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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998.
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file no. 1-7088
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AMERICAN BUSINESS PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-1030529
(State of Incorporation) (I.R.S. Employer Identification No.)
2100 RiverEdge Parkway, Suite 1200, Atlanta, Georgia 30328
(Address of principal executive offices, including zip code)
(770) 953-8300
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- -------------------
Common Stock, $2 par value New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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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
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The aggregate market value of the registrant's outstanding Common Stock, $2.00
par value per share, held by non-affiliates of the registrant on February 26,
1999 was $278,698,218.
There were 15,431,795 shares of Common Stock outstanding on February 26, 1999.
DOCUMENTS INCORPORATED HEREIN BY REFERENCE
Portions of the registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders to be held on May 5, 1999, are incorporated by reference in Part
III hereof.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
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PART I
ITEM 1 - BUSINESS
General
American Business Products, Inc. was incorporated under the laws of
Delaware in 1967 and reincorporated under the laws of Georgia in 1986.
Hereinafter, American Business Products, Inc. and its wholly owned subsidiaries
are collectively referred to as the "Company." On December 21, 1998, the Company
announced its intent to sell the book manufacturing business of its subsidiary,
BookCrafters USA, Inc. ("BookCrafters"). BookCrafters prints and binds both hard
cover and soft cover books for the publishing industry. The financial statements
reflect the operating results of this business as a discontinued operation. The
Company operates two businesses: Specialty Packaging and Printed Office
Products. The Company's Specialty Packaging business is comprised of three
segments: the extrusion of polyethylene and other materials onto papers and
nonwovens used in packaging and other products, the manufacture of soft packages
including Tyvek(R) mailers, and the manufacture of labels. The Company's Printed
Office Products business is comprised of a single segment, which supplies
custom-printed envelopes and labels, digital document services and business
forms. The Company's markets for these products are located principally
throughout the continental United States.
Sale of Subsidiary Assets
Effective December 31, 1996, Vanier Graphics Corporation ("Vanier"), a
wholly owned subsidiary of American Business Products, Inc. sold substantially
all its assets to The Reynolds and Reynolds Company (the "Vanier Sale"). Vanier
was a manufacturer of business forms and a provider of forms management and
work-flow analysis.
Business Segments
The Company's continuing operations are comprised of two businesses:
Specialty Packaging and Printed Office Products. The Company's Specialty
Packaging business consists of three business segments: extrusion coating and
laminating, soft packaging and labels manufacturing. The Printed Office Products
business consists of a single segment.
Extrusion coating and laminating consists primarily of the extrusion of
polyethylene and other materials onto papers and nonwovens used in packaging and
other products. The Company also prints and metalizes certain of these products
for customers. The materials produced by this business segment are used
primarily for packaging consumer products such as individual servings of sugar,
salt and pepper, sugar substitutes, and candy and ice cream bars, as well as
medical and pharmaceutical products. These materials are also used for composite
can liners and release liner papers for pressure sensitive products such as
labels and postage stamps. This business segment accounted for 27% of the
Company's sales in 1998, 26% in 1997, and 19% in 1996.
The soft packaging business segment includes the manufacture of
specialty mailers, including product lines manufactured from a synthetic olefin,
Tyvek(R), which offers superior quality, lighter weight and postage savings to
customers in comparison with kraft paper envelopes of the same size. This
business segment also produces some filing systems, which are used primarily by
the health care industry, and specialty paper envelopes. The soft packaging
business segment accounted for 19% of the Company's sales in 1998, 19% in 1997,
and 13% in 1996.
The labels manufacturing and distribution business segment provides
single-color, short-run labels distributed primarily through "quick print" and
other supply stores to non-manufacturing customers, and more complex,
multi-color, longer-run labels sold by a direct sales force and brokers to
manufacturing and nonmanufacturing customers. This business segment accounted
for 13% of the Company's sales in 1998, 12% in 1997, and 9% in 1996.
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The Printed Office Products business segment consists principally of
printing and distributing a wide variety of envelopes and documents for
businesses and distributing business forms and labels. Printed Office Products
accounted for 41% of the Company's sales in 1998, 43% in 1997, and 59% in 1996.
The 1996 sales include sales by Vanier.
Financial information regarding the Company's four business segments is
presented under the heading "Business Segment Information" of the Notes to
Consolidated Financial Statements beginning on page F-6 and incorporated herein
by reference.
Production
Substantially all of the Company's products, except business forms, are
manufactured by wholly owned subsidiaries of the Company in 11 manufacturing
facilities located throughout the United States. (See "Item 2 - Properties".)
The principal raw materials used by the Company in the manufacture of its
products are poly-resins, Tyvek(R), paper, paper envelopes and ink. Purchases of
such materials are made at competitive prices negotiated with suppliers. The
Company believes that there are sufficient alternative sources of supply to
provide its raw material requirements if for any reason its present suppliers
are unable to do so. Preparation of contingency plans is discussed further in
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations under the heading "Year 2000 Issue."
Trademarks
The Company holds trademarks which management believes are sufficient
for the operation of its business without any substantial restrictions and
adequate for the operation of each business segment.
Backlog
As of January 31, 1999, the Company had backlogs believed to be firm of
approximately $16.8 million for the extrusion coating and laminating segment,
approximately $9.8 million for the soft packaging segment and approximately
$14.4 million for the Printed Office Products segment. Comparable backlogs as of
January 31, 1998 were approximately $14.6 million for the extrusion coating and
laminating segment, approximately $7.0 million for the soft packaging segment
and approximately $20.7 million for the Printed Office Products segment. All
present backlogs are expected to be filled during 1999.
Distribution and Customers
The Company's products are sold throughout the United States, and less
than 2% of the Company's sales in any year have been outside of the United
States. The Company's products are sold through approximately 360 direct sales
representatives, brokers and distributors. No customer or related group of
customers in 1998 accounted for 10% or more of the sales of the Company. Demand
for the Company's extrusion coating and laminating, soft packaging, label
manufacturing and printed office supplies generally is not seasonal.
Competition
The Company's continuing operations are comprised of two businesses:
Specialty Packaging and Printed Office Products. The Company's Specialty
Packaging business consists of three business segments: extrusion coating and
laminating, soft packaging and labels manufacturing. The Printed Office Products
business consists of a single segment. Extrusion coating and laminating, soft
packaging, labels manufacturing and printed office products are in highly
competitive industries. The Company competes with some larger nationwide firms
with greater resources than the Company as well as numerous local and regional
businesses, most of which are smaller than the Company. Principal methods of
competition are pricing, service, quality and flexibility.
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Specialty Packaging
The flexible packaging industry, of which Specialty Packaging is a
subset, is a $17 billion industry according to industry sources. Of the
Company's three segments within the Specialty Packaging business, the Company
derives the greatest amount of revenues from extrusion coating and laminating.
The Company's technical expertise adds value to certain consumer packaging
products, providing better protection of food, medical and pharmaceutical
products. The extrusion coating segment exhibits certain entry barriers,
including a critical mass of technical expertise which may be time consuming and
difficult to assemble, and a significant capital investment, which may deter
smaller companies from entry into this market. The products tend to be in highly
specialized market niches each with relatively low sales volume, which may deter
larger companies from entry into this market. The Company's largest competitors
include Thilmany (a division of International Paper), Rexam Coated Products, and
Schoeller Technical Papers, Inc. Management believes none of these competitors
is superior to the Company in terms of quality and service, which together with
price, offer better total value than their competitors in this business segment.
Within the soft packaging business segment, the Company believes it is
the largest manufacturer of lightweight, tear-resistant mailers made of
Tyvek(R), and estimates it has approximately 65% of the United States market for
converting Tyvek(R) into mailers. The Company believes it holds a strong
competitive position in the sale of specialty mailers. The Company has expanded
its position within the specialty mailers market by supplying soft packages for
use in delivering products sold by catalog and television-based and
internet-based retailers. Management believes the Company has competitive
advantages in the soft packaging segment, which include creative and flexible
product development, manufacturing excellence, quick turnaround of orders and
value-added printing. Significant competitors include Papercone Corporation,
Mail-Well Inc., Atlantic Envelope and Williamhouse. Competition is based
primarily on product features, turnaround time of orders and price.
The United States flexographic pressure-sensitive label market amounted
to an estimated $2.2 billion in 1998 sales according to the U.S. Department of
Commerce. Within this business segment, the Company believes it is the largest
short-run custom label producer in the United States. Short-run labels are
distributed through "quick print" and other business supply stores to
non-manufacturing customers. There is competition from numerous commercial
printers and label printers; but, the Company believes its competitive advantage
is its quick turnaround of orders and highly efficient automated
order-processing system. The Company also produces multi-color, longer-run
labels sold by a direct sales force and brokers to manufacturing and
non-manufacturing customers. Significant competitors include Label Art, Lancer
Labels, Super Fast Labels and Label Works (owned by Taylor Corporation.)
Competition is based primarily on the quality of technically demanding labels,
turnaround time and price.
Printed Office Products
The Company's Printed Office Products business segment includes the
printing and marketing of a variety of envelopes and digitally imaged documents.
The segment also includes the distribution of other office products such as
business forms and labels. This segment is generally a subset of the commercial
printing market, which totaled an estimated $75 billion in 1998 sales according
to the U.S. Department of Commerce. The Company is a direct-to-user marketer of
custom-printed envelopes, and to a lesser extent, business forms, labels and
digital document services. In addition, the Company seeks to provide
knowledgeable, problem-solving customer service. Growth in this market has been
constrained due to strong competitive pricing and the development of electronic
communications. Competition is highly fragmented, but significant competitors
include Wallace Business Systems, Precept, American Business Forms and Atlantic
Envelope. Competition is based on consistency of customer service, turnaround
time for orders, availability of electronic order flow and price.
Employees
At December 31, 1998, the Company had approximately 2,535 full time
employees. No employee is covered by a collective bargaining agreement.
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Federal, State or Local Regulations Regarding Environment
Federal, state, and local regulations relating to protection of the
environment have not had and are not expected to have a material adverse effect
upon the Company's capital expenditures, liquidity, earnings, or competitive
position. The Company's various operating units are subject to EPA, state and
local standards for air emissions, industrial storm water discharges, generation
of hazardous waste, heating oil underground storage tanks, release response,
hazardous chemicals use reporting, sewer use, and the like, and the Company
believes that it is in substantial compliance with the applicable standards.
None of these environmental standards has had or is expected to have a material
adverse effect upon the Company.
Soil and groundwater contamination has been detected at a discontinued
manufacturing facility of one of the Company's subsidiaries. The Company intends
to address the contamination in conformity with the requirements established by
the North Carolina Department of Environment, Health, and Natural Resources. The
Company currently cannot estimate the costs that it may incur investigating
and/or remediating, the contamination, but the Company does not believe that
such costs will have a material adverse effect on the Company. The Company knows
of no significant environmental liabilities involving its operations.
International Operations
On May 12, 1998, the Company announced the sale of its investment in
the Company's European envelope manufacturing joint venture, Curtis 1000 Europe
GmbH. Additional information on this sale is included in the Consolidated
Financial Statements of the Company and Notes to Consolidated Financial
Statements beginning on page F-1 and incorporated herein by reference.
Year 2000 Issue
The discussion regarding the Company's Year 2000 issue is presented
under the heading "Year 2000 Issue" in Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations.
ITEM 2 - PROPERTIES
Properties
The Company's executive offices are located in approximately 15,200
square feet of space at 2100 RiverEdge Parkway, Suite 1200, Atlanta, Georgia.
