need to increase the allowance for
doubtful accounts.
Inventories. Inventories are carried at the lower of cost or market, with
cost determined under the last-in, first-out, or LIFO, method of inventory
valuation. We estimate reserves for inventory obsolescence and shrinkage based
on inventory aging and our judgment of future realization. Projected inventory
losses are recognized at the time the loss is evident rather than when the
goods are ultimately sold.
Restructuring and Impairment. In fiscal 2001, we recorded a restructuring
and impairment charge related primarily to a manufacturing and cost structure
rightsizing plan. The determination of the amount of these items involved the
estimation of the amount of liabilities that will be incurred in the future.
The actual amounts that will ultimately be incurred may differ significantly
from the amounts originally estimated. Adjustments to the previously estimated
amounts are recorded when it becomes evident that a particular item will be
settled for more or less than was originally estimated.
Accrued Rebates. We enter into contractual agreements with our customers
for rebates on certain products. We accrue a provision for these rebates and
take a charge against net sales in the same period as the associated revenue is
recognized.
Quantitative and Qualitative Disclosures About Market Risk
The fair value of our outstanding 101/4% senior subordinated notes due 2007
is exposed to the market risk of interest rate changes. We expect to acquire or
redeem all such existing notes in connection with our merger with BCO
Acquisition. The fair value of the new senior subordinated notes to be issued
in connection with our merger with BCO Holding will also be exposed to the
market risk of interest rate changes. Our cash flows and earnings are also
exposed to the market risk of interest rate changes resulting from variable rate
borrowings under our existing credit facility, and will continue to be exposed
to such market risks under our new credit facility to be entered into in
connection with our merger with BCO Acquisition.
Our existing credit facility permits us to borrow up to $90.0 million,
subject to certain conditions and limitations, including a borrowing base
formula. Borrowings under our existing credit facility bear interest at either
the prime rate or LIBOR, plus an applicable spread percentage. Borrowings under
our new credit facility are expected to yield interest on the same basis. We
determine whether to borrow at prime or LIBOR plus the applicable rate margin
based on cash requirements. The interest rate spread on prime borrowings under
our existing credit facility is fixed at 1.0%. The interest rate spread on
LIBOR borrowings under our existing credit facility at September 29, 2002 was
2.75% and the rate spread was fixed through fiscal year 2002. Beginning in
fiscal 2003, pending the completion of the transactions, the LIBOR rate margin
shall be determined quarterly based on our ratio of total indebtedness to
EBITDA. Thereafter, the LIBOR rate margin is expected to be determined based on
the applicable financial tests under our new credit facility. At September 29,
2002, no borrowings were outstanding under our existing credit facility. Each
100 basis point increase in interest rates under our existing credit facility
would impact quarterly pretax earnings and cash flows by less than $0.1 million
at the September 29, 2002 debt level.
We purchase approximately $1.0 million of equipment and spare and/or
replacement parts annually from foreign suppliers in transactions denominated
in foreign currencies. These purchases are exposed to the market risk of
exchange rate changes from fluctuations in the value of these foreign
currencies in relation to the U.S. Dollar.
We do not enter into derivatives or other market risk-sensitive instruments
to hedge interest rate or exchange rate risk or for trading purposes.