The offices are leased from an unrelated party under a lease expiring in 2003,
which has a five-year renewal option and annual cost of $272,000.
With respect to continuing operations, the Company owns eight
production and distribution/warehouse facilities in the United States
encompassing approximately 875,000 square feet. In addition, the Company leases
a production facility of approximately 85,000 square feet in Houston, Texas with
a lease expiration in 2000 and includes a five-year renewal option and annual
cost of $336,000. The Company leases a production facility of approximately
38,000 square feet in Fontana, California with a lease expiration in 2001 and
includes a five-year renewal option and annual cost of $173,000. The Company
leases a production facility of approximately 150,000 square feet in Exton,
Pennsylvania with a lease expiration in 2007 and annual cost of $763,000. The
Company leases a distribution facility of approximately 65,000 square feet in
Santa Fe Springs, California with a lease expiration in 1999 and includes two
five-year renewal options and an annual cost of $340,000. As a result of a
restructuring announced December 3, 1997, the Company has negotiated a lease
expiring in 2002 to replace this facility with 24,500 square feet at an annual
cost of $127,000. The Company has five other property leases, primarily sales
and administrative offices, with a total of approximately 41,000 square feet
with various expiration dates from 1999 to 2003. Management believes that
suitable replacement facilities can be obtained on comparable terms if lease
extensions are not negotiated.
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Certain properties owned by the Company are held subject to mortgages.
See the information set forth under the heading "Long Term Debt" in the Notes to
Consolidated Financial Statements beginning on page F-6 and incorporated herein
by reference.
All operating properties and equipment are believed to be in good
condition, adequately utilized and suitable for the purposes for which they are
used. As of February 26, 1999, the Company owned two properties previously used
by Vanier, which are redundant to current operating needs. The Company intends
to sell both of these properties.
ITEM 3 - LEGAL PROCEEDINGS
As of February 26, 1999, there were no material pending legal
proceedings, other than routine litigation incidental to the business, to which
the Company was a party or of which any of its properties were the subject, and
none are expected by management to materially affect the Company's financial
position and results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the shareholders of the Company
during the fourth quarter of 1998.
ITEM 4 (A) - EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information as of February 26, 1999 regarding the
executive officers of the Company:
LARRY L. GELLERSTEDT, III, 42, has served as President and Chief Executive
Officer of the Company since March 30, 1998 and Chairman of the Board of
Directors since May 8, 1998. He was previously employed at Beers Construction
Company ("Beers") in Atlanta, Georgia from 1978 to 1997. He is currently the
non-employee Chairman of the Board of Beers. From November 1990 through December
1997, Mr. Gellerstedt served as Chairman, Chief Executive Officer and President
of Beers. Beers ranks among the top ten construction companies in the nation
operating in fourteen states with over $1 billion in annual revenues. Mr.
Gellerstedt is a Director of ALLTEL Corporation, Beers Construction Company,
Rock-Tenn Corporation, SunTrust Bank, Atlanta and Southern Mills.
DAWN M. GRAY, 54, has served as Secretary of the Company since July 1989. She
served as Assistant Secretary from October 1976 to June 1989. She has served
with the Company or Curtis 1000 Inc., a wholly-owned subsidiary of the Company,
for over 31 years.
SHARON K. GRUBER, 45, has served as Vice President of Corporate Planning and
Strategy of the Company since August 1, 1998. She was previously employed as the
Vice President of Human Resources at Beers Construction Company ("Beers") in
Atlanta, Georgia from 1996 to 1998. Beers ranks among the top ten construction
companies in the nation, operating in fourteen states with over $1 billion in
annual revenues. From 1994 to 1996, she was an executive search consultant with
Covington-Glenn International. From 1986 to 1994, she was employed by Southern
California Edison, one of the country's largest electric utilities and the
largest subsidiary of Edison International where she served as the Manager of
Organizational Change, Strategic Planning Manager and Manager of Training. From
1983 to 1986, she was employed by Arthur Andersen & Company.
JOHN H. KARR, 48, joined the Company on June 30, 1997 and has served as
Treasurer of the Company since July 23, 1997 and Assistant Secretary since
December 9, 1998. He was employed by Burnham Service Corporation, a $200 million
revenue provider of transportation, distribution and logistics services to the
technology industry, from 1977 to 1996. From 1989 to 1996, he served as
Secretary and Treasurer of Burnham Service Corporation with responsibilities
including capital structure, risk management, employee benefit programs,
acquisitions and divestitures and general financial management.
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RICHARD G. SMITH, 50, joined the Company as Vice President - Corporate
Development in September 1995 and has served as Vice President and Chief
Financial Officer of the Company since January 1996. From August 1994 to August
1995, Mr. Smith was Senior Vice President of Brambles USA, Inc., the major U.S.
subsidiary of Brambles Industries Limited, an Australian based specialized
industrial services provider with annual revenues of approximately $2 billion.
From September 1992 to July 1994, he was Vice President and Chief Financial
Officer of Brambles Acquisition, Inc., the largest subsidiary of Brambles USA,
Inc. He was Vice President and Chief Financial Officer of Environmental Systems
Company, a New York Stock Exchange-listed hazardous waste company from June 1991
to August 1992. Environmental Systems Company was acquired by Brambles in March
1992. Prior to 1991 he served as Vice President of Corporate Development for
Laidlaw, Inc.
CHRISTOPHER R. WILLIAMS, 43, has served as Vice President and Chief Information
Officer of the Company since March 30, 1998. He was previously employed at Beers
Construction Company ("Beers") in Atlanta, Georgia from March 1985 through March
1998. Beers ranks among the top ten construction companies in the nation,
operating in fourteen states with over $1 billion in annual revenues. He served
as Chief Financial Officer of Beers from July 1991 to March 1998 and as Vice
President - Finance from March 1985 to July 1991. From August 1978 to March
1985 he was employed at Ernst & Young.
RAYMOND J. WILSON, 40, joined the Company on June 30, 1997 and has served as
Corporate Controller of the Company since July 23, 1997. Prior to joining the
Company, he was employed from February 1997 to June 1997 as Vice
President-Finance and Chief Financial Officer for MEHL/Biophile International
Corporation, a publicly held technology transfer company recently concentrating
on patented hair removal and cosmetic dermatological products. From September
1985 to February 1997 he was employed at Engraph, Inc., a $300 million
international manufacturer of packaging and other identification materials for
many of the world's most successful consumer products companies. Engraph was a
publicly traded company prior to being purchased by Sonoco Products Company in
October 1993. At Engraph, he served as Vice President-Finance from April 1995 to
February 1997; Corporate Controller and Chief Accounting Officer from August
1994 to April 1995; Corporate Controller from May 1992 to August 1994; Manager
of Accounting and Control from April 1990 to May 1992; and Internal Control
Manager from September 1985 to April 1990. From June 1980 to September 1985 he
was employed at Deloitte & Touche, formerly Touche Ross & Company.
The Board of Directors elects officers at their annual meeting for
one-year terms or until their successors are elected and qualified. Officers are
subject to removal by the Board of Directors at any time.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
American Business Products, Inc.'s Common Stock is listed on the New
York Stock Exchange. The Ticker Symbol is ABP. On February 26, 1999, there were
approximately 4,800 shareholders of record including dividend reinvestment
participants.
Quarterly Share Price and Dividend Data
1998 Quarterly Data (unaudited)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
Dividends per share $ 0.155 $ 0.155 $ 0.155 $ 0.165
Price Range of Common Stock
(High-Low) $24.13-$19.63 $23.44-$19.50 $21.69-$16.50 $24.00-$16.06
1997 Quarterly Data (unaudited)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
Dividends per share $ 0.155 $ 0.155 $ 0.155 $ 0.155
Price Range of Common Stock
(High-Low) $25.25-$22.00 $25.00-$22.50 $25.38-$21.88 $25.87-$19.06
ITEM 6 - SELECTED FINANCIAL DATA
Five-year Financial Review
(In thousands, except per share amounts) 1998 1997 1996 1995 1994
Net Sales $461,270 $453,315 $568,275 $568,493 $508,102
Income from Continuing Operations $ 18,337 $ 18,403 $ 18,639 $ 21,397 $ 16,113
Per Common Share
Basic $ 1.15 $ 1.12 $ 1.14 $ 1.32 $ 1.01
Diluted 1.15 $ 1.11 $ 1.13 $ 1.32 $ 1.00
Net Income $ 11,787 $ 19,242 $ 21,054 $ 25,505 $ 19,528
Per Common Share
Basic $ 0.74 $ 1.17 $ 1.28 $ 1.57 $ 1.22
Diluted $ 0.74 $ 1.16 $ 1.28 $ 1.57 $ 1.21
Dividends Paid
Common Stock $ 10,025 $ 10,183 $ 9,510 $ 9,085 $ 8,550
Per Common Share $ 0.630 $ 0.620 $ 0.580 $ 0.560 $ 0.533
Total Assets $301,244 $330,494 $337,771 $333,764 $309,016
Long-Term Debt $ 34,016 $ 42,850 $ 54,958 $ 61,761 $ 75,144
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's continuing operations are comprised of two businesses:
Specialty Packaging and Printed Office Products. The Company's Specialty
Packaging business is comprised of three segments: the extrusion of polyethylene
and other materials onto papers and nonwovens used in packaging and other
products, the manufacture of soft packages including Tyvek (R) mailers, and the
manufacture of labels. The Company's Printed Office Products business is
comprised of a single segment, which supplies custom-printed envelopes and
labels, digital document services and business forms.
Net sales from continuing operations in 1998 were $461.3 million, an
increase of 1.8%, compared to $453.3 million in 1997, which represented a 20.2%
decrease from $568.3 million in 1996. 1996 sales included $128.8 million of
revenues from the Company's business forms manufacturing operations, which were
sold effective December 31, 1996, without which the Company's 1996 net sales
from continuing operations would have been $439.5 million. A more detailed
analysis of net sales is included in the discussion below of the Company's two
continuing businesses: Specialty Packaging and Printed Office Products.
The Company's gross profit margin from continuing operations was 30.1%
in 1998 compared to 29.3% in 1997 and 29.9% in 1996. The reduced margin in 1997
was due primarily to inefficiencies resulting from plant consolidation at the
Company's Printed Office Products business, which were overcome in 1998.
Selling and administrative expenses from continuing operations (as a
percentage of net sales) were 22.0% in 1998 compared to 22.7% in 1997 and 22.5%
in 1996. The decrease in 1998 was due primarily to product mix changes and
improved efficiencies within the soft packaging segment of the Company's
Specialty Packaging business.
As discussed below, the Company recorded restructuring and other
charges of $5.2 million before tax in 1998, $4.0 million before tax in 1997 and
$8.3 million before tax in 1996 which related primarily to the Company's Printed
Office Products business.
Interest expense for 1998 was $7.1 million, an increase of 9.1% from
$6.5 million in 1997. The increase in 1998 is due to additional supplemental
executive retirement plan ("SERP") expense of $1.2 million incurred as a result
of declining bond market interest rates which affected valuation of the
Company's SERP liability. Interest expense in 1997 decreased 16.7% from $7.8
million in 1996 due to capitalization of interest in conjunction with capital
projects and to reduced long-term debt. The Company in 1998 reclassified from
selling and administrative expense to interest expense the interest portion of
the Company's SERP expense. Prior years have been restated for comparability.
Interest income for 1998 was $4.4 million, an increase of 5.4% over the
$4.2 million in 1997. The increase was due primarily to more efficient
management of the Company's cash balances, partially offset by the effect of
lower market interest rates. Interest income in 1997 increased 193.1% from the
$1.4 million in 1996, resulting primarily from interest income earned on the
proceeds from the sale of the Company's business forms manufacturing operations.
Miscellaneous-net income was $0.3 million in 1998, a decrease of 94.6%
from $4.8 million in 1997. The decrease in 1998 was due primarily to lower gains
on the disposition of redundant realty in 1998, discussed below, as well as
decreased death benefit income from Company owned life insurance policies.
Miscellaneous-net income increased 84.8% in 1997 from $2.6 million in 1996,
primarily due to increased death benefit income from Company owned life
insurance policies as well as increased gains on sale of equipment relative to
1996.
The Company's effective income tax rate from continuing operations
increased to 37.7% in 1998 compared to 35.3% in 1997, which declined compared to
37.3% in 1996. The higher effective rate in 1998 resulted from the
non-deductible portion of the loss on the sale of the Company's investment in
Curtis 1000 Europe GmbH, the Company's European envelope manufacturing joint
venture. The lower effective rate in 1997 resulted primarily from recognition in
that year of the benefit of tax strategies developed by the Company and of the
recoverability of tax overpayments of earlier years.
The effect of inflation on sales and operating income in 1998 and 1997
was not significant. In 1996, sales and operating income were decreased by lower
raw material costs than in 1995 and the need to pass through lower prices to
customers with resultant pressure on profit margins. These effects were most
evident in the Company's business forms manufacturing operations, which were
divested at year-end 1996.
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Specialty Packaging
The Company's Specialty Packaging business is composed of three
segments: extrusion coating and laminating of packaging and other products,
soft packaging including Tyvek(R) mailers, and printing of labels.
In 1998, the Company's Specialty Packaging business' net sales were
$284.4 million, an increase of 3.8% compared to $273.9 million in 1997, which
represented an increase of 10.3% compared to $248.4 million in 1996. The sales
increase in 1998 was due primarily to continued product and market development.
The sales increase in 1997 was due primarily to capacity expansion in the
extrusion coating and laminating segment, higher unit sales to key customers in
the soft packaging segment and customer acceptance of price increases in the
labels segment.
The Company measures each of its businesses' and segments' operating
profit, which the Company defines as income before interest and taxes less a
capital charge equal to 2.5% of the net assets used by that business or
segment. The capital charge is in lieu of any corporate expense allocation.
In 1998, the Company's Specialty Packaging business' operating profit
was $29.7 million, an increase of 9.2% compared to $27.2 million in 1997 and
$27.2 million in 1996. The operating profit increase in 1998 was due to higher
sales, improved operational efficiency and the absence of special charges
incurred in 1997 to close a plant and write off certain assets no longer
planned to be used by the Company. Operating profit improvements in 1997, which
were associated with higher revenues that year, were offset by the previously
mentioned special charges.
The Specialty Packaging business' extrusion coating and laminating
segment generated net sales of $125.0 million in 1998, a 4.1% increase
compared to $120.1 million in 1997. Net sales in 1997 were 10.6% greater than
net sales in 1996 of $108.5 million. The growth in 1998 resulted from continued
product and market development and was offset partially by the loss of an
important customer during 1998 due to the customer's adoption of types of
packaging not manufactured by the Company, as well as the start-up of
additional capacity among other firms which compete with the Company's
extrusion coating operations. The double-digit growth in 1997 sales over 1996
was due primarily to the Company's start-up of a modern new production line
during 1997.
The extrusion coating and laminating segment reported operating profit
in 1998 of $13.8 million, an increase of 2.2%, compared to operating profit of
$13.5 million in 1997. Operating profit in 1997 decreased 5.0% from operating
profit of $14.2 million in 1996. The increase in 1998 was due primarily to the
increased net sales. The decrease in 1997 was due primarily to higher costs and
customer resistance to price increases on their ongoing purchases.
The Company is seeking to accelerate the future growth of its
extrusion coating and laminating segment by developing and acquiring
complementary technologies, capabilities, manufacturing plants and personnel.
The Specialty Packaging business' soft packaging segment generated net
sales of $95.0 million in 1998, an increase of 3.3% compared to $92.0 million
in 1997. Net sales in 1997 were 9.6% greater than net sales in 1996 of $83.9
million. Sales growth in 1998 resulted primarily from investment in new product
and market development, partially offset by weak demand in traditional envelope
distribution channels. The growth in 1997 sales over 1996 was due primarily to
increased demand from two significant customers.
The soft packaging segment reported operating profit in 1998 of $5.6
million, an increase of 46.1%, compared to operating profit of $3.8 million
in 1997. Operating profit in 1997 decreased 42.1% from operating profit of
$6.6 million in 1996. The increase in 1998 and the decrease in 1997 resulted
from the incurrance of special charges of $1.8 million in 1997 associated with
closing a manufacturing facility and writing off certain information systems.
In 1998, the Company commenced supplying soft packages for use in
delivering products sold by catalog and television-based and Internet-based
retailers.
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The Specialty Packaging business' labels segment generated net sales
of $64.4 million in 1998, a 4.1% increase, compared to $61.9 in 1997. Net
sales in 1997 were 10.6% greater than net sales in 1996 of $56.0 million. The
increase in 1998 resulted primarily from increased sales of higher quality
labels, partly offset by reduced demand for single-color labels which users may
produce for themselves with personal computers and inexpensive printers. The
growth in 1997 sales over 1996 was due primarily to price increases and
secondarily to increased shipments.
The Company's labels segment reported operating profit in 1998 of
$10.3 million, an increase of 4.3%, compared to operating profit of $9.8
million in 1997. Operating profit in 1997 increased 55.0% from operating profit
of $6.3 million in 1996. These increases resulted from essentially the same
factors that impacted net sales.
The Company expects that demand for its single-color labels for office
applications will continue to decline resulting in reduced near term profit at
the Company's label segment. The Company has developed the ability to produce
higher quality and more technically demanding labels, has entered new
distribution channels and has begun to increase its production of labels for
packaging markets relative to office markets.
Printed Office Products
The Company's Printed Office Products segment generated net sales of
$188.6 million in 1998, a 3.4% decrease compared to $195.2 million in 1997. Net
sales in 1997 decreased 41.9% from net sales in 1996 of $335.9 million.
Included in 1996 net sales were net sales of $128.8 million from the Company's
former business forms manufacturing operation. Excluding these sales, the
Printed Office Products segment would have shown net sales of $207.1 million in
1996 and a 5.7% decline in net sales in 1997. The declines in sales of 1998 and
1997, exclusive of sales of the former business forms manufacturing operation's
sales, were due primarily to disruptions caused by the 1996-1997 plant
consolidation program and loss of focus on selling core products. Although the
sales decline in 1998 was less than in 1997, in both dollar and percentage
terms, the rate of decline accelerated during 1998, amounting to a 10.0%
decline in the fourth quarter of 1998 versus the same period of the prior year.
The Company's Printed Office Products segment reported operating
profit in 1998 of $7.2 million, a decrease of 15.1%, compared to operating
profit of $8.5 million in 1997. Operating profit in 1997 decreased 26.0% from
operating profit of $11.5 million in 1996. Included in the 1998 results are
charges related to management changes of $1.4 million, charges from the
write-off of the segment's former order-entry systems project of $5.2 million
and gains of $0.7 million from the sale of realty rendered redundant by the
1996-1997 plant consolidation program. Exclusive of the charges and the realty
gains, the Printed Office Products segment would have reported operating profit
of $13.1 million in 1998. Included in the 1997 results are charges of $2.5
million related to a take or pay contract with the purchaser of the Company's
former business forms manufacturing business, management changes, certain
information systems write-offs and gains of $2.6 million from sale of realty
rendered redundant by the 1996-1997 plant consolidation program. Excluding the
charges and the gains, the segment would have shown operating profit of $8.4
million in 1997. The increased operating profit in 1998, excluding the charges
and gains, resulted primarily from cost reduction and management
reorganization. Included in the 1996 results is operating profit from the
Company's former business forms manufacturing operations of $0.9 million, net of
the loss on the sale of this operation and its portion of restructuring
charges, other restructuring charges related to the 1996-1997 plant
consolidation program of $6.9 million and gains of $3.1 million on sales of
realty rendered redundant by the plant consolidation program. Exclusive of the
business forms manufacturing operations' profit, the loss on sale of these
operations, the restructuring charges and the related realty sale gains, the
Printed Office Products segment would have shown operating profit of $14.4
million in 1996. The decrease in 1997 operating profit from 1996, excluding the
charges and gains, is due primarily to order processing and production
bottlenecks in 1997 resulting from the 1996-1997 plant consolidation program.
The Company has developed various programs intended to halt the
revenue decline and recover revenue growth at its Printed Office Products
business. Such programs include steps to improve the effectiveness of the
business' direct sales force by concentrating on core products, developing
national accounts, and generating revenues through new distribution channels.
Though there can be no assurance such programs will be successful, the Company
anticipates showing measurable results in the second half of 1999.
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Discontinued Operation
In December 1998, the Company announced its plan to sell its hardcover
and softcover book manufacturing business. The financial statements reflect the
operating results of this business as a discontinued operation and prior years
financial information has been appropriately restated. This initiative is part
of an overall corporate restructuring intended to enhance profitability by
focusing the Company on its Specialty Packaging and Printed Office Products
businesses. As a result of the planned disposition, the Company recorded an
after tax loss of approximately $7.2 million, based on estimated proceeds from
the disposal. Taking into account the estimated disposal loss and income from
operations of $0.6 million, the Company showed a loss from the discontinued
operation of $6.6 million in 1998. The discontinued operation's income from
operations in 1998 was 24.1% lower than its income from operations of $0.8
million in 1997, which was 65.3% lower than income from operations of $2.4
million in 1996. In 1998 the decline was due primarily to lower gross margins
and in 1997 to lower net sales.
Pro Forma Financial Information
In 1998, the Company conducted a review of a custom-designed software
system that was being developed by the Company's Printed Office Products
business. After extensive review, the Company discontinued the software
development project, which necessitated the Company to record a pre-tax charge
of approximately $5.2 million to write off the Company's investment in the
project, which is recorded in restructuring and other charges in the
accompanying Consolidated Statements of Income.
Also in 1998, the Company sold its investment in Curtis 1000 Europe
GmbH, the Company's European envelope manufacturing joint venture. The Company
recorded a loss of approximately $1.8 million before tax on the sale, which is
recorded in miscellaneous-net in the accompanying Consolidated Statements of
Income.
The Company incurred charges of $1.4 million before tax due to
management changes at its Printed Office Products business during 1998, which
are recorded in selling and administrative expenses in the accompanying
Consolidated Statements of Income.
During 1998, gains of $0.5 million before tax from the sale of realty
rendered redundant to operating needs by the Company's 1996-1997 Printed Office
Products plant consolidation program were included in miscellaneous-net in the
accompanying Consolidated Statements of Income.
As discussed above, in 1998 the Company recorded a pre-tax loss from
disposal of a discontinued operation of $12.1 million.
The foregoing charges, losses and gains collectively reduced the
Company's income from continuing operations by $5.0 million, or $0.31 per
diluted share, and its net income by $12.2 million, or $0.76 per diluted
share, without which the Company would have shown 1998 income from continuing
operations of $23.4 million, or $1.46 per diluted share, and net income of
$24.0 million, or $1.50 per diluted share.
In late 1997, the Company announced a profit improvement plan and
charges against income. The profit improvement plan focused primarily on a
series of actions at the Company's Printed Office Products business. These
actions were intended to improve customer service, eliminate processing
bottlenecks and reduce costs. The charges against 1997 results relate to
management changes and reorganization, estimated penalties associated with a
take or pay contract with the purchaser of the Company's former business forms
manufacturing operations, the cessation of manufacturing at a Company facility
and certain information systems asset impairments. The before tax amount of
such charges was $1.4 million included in selling and administrative expenses,
$4.0 million included in restructuring and other charges and $1.8 million
included in miscellaneous-net in the accompanying Consolidated Statements of
Income.
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During 1997, gains of $2.9 million before tax from the sale of realty
rendered redundant to operating needs by the Company's 1996-1997 Printed Office
Products plant consolidation program were included in miscellaneous-net in the
accompanying Consolidated Statements of Income.
The foregoing 1997 charges, gains and income collectively reduced the
Company's income from continuing operations and its net income by $2.6 million,
or $0.16 per diluted share, without which the Company would have shown 1997
income from continuing operations of $21.0 million, or $1.27 per diluted share,
and net income of $21.8 million, or $1.32 per diluted share.
In early 1996, the Company announced a program to consolidate the
Printed Office Products business' plants to reduce operating costs. The Company
closed 14 plants, 13 plants during 1996 and the final facility in the first
quarter of 1997, transferring production to other facilities. As a result of
the plant consolidation program, the Company recorded restructuring and other
charges to operations in 1996 of $8.3 million before tax, consisting of
severance and other employee related costs of $6.3 million, fixed asset
write-downs of $0.4 million and lease termination and other miscellaneous costs
of $1.6 million.
Also in 1996, the Company recognized a loss of $2.8 million, which is
included within miscellaneous-net in the accompanying Consolidated Statements
of Income, upon the sale of its former business forms manufacturing operations.
In 1996 the Company's former business forms manufacturing operations
contributed income before taxes of $3.6 million, which is expressed net of the
loss on sale of these operations, the part of the Printed Office Products plant
consolidation restructuring charge that related to business forms manufacturing
operations and interest income that would have been earned had the proceeds
from sale of these operations been invested in money market instruments
throughout 1996.
As a result of the Printed Office Products plant consolidation program
the Company sold certain real estate assets resulting in gains of $3.1 million
before tax in 1996 which are included within miscellaneous-net in the
accompanying Consolidated Statements of Income.
The foregoing 1996 charges, gains, losses and income collectively
reduced the Company's income from continuing operations and its net income by
$2.4 million, or $0.14 per diluted share, without which the Company would have
shown 1996 income from continuing operations of $21.1 million, or $1.28 per
diluted share, and net income of $23.5 million, or $1.42 per diluted share.
Liquidity and Capital Resources
In December 1997, the Company announced plans to purchase up to 1.7
million shares or approximately 10% of its outstanding Common Stock through
negotiated transactions and open market purchases. Since inception of the
program, the Company has purchased approximately 1,094,000 shares at a cost of
approximately $22.2 million.
Stockholders' equity decreased $19.0 million during 1998 due primarily
to stock repurchases by the Company and totaled $162.7 million at December 31,
1998.
Cash and cash equivalents decreased $15.1 million during 1998 and
totaled $60.0 million at December 31, 1998. Operating activities provided
$42.0 million in cash during 1998. The other significant sources of cash during
1998 were $4.4 million in proceeds from the sale of the Company's investment in
Curtis 1000 Europe GmbH, $3.3 million from liquidation of Company owned life
insurance policies and $3.0 million of proceeds from the sale of property,
plant and equipment. Cash was used to purchase $25.3 million of property, plant
and equipment, repurchase $21.6 million of common stock, reduce long-term debt
by $12.0 million and pay $10.0 million in dividends.
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Cash and cash equivalents decreased $7.4 million during 1997 and
totaled $75.1 million at December 31, 1997. Operating activities provided
$29.9 million in cash during 1997. The other significant source of cash during
1997 was $7.2 million of proceeds from the sale of property, plant and
equipment. Cash was used to purchase $20.8 million of property, plant and
equipment, reduce long-term debt by $12.1 million and pay $10.2 million in
dividends.
The Company maintains a committed revolving credit agreement (the
"Credit Agreement") with a bank under which the Company may borrow up to $50
million through April 22, 2001, at interest rates related to prime and
Eurocurrency rates. At December 31, 1998 there were no borrowings under this
Credit Agreement. A wholly owned subsidiary of the Company has borrowed
approximately $6.5 million through a variable interest rate industrial revenue
bond (the " Bond") due May 1, 2031. The interest rate on the Bond was 4.10%
and 4.30%, respectively, at December 31, 1998 and 1997. The Bond is supported
by a letter of credit issued pursuant to the Credit Agreement, which
commensurately reduces the balance available to the Company under the Credit
Agreement.
The Company believes its liquid current assets, internal cash flow,
availability of additional borrowing under its existing loan agreements, and,
to the extent necessary, additional external financing, should adequately meet
the Company's needs for the foreseeable future.
Year 2000 Issue
The Year 2000 issue is the result of potential problems with computer
systems or any equipment with computer chips that use dates where the date has
been stored as just two digits (e.g. 98 for 1998). On January 1, 2000, any
clock or date recording mechanism, including date sensitive software which uses
only two digits to represent the year, may recognize a date incorrectly (e.g.,
interpret the two digits 00 as the year 1900 rather than the year 2000). This
could result in a system failure or miscalculations causing disruption of
operations, including among other things, a temporary inability to process
transactions, send invoices, or engage in similar activities.
The Company has undertaken a program to address Year 2000 readiness
with respect to the following: (i) the Company's information technology
hardware and software ("IT systems"); (ii) the Company's non-information
technology systems, such as buildings, plant, equipment, telephone systems, and
other infrastructure systems that may contain microcontroller technology
("non-IT systems"); and (iii) exposure from third parties with which the
Company does business.
The Company's plan with regard to the Year 2000 issue for each of the
above involves the following phases: (i) assessment of systems to determine the
extent to which the Company may be vulnerable to the Year 2000 issue; (ii) the
development of remedies to address problems discovered in the assessment phase;
(iii) the testing of such remedies; and (iv) the preparation of contingency
plans to address potential worst case scenarios should the remedies not be
successful.
The Company has analyzed its IT systems in an effort to identify any
systems that may experience problems relating to the Year 2000 issue and
implement any changes required to remedy such problems. The result of the
analysis was that most of the IT systems used by the Company were vulnerable to
potential problems relating to the Year 2000 issue. A Company-wide enterprise
resource planning ("ERP") software solution was chosen as the primary means to
address the Year 2000 issue. The ERP software was selected not only to address
the Year 2000 issue, but also to add functionality and efficiency in the
business processes of the Company. The ERP software is being implemented in
stages and in each of the Company's operating companies. The first stage was
comprised primarily of the financial modules. As planned, the implementations
were completed in all but one of the operating companies during 1998. The
financial modules for the remaining operating company are planned to be tested
and in operation by the end of the first quarter of 1999. The second stage
includes the manufacturing and distribution modules. These modules are being
installed in most but not all operating companies. This stage is planned to be
completed by the end of the second quarter of 1999. The Company estimates that
remediation and testing of IT systems not replaced by the ERP software solution
was 90% complete as of December 31, 1998. The majority of the
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work remaining involves integrating the remediated IT systems to the ERP
financial modules. This is scheduled to be completed during the first quarter
of 1999.
The Company has assessed its significant non-IT systems that may
contain embedded microcontrollers to determine what remediation efforts may be
necessary. The assessment was 95% complete as of December 31, 1998. To date,
almost all non-IT systems tested have been evaluated as being not likely to
experience problems relating to the Year 2000 issue. The Company plans to
either perform remediation or replace the non-IT systems considered to be
vulnerable to potential problems relating to the Year 2000 issue by the end of
the second quarter of 1999.
The Company is taking steps intended to assess the Year 2000 readiness
of certain third parties whose possible lack of Year 2000 readiness could, in
the Company's opinion, cause a materially adverse impact on the Company's
business, results of operations or financial condition. The Company has
received some preliminary information and has initiated more extensive
inquiries and other procedures. The Company expects most of this effort to be
undertaken during the first quarter of 1999 and to be concluded during the
second quarter of 1999.
The Company continues to develop contingency plans for mission
critical business processes. These plans are intended to mitigate risks from
internal systems as well as potential risks in the supply chain of the
Company's customers and suppliers. The majority of this effort is scheduled for
the first and second quarters of 1999. Though essential to the operation of the
Company's business, the software and operating systems that the Company
utilizes may be supplemented by manual processing.
The total Year 2000 remediation project is estimated to cost
approximately $25 million of which approximately $13 million has been spent to
date. All of the projected cost is expected to be funded from operating cash
flow. Approximately 80% of the estimated spending relates to the ERP software
solution. Costs associated with the ERP software solution will be treated as
period expense or capitalized and amortized in accordance with applicable
accounting principles and Company policy. Costs associated with correcting
existing systems will be expensed as incurred.
Failure to successfully execute the Company's Year 2000 readiness
plans on a timely basis or the failure of external parties to achieve Year 2000
readiness on a timely basis could have a material adverse impact on the
Company's financial position and results of operations.
Other Matters
Federal, state and local regulations relating to protection of the
environment have not had and are not expected to have a material adverse effect
upon the Company's capital expenditures, liquidity, earnings or competitive
position. Soil and groundwater contamination is present at one of the Company's
discontinued manufacturing facilities. The Company intends to address the
contamination in conformity with applicable regulatory requirements. The
Company currently cannot estimate the costs that it may incur investigating
and/or remediating the contamination, but the Company does not believe that
such expenditures will have a material adverse effect on the Company.
The Company's various operating units are subject to EPA, state and
local standards for air emissions, industrial storm water discharges,
generation of hazardous waste, heating oil underground storage tanks, release
response, hazardous chemical use reporting, sewer use and the like, and the
Company believes that it is in substantial compliance with the applicable
standards. None of these environmental standards has had or is expected to have
a material adverse effect upon the Company.
Pursuant to amendments to the Internal Revenue Code of 1986 which were
enacted in 1996, the deductibility for income tax purposes of interest expense
on certain loans from life insurance companies that are secured by the cash
values of underlying life insurance policies is being phased out. The expense
was 90% deductible in 1997, was 80% deductible in 1998 and nondeductible
thereafter. In 1998 the deductibility of $2.0 million of interest expense was
limited to 80% deductibility, and in 1997, the deductibility of $2.3 million of
interest expense was limited to 90% deductibility.
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The fair market value of the Company's long-term debt is based on
management's estimate of current market prices for the same issues. Fair value
is estimated to be $43,162,000 at December 31, 1998 and $54,088,000 at December
31, 1997. A decrease in interest rates of 10% would have the effect of
increasing the estimated fair value to $43,673,000 at December 31, 1998 and
$54,930,000 at December 31, 1997. These values were calculated using the
discounted cash flow method.
Forward Looking Statements; Risks and Uncertainties
From time to time, the Company or its representatives have made or may
make forward-looking statements that reflect the Company's current
expectations, hopes, intentions, plans, or strategies, orally or in writing.
The words or phrases "is expected," "will continue, "anticipates," "estimates,"
plans," "intends," or similar expressions in any of these communications are
intended to identify "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934 and Section 27A of the Securities
Act of 1933, as enacted by the Private Securities Litigation Reform Act of
1995. The Company assumes no obligation to update any such forward-looking
statements. Except for historical information contained in this report,
statements set forth in this report are forward-looking statements.
There can be no assurance the Company's actual performance will not
differ materially from that projected in the Company's forward-looking
statements due to important factors including but not limited to those
described below. The Company's expectations with respect to future sales and
profits assume reasonable continued growth in the general economy, which
affects demand for the Company's products. The Company's Printed Office
Products business has experienced generally declining revenues since 1995 and
while the Company has developed programs intended to halt these revenue
declines and to increase this business' future revenues, such programs are new
to the Company and there can be no assurance such programs will be successful.
The Company's Specialty Packaging business has experienced a slowing of its
historical revenue growth rates primarily due to greater competition and a
maturation of certain markets in which this business participates. The
Company's Specialty Packaging business is seeking more rapid growth through
development of new products and penetration of new, higher growth markets.
However, the Company may be less successful or it may take longer and cost more
to develop new products and distribution channels and penetrate new markets
than the Company currently anticipates. Loss of customers due to changes in
customers' manufacturing processes that reduce or eliminate their need for the
Company's products often cannot be predicted and may adversely affect the
Company's revenues and profits. The Company has been engaged in monetizing
non-strategic, redundant and low-productivity assets. The Company's ability to
continue monetizing such assets depends in part upon the Company's ability to
identify such assets as they become non-strategic or unproductive, the
availability of suitable conversion strategies, demand for such assets among
other parties, and market conditions generally. Further, the Company expects to
develop programs intended to increase the rate of growth of the Company, which
may include plans to acquire other companies and businesses. The Company's
success in implementing an acquisition program will depend, among other things,
on the Company's ability to identify, evaluate, negotiate, integrate and
operate acquisitions; the availability of suitable acquisitions to the Company,
competition for such acquisitions, the cost and availability of acquisition
financing to the Company and others, and capital market conditions generally,
all of which are subject to uncertainty.
The Company intends to sell its book manufacturing business. However,
there can be no assurance that the Company will be successful in this endeavor
or that a sale, if completed, will achieve any particular price or terms, which
will depend in part on the level of interest of third parties in acquiring
ownership of the Company's book manufacturing business.
Although the Company believes its plan to achieve timely Year 2000
readiness is reasonable based on known facts and circumstances it remains
possible that, dependant on factors and future events such as availability in
the labor force of information systems programmers and other information
systems personnel, the wide variety of information technology systems and
components, both hardware and software, that must be evaluated, the large
number of external parties with which the Company interacts, responsiveness of
third parties beyond the Company's control such as system vendors, service
suppliers, and others with whom the Company interacts, and the capabilities of
the information systems which the Company intends to utilize, achieving Year
2000 readiness may take longer or cost more than the Company anticipates. Due
to numerous uncertainties including those listed above, no assurances can be
given that the Company will achieve Year 2000 readiness on a timely basis, that
third parties with whom the
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Company contracts will achieve Year 2000 readiness on a timely basis, that the
Company's Year 2000 project will be completed within current cost estimates,
that the Year 2000 issue will not precipitate disruptions in financial markets
or the economy generally, which could materially, if indirectly, affect the
Company, or that the Year 2000 issue will not cause other consequences for the
Company which could be adverse and material.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
This discussion is presented under the heading "Other Matters" within
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations and incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of the Company and
its subsidiaries are included herein beginning on page F-I and incorporated
herein by reference.
Consolidated Statements of Income for each of the three years in the
period ended December 31, 1998
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 1998
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1998
Notes to Consolidated Financial Statements
Independent Auditors' Report
Quarterly Supplementary Financial Information
1998 Quarterly Data (unaudited)
(In thousands, except per share data) 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
Net Sales $ 119,094 $ 113,336 $ 114,326 $ 114,514
Gross Margin 36,017 34,315 33,810 34,474
Income from Continuing Operations 5,839 1,919 5,242 5,337
Per Share - Basic 0.36 0.12 0.33 0.34
Per Share - Diluted 0.36 0.12 0.33 0.34
Net Income (Loss) 5,946 1,968 5,573 (1,700)
Per Share - Basic 0.37 0.12 0.35 (0.11)
Per Share - Diluted 0.37 0.12 0.35 (0.11)
1997 Quarterly Data (unaudited)
(In thousands, except per share data) 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
Net Sales $ 112,376 $ 112,268 $ 110,614 $ 118,057
Gross Margin 33,319 33,478 33,130 32,803
Income from Continuing Operations 7,024 5,749 4,673 957
Per Share - Basic 0.43 0.35 0.28 0.06
Per Share - Diluted 0.43 0.35 0.28 0.05
Net Income 7,375 6,070 4,644 1,153
Per Share - Basic 0.45 0.37 0.28 0.07
Per Share - Diluted 0.45 0.37 0.28 0.06
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ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change of or disagreements with independent
accountants by the Company in the past two fiscal years or subsequently.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors of the Company is set forth in
"Proposal I - Election of Directors" under the captions "Nominees,"
"Information Regarding Nominees and Directors" and "Meetings and Committees of
the Board of Directors" in the Company's definitive Proxy Statement for its
1999 Annual Meeting of Shareholders to be held on May 5, 1999 (the "Proxy
Statement"). Such information is incorporated herein by reference. Pursuant to
Instruction 3 of Item 401(b) of Regulation S-K and General Instruction G(3) of
Form 10-K, information relating to the executive officers of the Company is set
forth in Part I, Item 4(A) of this Report under the caption "Executive Officers
of the Registrant." Information regarding compliance by directors and executive
officers of the Company and owners of more than ten percent of the Company's
Common Stock with the reporting requirements of Section 16(a) of the Securities
Exchange Act of 1934, as amended, is set forth in the Proxy Statement under the
caption "Section 16(a) of the Securities Exchange Act of 1934 Beneficial
Ownership Reporting." Such information is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
Information relating to compensation of the executive officers and
directors of the Company is set forth in "Proposal I - Election of Directors"
under the caption "Director Compensation" and in "Executive Compensation" in
the Proxy Statement. Such information is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding ownership of the Company's $2.00 par value
Common Stock by certain persons is set forth in "Voting" under the caption
"Principal Shareholders" and in "Proposal I - Election of Directors" under the
caption "Information Regarding Nominees and Directors" and under the caption
"Executive Compensation" in the Proxy Statement. Such information is
incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding relationships or transactions between the
Company and affiliates of the Company is set forth under the caption "Executive
Compensation - Certain Relationships and Related Transactions" in the Proxy
Statement referred to in Item 10 above. Such information is incorporated herein
by reference.
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PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements
The Consolidated Financial Statements and the Independent Auditors'
Report thereon which are required to be filed as part of this
Report are included in the Financial Information section, which is
incorporated herein by reference beginning on page F-1. These
Consolidated Financial Statements are as follows:
Consolidated Statements of Income for each of the three years
in the period ended December 31, 1998
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 1998
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedule
The financial statement schedule filed as part of this Report
pursuant to Article 12 of Regulation S-X is set forth on page S-I
of this Report, which is incorporated herein by reference. All
other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
have been omitted because such schedules are not required under the
related instructions or are inapplicable or because the information
required is included in the Consolidated Financial Statements or
notes thereto.
3. Exhibits
The exhibits required to be filed as part of this Report are set
forth in the Index of Exhibits beginning on page E-I of this
Report.
(b) Reports on Form 8-K:
On December 23, 1998, the Company filed a Current Report on
Form 8-K to report that SunTrust Equitable Securities
Corporation had been retained to sell the business of the
Company's book manufacturing subsidiary, BookCrafters USA,
Inc.
(c) The exhibits required to be filed as part of this Report are set forth
in the Index of Exhibits beginning on page E-I of this Report.
(d) The financial statement schedule required to be filed as part of this
Report is set forth on page S-I of this Report.
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20
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.
AMERICAN BUSINESS PRODUCTS, INC.
(Registrant)
Date: March 3, 1999 BY: /S/ Larry L. Gellerstedt, III
-----------------------------
Larry L. Gellerstedt, III
Chief Executive Officer,
President, Director and
Chairman of the Board
Date: March 3, 1999 /S/ Richard G. Smith
-----------------------------
Richard G. Smith
Vice President
and Chief Financial Officer
Date: March 3, 1999 /S/ Raymond J. Wilson
-----------------------------
Raymond J. Wilson
Controller
20
21
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 date indicated.
Date: March 3, 1999 */S/ Henry Curtis VII
--------------------------------
Henry Curtis VII, Director
Date: March 3, 1999 */S/ Larry L. Gellerstedt, III
--------------------------------
Larry L. Gellerstedt, Director
Date: March 3, 1999 */S/ Hollis L. Harris
--------------------------------
Hollis L. Harris, Director
Date: March 3, 1999 */S/ W. Stell Huie
--------------------------------
W. Stell Huie, Director
Date: March 3, 1999 */S/ Thomas F. Keller,
--------------------------------
Thomas F. Keller, Director
Date: March 3, 1999 */S/ James F. McDonald
--------------------------------
James F. McDonald, Director
Date: March 3, 1999 */S/ Daniel W. McGlaughlin
--------------------------------
Daniel W. McGlaughlin, Director
Date: March 3, 1999 */S/ C. Douglas Miller
--------------------------------
C. Douglas Miller, Director
Date: March 3, 1999 */S/ G. Harold Northrop
--------------------------------
G. Harold Northrop, Director
Date: March 3, 1999 */S/ Joe W. Rogers, Jr.
--------------------------------
Joe W. Rogers, Jr., Director
Date: March 3, 1999 */S/ William B. Stokely, III
--------------------------------
William B. Stokely, III, Director
*By: /S/ John H. Karr
-------------------------------
John H. Karr,
Attorney-in-Fact
21
22
SCHEDULE II
AMERICAN BUSINESS PRODUCTS, INC.
FINANCIAL STATEMENT SCHEDULE
AMERICAN BUSINESS PRODUCTS, INC. AND SUBSIDIARIES
VALUATION RESERVES
ADDITIONS
CHARGED TO OTHER CHARGES
BEGINNING COSTS AND ADD(DEDUCT) ENDING
DESCRIPTION BALANCE EXPENSES DESCRIBE(1) DEDUCTIONS(2) BALANCE
---------------------------------------------------------------------------
For the Year Ended December 31, 1996:
Allowance for doubtful accounts $2,581 $1,722 ($788) $1,812 $1,703
Allowance for inventory obsolescence $ 80 $ 269 -- -- $ 349
Restructuring reserve -- $8,334 -- $7,498 $ 836
For the Year Ended December 31, 1997:
Allowance for doubtful accounts $1,703 $1,314 -- $1,175 $1,842
Allowance for inventory obsolescence $ 349 $2,175 -- $ 230 $2,294
Restructuring reserve $ 836 -- -- $ 836 --
For the Year Ended December 31, 1998:
Allowance for doubtful accounts $1,842 $ 19 -- $ 728 $1,133
Allowance for inventory obsolescence $2,294 $ 376 -- $ 241 $2,429
(1) Sale of Vanier Graphics Corporation Assets on December 31, 1996.
(2) Deductions represent uncollectible accounts charged off, less recoveries;
inventory charged off; and payments against the restructuring reserve.
S-1
23
AMERICAN BUSINESS PRODUCTS, INC.
INDEX OF EXHIBITS
Where an exhibit is filed by incorporation by reference to a previously
filed registration statement or report, such registration statement or report is
identified in parentheses.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Articles of Incorporation (Exhibit 3(a), Annual Report on Form 10-K for
the fiscal year ended December 31, 1989, SEC File No. 1-7088.)
3.2 Restated Bylaws, as amended and restated on October 27, 1998 and
February 10, 1999, filed herewith.
4.1 Note Agreement dated as of October 1, 1990 among the Company and the
institutional investors listed on Schedule I thereto, together with the
form of 9.92% Senior Note to be used in connection therewith (Exhibit
4, Annual Report on Form 10-K for the fiscal year ended December 31,
1990, SEC File No. 1-7088.)
4.2 Note Agreement dated as of December 1, 1993 among the Company and the
institutional investors listed on Schedule I thereto, together with the
form of 5.77% Senior Note to be used in connection therewith. (Exhibit
4.2 Annual Report on Form 10-K for the fiscal year ended December 31,
1993, SEC File No. 1-7088.)
4.3 Form of Rights Agreement dated as of October 25, 1989 between the
Company and Citizens and Southern Trust Company (Georgia), N.A.
(Exhibit 4, Current Report on Form 8-K dated October 25, 1989, SEC File
No. 1-7088.)
4.4 First Amendment to Rights Agreement dated as of August 10, 1992 between
the Company and Wachovia Bank of North Carolina, N.A., as successor
Rights Agent (Exhibit 4(c), Annual Report on Form 10-K for the fiscal
year ended December 31, 1992, SEC File No. 1-7088.)
10.1 Executive Compensation Plans and Arrangements:
(a) Supplemental Retirement Income Plan (Exhibit 10(a), Annual
Report on Form 10-K for the fiscal year ended December 31,
1989, SEC File No. 1-7088.)
(b) Deferred Compensation Investment Plan (Directors) (Exhibit
10(b), Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, SEC File No. 1-7088.)
(c) Deferred Compensation Investment Plan (Executives) (Exhibit
10(c), Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, SEC File No. 1-7088.)
(d) 1981 Stock Option Plan (Exhibit 10(d), Annual Report on Form
10-K for the fiscal year ended December 31, 1989, SEC File No.
1-7088.)
E-1
24
(e) Deferred Compensation Plan for Directors (Exhibit 10(e),
Annual Report on Form 10-K for the fiscal year ended December
31, 1989, SEC File No. 1-7088.)
(f) American Business Products, Inc. Executive Retirement Plan
dated September 14, 1992 (Exhibit 10(h), Annual Report on Form
10-K for the fiscal year ended December 31, 1992, SEC File No.
1-7088.)
(g) 1991 Stock Option Plan, and First Amendment thereto. (Exhibit
10(g), Annual Report on Form 10-K for the fiscal year ended
December 31, 1993, SEC File No. 1-7088.)
(h) 1993 Directors Stock Incentive Plan (Exhibit 10(h), Annual
Report on Form 10-K for the fiscal year ended December 31,
1993, SEC File No. 1-7088.)
(i) Special Nonqualified Deferred Compensation Plan and related
Trust Agreement (Exhibit 10.1 (a) Quarterly Report on Form
10-Q for the quarter ended September 30, 1995.)
(j) Second Amendment to the 1991 Stock Option Plan (Exhibit 10.1
(a), Quarterly Report on Form 10-Q for the quarter ended June
30, 1995.)
(k) First Amendment to the Deferred Compensation Plan for
Directors (Exhibit 10.1 (a) Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996.)
(1) First Amendment to the 1993 Directors Stock Incentive Plan
(Exhibit 10.1 (1) Annual Report on Form 10-K for the Fiscal
Year ended December 31, 1996.)
(m) Second Amendment to the American Business Products, Inc.
Supplemental Retirement Income Plan (Exhibit 10.1 (a))
Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.)
(n) Second Amendment to the American Business Products, Inc.
Deferred Compensation Plan (Executives) (Exhibit 10.1 (b)
Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.)
(0) Agreement, dated May 8, 1997, between American Business
Products, Inc. and Raymond J. Wilson. (Exhibit 10.1(o) Annual
Report on Form 10-K for the fiscal year ended December 31,
1997.)
(p) Agreement, dated June 26, 1997, between American Business
Products, Inc. and John H. Karr. (Exhibit 10.1 (p) Annual
Report on Form 10-K for the fiscal year ended December 31,
1997.)
(q) Agreement, dated October 30, 1997, between American Business
Products, Inc. and Thomas R. Carmody. (Exhibit 10.l(q) Annual
Report on Form 10-K for the fiscal year ended December 31,
1997.)
(r) Separation Agreement, dated November 30, 1997, between
American Business Products, Inc. and Robert W. Gundeck.
(Exhibit 10.1(r) Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.)
E-2
25
(s) Agreement, dated February 14, 1998, between American Business
Products, Inc. and Richard G. Smith. (Exhibit 10.1(s) Annual
Report on Form 10-K for the fiscal year ended December 31,
1997.)
(t) Agreement, dated February 24, 1998, between American Business
Products, Inc. and Larry L. Gellerstedt, III. (Exhibit 10.1(t)
Annual Report on Form 10-K for the fiscal year ended December
31, 1997.)
(u) Second Amendment to the 1993 Directors Stock Incentive Plan.
(Exhibit 10.1 Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.)
(v) Agreement, dated March 24, 1998, between American Business
Products, Inc. and Christopher R. Williams, filed herewith.
(w) Agreement, dated July 27, 1998, between American Business
Products, Inc. and Sharon K. Gruber, filed herewith.
(x) Indemnification Agreement, dated August 19, 1998, between
American Business Products, Inc. and Richard G. Smith, filed
herewith.
10.2 Agreement for the Purchase of Stock dated as of September 21, 1990 by
and among the Company, Edward C. Leavy, Edward C. Leavy, Executor under
the will of Jean L. Leavy, and James B. Kauffman relating to the
purchase of Jen-Coat, Inc. (Exhibit 2, Current Report on Form 8-K,
dated October 1, 1990, SEC File No. 1-7088.)
10.3 (a) Stock Purchase Agreement dated September 1, 1993 among the
Company, Home Safety Equipment Co., Inc., and William
Frederick Conway, Sr., Betty Conway, Allen C. Conway, Winifred
Conway Arledge, William Frederick Conway, Jr., Winifred B.
Arledge, QSST Trust #1, Winifred B. Arledge, QSST Trust #2,
Allen C. Conway, QSST Trust #1, Allen C. Conway, QSST Trust
#2, Allen C. Conway, QSST Trust #3, and William Frederick
Conway, Jr., QSST Trust #1, William Frederick Conway, Jr.,
QSST Trust #2 (Exhibit 2, Current Report on Form 8-K dated
September 13, 1993, SEC File No. 1-7088.)
(b) Non-Competition Agreement dated as of August 10, 1993 by and
among William Frederick Conway, Sr., Betty Conway, Allen C.
Conway, Winifred Conway Arledge, Sol A. Arledge, and William
Frederick Conway, Jr. and the Company (Exhibit 99.1, Current
Report on Form 8-K, dated September 13, 1993, SEC File No.
1-7088.)
10.4 Revolving Credit Agreement dated as of April 22, 1996 by and between
American Business Products, Inc., and SunTrust Bank, Atlanta, (Exhibit
10.4 Annual Report on Form 10-K for the fiscal year ended December 31,
1996.)
10.5 First Amendment dated August 1, 1997 to Revolving Credit Agreement
dated April 22, 1997 by and between American Business Products, Inc.
and SunTrust Bank, Atlanta. (Exhibit 10.5 Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.)
10.6 Second Amendment dated December 31, 1997 to Revolving Credit Agreement
dated April 22, 1997 by and between American Business Products, Inc.
and SunTrust Bank, Atlanta (Exhibit 10.6 Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.)
E-3
26
21 Subsidiaries of the Registrant.
23 Independent Auditors' Consent.
24 Power of Attorney.
27 Financial Data Schedules (for SEC use only)
E-4
27
AMERICAN BUSINESS PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
(In thousands, except per share amounts)
1998 1997 1996
-------- -------- --------
NET SALES $461,270 $453,315 $568,275
COST AND EXPENSES
Cost of goods sold 322,654 320,585 398,342
Selling and administrative expenses 101,567 102,754 128,040
Restructuring and other charges 5,155 3,990 8,334
------- -------- --------
429,376 427,329 534,716
------- -------- --------
OPERATING INCOME 31,894 25,986 33,559
OTHER INCOME (EXPENSE)
Interest expense (7,122) (6,529) (7,841)
Interest expense 4,428 4,200 1,433
Miscellaneous-net 257 4,786 2,590
------- -------- --------
INCOME BEFORE INCOME TAXES 29,457 28,443 29,741
PROVISION FOR INCOME TAXES
Current
Federal 9,355 8,779 9,287
State 1,850 2,239 2,651
Deferred (85) (978) (836)
------- -------- --------
11,120 10,040 11,102
------- -------- --------
INCOME FROM CONTINUING OPERATIONS 18,337 18,403 18,639
DISCONTINUED OPERATION
Income from operations - net of
income taxes of $479, $631, and $1,883 637 839 2,415
Loss on disposal - net of income
tax benefit of $4,954 (7,187) -- --
------- -------- --------
INCOME (LOSS) FROM DISCONTINUED OPERATION (6,550) 839 2,415
------- -------- --------
NET INCOME $11,787 $19,242 $21,054
======= ======== ========
PER COMMON SHARE
Income from continuing operations
Basic $1.15 $1.12 $1.14
Diluted $1.15 $1.11 $1.13
Income (loss) from discontinued operation
Basic ($0.41) $0.05 $0.15
Diluted ($0.41) $0.05 $0.15
Net Income
Basic $0.74 $1.17 $1.28
Diluted $0.74 $1.16 $1.28
See Notes to Consolidated Financial Statements.
F-1
28
AMERICAN BUSINESS PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(In thousands, except share amounts)
1998 1997
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 60,034 $ 75,092
Accounts receivable, less allowances of $1,133 and $1,842 50,398 51,261
Inventories 32,044 29,882
Net assets of discontinued operation 15,000 7,447
Other 8,735 9,877
-------- --------
Total Current Assets 166,211 173,559
PROPERTY, PLANT AND EQUIPMENT -- AT COST
Land 2,523 2,461
Buildings and improvements 38,115 33,358
Machinery, equipment and software 82,252 84,825
Construction in progress 12,091 8,559
-------- --------
134,981 129,203
Less accumulated depreciation 57,640 55,696
-------- --------
77,341 73,507
INTANGIBLE ASSETS FROM ACQUISITIONS
Goodwill, less amortization of $5,863 and $4,970 26,339 27,232
Other, less amortization of $5,328 and $4,957 619 990
-------- --------
26,958 28,222
DEFERRED INCOME TAXES 14,724 13,945
NET ASSETS OF DISCONTINUED OPERATION -- 15,511
OTHER ASSETS 16,010 25,750
-------- --------
TOTAL ASSETS $301,244 $330,494
======== ========
CURRENT LIABILITIES
Accounts payable $ 45,881 $ 45,597
Salaries and wages 9,442 8,717
Profit sharing contributions 3,473 2,768
Current maturities of long-term debt 8,833 12,047
-------- --------
Total Current Liabilities 67,629 69,129
LONG-TERM DEBT 34,016 42,850
SUPPLEMENTAL RETIREMENT BENEFITS 20,418 19,831
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS 16,441 16,987
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY
Common stock - $2 par value, authorized 50,000,000
shares, issued 16,740,197 and 16,676,932 shares 33,480 33,354
Additional paid-in capital 8,169 7,144
Retained earnings 146,824 145,062
Accumulated other comprehensive income -- 261
-------- --------
188,473 185,821
Less 1,330,102 and 261,659 shares
of common stock in treasury - at cost 25,733 4,124
-------- --------
162,740 181,697
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $301,244 $330,494
======== ========
See Notes to Consolidated Financial Statements
F-2
29
AMERICAN BUSINESS PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share amounts)
ADDITIONAL
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME
BALANCE DECEMBER 31, 1995 16,582,209 $33,164 $5,701 $124,459
Net income 21,054 $ 21,054
Other comprehensive income(loss) 286
------------
Total comprehensive income $ 21,340
============
Dividends paid, $0.58 per share (9,510)
Exercise of stock options 38,039 77 405
Restricted stock awards 600 1 12
------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 16,620,848 33,242 6,118 136,003
Net income 19,242 $ 19,242
Other comprehensive income (loss) (390)
------------
Total comprehensive income $ 18,852
============
Dividends paid, $0.62 per share (10,183)
Exercise of stock options 55,084 110 1,004
Restricted stock awards 1,000 2 22
Repurchase of common stock
------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 16,676,932 33,354 7,144 145,062
Net income 11,787 $ 11,787
Other comprehensive income (loss) (261)
------------
Total comprehensive income $ 11,526
============
Dividends paid, $0.63 per share (10,025)
Exercise of stock options 50,823 101 771
Restricted stock awards 12,442 25 254
Repurchase of common stock
------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 16,740,197 $33,480 $8,169 $146,824
==================================================================
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE TREASURY STOCK STOCKHOLDERS'
INCOME SHARES AMOUNT EQUITY
BALANCE DECEMBER 31, 1995 $ 365 (204,232) $ (2,816) $ 160,873
Net income 21,054
Other comprehensive income(loss) 286 286
Total comprehensive income
Dividends paid, $0.58 per share (9,510)
Exercise of stock options (9,024) (207) 275
Restricted stock awards 13
------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 651 (213,256) (3,023) 172,991
Net income 19,242
Other comprehensive income (loss) (390) (390)
Total comprehensive income
Dividends paid, $0.62 per share (10,183)
Exercise of stock options (22,203) (535) 579
Restricted stock awards 24
Repurchase of common stock (26,200) (566) (566)
------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 261 (261,659) (4,124) 181,697
Net income 11,787
Other comprehensive income (loss) (261) (261)
Total comprehensive income
Dividends paid, $0.63 per share (10,025)
Exercise of stock options (943) (22) 850
Restricted stock awards 279
Repurchase of common stock (1,067,500) (21,587) (21,587)
------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 $ - (1,330,102) $(25,733) $ 162,740
==================================================================
See Notes to Consolidated Financial Statements
F-3
30
AMERICAN BUSINESS PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
(In thousands)
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Continuing operations
Income from continuing operations $ 18,337 $ 18,403 $ 18,639
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 12,285 11,697 14,842
(Gain)/loss on disposition of plant and equipment 4,094 (3,592) (3,333)
Loss on sale of foreign joint venture investment 1,849 -- --
Loss on disposition of Vanier assets -- -- 2,786
Change in assets and liabilities, excluding
effects of dispositions:
Decrease in accounts receivable 863 1,025 7,317
(Increase) decrease in inventories (2,162) 5,904 3,663
(Increase) decrease in other current assets 3,953 (533) (5,998)
(Increase) decrease in intangible and other assets (80) (2,225) 496
Increase in deferred income taxes (727) (1,005) (829)
Decrease in accounts payable (2,908) (77) (82)
Increase (decrease) in other current liabilities 1,581 (4,615) (3,990)
Increase (decrease) in supplemental retirement,
postemployment and postretirement benefits (43) 1,082 (182)
-------- -------- --------
Total adjustments 18,705 7,661 14,690
-------- -------- --------
Net cash provided by continuing operations 37,042 26,064 33,329
Discontinued operation
Income (loss) from discontinued operation (6,550) 839 2,415
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,610 2,583 2,371
Gain on disposition of plant and equipment (64) (39) (50)
Write-down of assets to net realizable value 10,993 -- --
Change in assets and liabilities:
(Increase) decrease in accounts receivable (2,193) 535 1,804
(Increase) decrease in inventories (50) 693 (82)
(Increase) decrease in other current assets (4,230) (255) 2
(Increase) decrease in intangible and other assets (40) 97 (47)
(Increase) decrease in deferred income taxes (52) 47 (110)
Increase (decrease) in accounts payable 4,634 (254) 146
Decrease in other current liabilities (151) (540) (736)
Increase in supplemental retirement,
postemployment and postretirement benefits 84 95 285
-------- -------- --------
Total adjustments 11,541 2,962 3,583
-------- -------- --------
Net cash provided by discontinued operation 4,991 3,801 5,998
Net cash provided by operating activities 42,033 29,865 39,327
(continued)
F-4
31
AMERICAN BUSINESS PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
(In thousands)
(continued)
1998 1997 1996
CASH FLOWS FROM INVESTING ACTIVITIES
Continuing operations
Disposition of Vanier assets -- -- 47,211
(Increase) decrease in cash value of life insurance 3,264 (1,472) 422
Proceeds from sale of foreign joint venture investment 4,446 -- --
Additions to property, plant and equipment (20,433) (17,084) (24,201)
Proceeds from disposition of property, plant and equipment 2,931 7,127 7,015
-------- -------- --------
(9,792) (11,429) 30,447
Discontinued operation
Additions to property, plant and equipment (4,875) (3,710) (4,206)
Proceeds from disposition of property, plant and equipment 107 104 147
-------- -------- --------
(4,768) (3,606) (4,059)
Net cash (used) provided by investing activities (14,560) (15,035) 26,388
CASH FLOWS FROM FINANCING ACTIVITIES
Continuing operations
Increase in long-term debt -- -- 6,460
Reductions of long-term debt (11,873) (11,933) (9,284)
Repurchase of common stock (21,587) (566) --
Sales and exchanges of common stock 1,129 603 288
Dividends paid (10,025) (10,183) (9,510)
-------- -------- --------
(42,356) (22,079) (12,046)
Discontinued operation
Reductions of long-term debt (175) (175) (176)
-------- -------- --------
Net cash used by financing activities (42,531) (22,254) (12,222)
Net (decrease) increase in cash and cash equivalents (15,058) (7,424) 53,493
Cash and cash equivalents at beginning of year 75,092 82,516 29,023
-------- -------- --------
Cash and cash equivalents at end of year $ 60,034 $ 75,092 $ 82,516
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (net of amount capitalized) $ 7,233 $ 7,740 $ 8,465
Income taxes $ 7,969 $ 11,099 $ 21,983
See Notes to Consolidated Financial Statements
F-5
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of American Business Products, Inc. and its subsidiaries (the
"Company"). Intercompany balances and transactions have been eliminated. These
financial statements have been prepared in accordance with generally accepted
accounting principles, which in certain instances requires the use of
management's estimates. Actual results could differ from those estimates.
NATURE OF OPERATIONS: The Company operates two businesses: specialty packaging
and printed office products. The Company's specialty packaging business is
comprised of three segments: the extrusion of polyethylene and other materials
onto papers and nonwovens used in packaging and other products, the manufacture
of soft packages including Tyvek@ mailers, and the manufacture of labels. The
Company's printed office products business is comprised of a single segment
which supplies custom-printed envelopes and labels, digital document services
and business forms. The markets for these products are located principally
throughout the continental United States.
CASH AND CASH EQUIVALENTS: The Company invests cash in excess of daily operating
requirements in income producing investments. Such amounts, stated at cost which
approximates market, at December 31, 1998 and 1997 were $53,876,000 and
$60,682,000, respectively. All such investments have an original maturity of 90
days or less and are considered to be cash equivalents. Amounts due banks upon
the clearance of certain checks under the Company's cash management program have
been included in accounts payable. At December 31, 1998 and 1997 such amounts
were $9,172,000 and $5,959,000, respectively.
INVENTORIES: Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
INTANGIBLE ASSETS: The excess of cost over amounts assigned to tangible assets
of purchased subsidiaries (goodwill) is being amortized on the straight-line
basis over periods of 15 to 40 years. The Company evaluates the net carrying
value of such assets based on expectations of nondiscounted cash flows of each
subsidiary for which such assets are recorded. The Company believes no material
impairment of such assets exists. Other acquired intangibles are principally
non-compete agreements and are being amortized on a straight-line basis over
seven years.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost.
Depreciation is computed using the straight-line method for financial reporting
purposes and accelerated depreciation methods for income tax purposes and for
continuing operations was $11,021,000, $10,433,000, and $12,855,000 for 1998,
1997 and 1996, respectively. Total depreciation expense, including the
discontinued operation, was $13,631,000, $13,016,000 and $15,226,000 for 1998,
1997 and 1996, respectively.
INCOME TAXES: Income taxes are accounted for under Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
In estimating future tax consequences, SFAS 109 generally considers all expected
future events other than proposed enactments of changes in the tax law or rates.
SOFTWARE: In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This new statement requires
capitalization of certain costs of computer software obtained for internal use.
The capitalized costs include the cost of designing the chosen path, coding,
installation of hardware and testing. Other costs associated with the
development and implementation of software systems are expensed
F-6
33
as incurred. The Company adopted this statement in the first quarter of 1998,
which did not result in a significant change from previous policies.
ENVIRONMENTAL COSTS: Environmental expenditures that relate to current
operations are expensed or capitalized as appropriate. Remediation costs of
existing conditions caused by past operations are accrued when it is probable
that a liability has been incurred and the cost can be reasonably estimated.
REVENUE RECOGNITION: Sales and related costs are generally recorded by the
Company upon shipment of products to its customers. Under contractual agreement
with customers, sales of certain custom products are recognized upon completion
of the order and invoiced under normal credit terms.
STOCK BASED COMPENSATION: As permitted under Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees", and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
Compensation cost for non-vested restricted stock awarded to an employee is
measured at the grant date based on the market price of a share of
non-restricted stock on the grant date. The compensation cost is recognized over
the vesting period.
NET INCOME PER COMMON SHARE: Net income per common share amounts are based upon
the weighted average number of common and common equivalent shares outstanding
during the respective years. The average number of common shares used in the
calculation of basic net income per common share was 15,947,591 in 1998,
16,421,808 in 1997, and 16,395,851 in 1996. The average number of common and
common equivalent shares used in the calculation of diluted net income per
common share was 16,003,543 in 1998, 16,525,309 in 1997 and 16,497,580 in 1996.
Options to purchase 571,852, 58,887 and 7,870 shares of common stock at prices
ranging from $20.75 to $27.50 per share were outstanding during 1998, 1997 and
1996, respectively but were not included in the computation of diluted net
income per share because the options' exercise price was greater than the
average market price of the common shares. The only common equivalent shares are
those related to stock options outstanding during the respective years.
FOREIGN CURRENCY TRANSLATION: The Company's former investment in a 50 percent
owned foreign joint venture was translated at the rate in effect at the balance
sheet date. The Company's share of net income of the joint venture was
translated at average exchange rates prevailing during the year. Resulting
translation adjustments were reported separately as a component of accumulated
other comprehensive income.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company has not completed the process of evaluating the
impact that will result from adopting SFAS 133. The Company is therefore unable
to disclose the impact that adopting SFAS 133 will have on its financial
position and results of operations when such statement is adopted.
SEGMENT INFORMATION: Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") which changes the method used
by the Company to report information about its operating segments. Information
for 1997 and 1996 has been restated to conform to the 1998 presentation. SFAS
F-7
34
131 establishes standards to be used by enterprises to identify and report
information about operating segments and for related disclosures about products
and services, geographic areas, and major customers. The adoption of SFAS 131
did not affect results of operations or financial position, but did affect the
disclosure of segment information contained in Note 14.
RECLASSIFICATION: Certain 1997 and 1996 amounts have been reclassified to
conform with the 1998 presentation.
2. DISCONTINUED OPERATION
On December 21, 1998, the Company announced its plan to sell the business of
BookCrafters USA, Inc., its hardcover and softcover book manufacturing and
distribution segment, to a third party. Accordingly, the segment was accounted
for as a discontinued operation in 1998. The Company has restated its prior
financial statements to present the operating results of BookCrafters USA, Inc.
as a discontinued operation. The Company expects to dispose of the business by
the end of 1999.
In 1998, the Company recorded an estimated loss of $7,187,000 after tax for the
disposal of the assets of the segment. The loss was based on the estimated
proceeds from the disposal and to accrue for expected operating results during
the phase-out period.
The following are the components of the net assets for discontinued operations
of BookCrafters USA, Inc.:
(In thousands) DECEMBER 31, 1998 DECEMBER 31, 1997
CURRENT NET ASSETS:
Accounts receivable $ 9,463 $ 7,270
Inventory 2,483 2,433
Other assets 5 31
Accounts payable (3,730) (2,287)
-------- --------
Total net current assets 8,221 7,447
-------- --------
LONG-TERM ASSETS:
Property, plant and equipment, net of accumulated
depreciation of $20,719 and $19,369 6,682 15,452
Other long-term 97 59
-------- --------
Total long-term assets 6,779 15,511
-------- --------
Net assets of Discontinued Operation $ 15,000 $ 22,958
======== ========
At December 31, 1998, assets are shown at their net realizable values and
liabilities are shown at their face amounts.
Summarized income statement information for BookCrafters USA, Inc. is as
follows:
(In thousands) 1998 1997 1996
Net Sales $49,707 $49,674 $53,895
Operating income $ 1,090 $ 1,687 $ 4,590
3. VANIER GRAPHICS CORPORATION
On December 31, 1996, the Company sold substantially all of the assets of its
subsidiary, Vanier Graphics Corporation ("Vanier"), for $47,211,000 in cash (the
"Vanier Sale"). Vanier was a business forms manufacturer and provider of forms
management and workflow analysis. The Company recorded a loss of approximately
$2,786,000 before tax on the sale which was included in miscellaneous-net
income. Vanier recorded sales of approximately $128,800,000 in 1996.
F-8
35
4. CURTIS 1000 EUROPE GMBH
Effective May 12, 1998, the Company sold its investment in Curtis 1000 Europe
GmbH, the Company's European envelope manufacturing joint venture. The Company
accounted for its investment using the equity method. Proceeds from the sale
were approximately $4,446,000, with an additional tax credit of approximately
$418,000 generated in connection with the sale. The Company recorded a loss of
approximately $1,849,000 before tax on the sale, which is included in
miscellaneous-net income.
5. RESTRUCTURING AND OTHER CHARGES
During 1998, the Company conducted a review of a custom-designed software system
that was being developed by Curtis 1000 Inc., the Company's printed office
products subsidiary. After extensive review, the Company discontinued the
software development project, which resulted in the Company recording a pre-tax
charge of approximately $5,155,000 to write off the Company's investment in the
project.
In 1997, the Company recognized charges against income, which included amounts
for management changes and reorganization, estimated penalties associated with a
take or pay contract with the purchaser of the Company's former business forms
manufacturing business, the cessation of manufacturing at a Company facility and
certain information systems asset impairments. The before tax amount of such
charges was $1,394,000 included in selling and administrative expenses,
$3,990,000 included in restructuring and other charges and $1,800,000 included
in miscellaneous-net income. The charge to restructuring and other charges
consisted of severance and other employee related costs of $1,569,000, lease
termination and other miscellaneous cost of $100,000 and information systems and
other fixed asset impairments of $2,321,000. Of the $1,669,000 restructuring
charge, cash expenditures of $1,156,000 and $109,000 were made against the
accrual in 1998 and 1997, respectively. Severance costs related to 93 employees,
primarily production and administrative personnel located at the closed facility
and management employees at Curtis 1000. Of these, 7 employees' employment
terminated in 1997, and 86 employees' employment terminated in 1998. The
information systems asset impairment charge was necessitated by a realization by
the Company that the planned benefits of the system would not be achieved. The
impairment of the other fixed assets was caused by the decision to cease
manufacturing at a Company facility. The remaining book value of the assets was
written off, as the assets will no longer be used.
In February 1996, the Company announced a restructuring plan (the "1996 Plan")
intended to reduce operating costs by closing 14 plants and transferring
production to larger facilities. As of December 31, 1997, the Company had closed
all 14 plants and transferred production to the larger facilities. As a result
of the 1996 Plan, the Company recorded restructuring and other charges to
operations in 1996 of $8,334,000, consisting of severance and other employee
related costs of $6,320,000, fixed asset write-downs of $427,000 and lease
termination and other miscellaneous costs of $1,587,000. Cash expenditures of
$7,498,000 were made against the restructuring accrual in 1996 with the balance
of approximately $836,000 made in 1997. Severance costs related to approximately
509 employees, primarily production and administrative personnel located at the
closed plants. Of these, 478 employees' employment terminated in 1996, and 31
employees' employment terminated in 1997.
As a result of the 1996 Plan and the Vanier Sale (Note 3), the Company sold
certain real estate assets resulting in gains of $499,000 in 1998, $2,909,000 in
1997 and $3,129,000 in 1996 which are included in miscellaneous-net income in
the accompanying Consolidated Statements of Income. The Company also had
approximately $0.8 million in real estate assets held for sale at December 31,
1998 which are classified as other current assets. The Company plans to sell
these assets in 1999. In addition, the Company has one facility under lease
until November 30, 2000 classified as property, plant and equipment. The lease
contains a purchase provision at the option of the lessee.
F-9
36
6. INVENTORIES
(In thousands) 1988 1997
Products finished or in process $ 17,118 $ 15,700
Raw materials 16,740 15,914
Supplies 615 562
-------- --------
34,473 32,176
Inventory obsolescence reserve (2,429) (2,294)
-------- --------
Net inventory $ 32,044 $ 29,882
======== ========
7. LONG-TERM DEBT
The components of long-term debt are as follows:
(In thousands) 1998 1997
Senior notes, 9.92%, due 1996 to 2000 $ 1,071 $ 5,357
Senior notes, 5.77%, due 1997 to 2003 34,286 41,143
Note payable to bank, variable at LIBOR
plus 1. 15%, 6.74% and 7.15% at
December 31, 1998 and 1997, principal due to 2000 324 552
Mortgage note, variable at 56% of bank's base rate
plus .25%, not to exceed 15%, 4.75% and 5.08% at
December 31, 1998 and 1997, principal due to 1999 500 1,000
Mortgage note, variable at 79.4% of prime rate
not to exceed 11.75%, 6.06% and 6.65% at
December 31, 1998 and 1997, principal due to 1999 176 351
Industrial revenue bonds due 2031, variable rate
4.10% and 4.30% at December 31, 1998 and 1997 6,460 6,460
Other 32 34
-------- --------
42,849 54,897
Less current maturities 8,833 12,047
-------- --------
$ 34,016 $ 42,850
======== ========
The Company has an unsecured committed revolving credit agreement (the "Credit
Agreement") with a bank, under which the Company may borrow up to $50.0 million
through April 22, 2001. The Credit Agreement provides for borrowing at rates
related to prime and Eurocurrency rates, and for payment of commitment fees on
the unused portion of the credit facility. Currently, the Company has no
outstanding borrowing under the Credit Agreement. Curtis 1000 Inc., a wholly
owned subsidiary, has borrowed approximately $6.5 million through a variable
interest rate industrial revenue bond (the "Bond") due May 1, 2031. The interest
rate on the Bond was 4.10% and 4.30% at December 31, 1998 and 1997,
respectively. The Bond is supported by a letter of credit issued pursuant to the
Credit Agreement, which commensurately reduces the balance available to the
Company under the Credit Agreement. The Credit Agreement provides for payment of
fees of 2/10% per annum on the amount of the letter of credit outstanding,
which was $6.6 million at December 31, 1998 and 1997.
The net carrying amount of plant, equipment and other assets assigned as
collateral to the Company's long-term debt obligations was approximately
$28,922,000 and $23,694,000 at December 31, 1998 and 1997, respectively. The
Company has agreed to certain restrictive covenants during the terms of some of
these agreements. Under the most restrictive of the covenants, the Company must
maintain tangible net worth not less than approximately $95,000,000 plus 25% of
net income earned after 1992 and must limit the amount of Senior Funded Debt to
not more than 40% of total capitalization. The aggregate amounts of long-term
debt maturing during the next five years and thereafter are approximately: 1999
- - $8,833,000; 2000 - $6,952,000; 2001 - $6,857,000; 2002 - $6,857,000; 2003-
$6,857,000; thereafter - $6,493,000. Loans from life insurance companies
aggregating approximately $47,600,000 and $45,600,000 are secured by the cash
values of the underlying life insurance policies of $51,600,000 and $49,500,000
at December
F-10
37
31, 1998 and 1997, respectively. Such loans have been netted against the cash
values. Interest is payable annually at rates ranging from 8% to 13%.
The fair value of the Company's long-term debt is based on management's estimate
of current market prices for the same issues. Fair value is estimated to be
$43,162,000 at December 31, 1998 and $54,088,000 at December 31, 1997.
8. INCOME TAXES
Deferred income taxes have been established for the effects of differences in
the bases of assets and liabilities for financial reporting and income tax
purposes.
The provision for income taxes is reconciled with the Federal statutory rate as
follows:
(In thousands) 1998 1997 1996
Income tax at Federal statutory rate $ 6,451 $ 10,469 $ 11,914
State income taxes net of Federal
income tax benefit 325 1,502 1,926
Non-taxable life insurance proceeds
and increase in cash value (1,105) (1,527) (1,078)
Loss associated with Curtis 1000 Europe GmbH 709 -- --
Other 265 227 223
------- -------- --------
Total provision $ 6,645 $ 10,671 $ 12,985
======= ======== ========
The income tax provision is summarized as follows:
(In thousands) 1998 1997 1996
Continuing operations $11,120 $ 10,040 $ 11,102
Discontinued operation (4,475) 631 1,883
------- -------- --------
$ 6,645 $ 10,671 $ 12,985
======= ======== ========
Components of the net deferred income tax asset at December 31, 1998 and 1997
are as follows:
(In thousands) 1998 1997
DEFERRED INCOME TAX ASSETS
Postretirement and postemployment benefits $ 14,815 $ 15,459
State net operating loss carryforward,
net of Federal benefit 1,577 1,415
Accrued vacation 1,424 1,174
Other 4,438 4,860
-------- --------
Gross deferred tax asset 22,254 22,908
Valuation allowance (1,572) (461)
-------- --------
20,682 22,447
-------- --------
DEFERRED INCOME TAX LIABILITIES
Property, plant and equipment 5,091 7,227
Federal effect of deferred state taxes 867 1,275
-------- --------
5,958 8,502
-------- --------
NET DEFERRED INCOME TAX ASSET $ 14,724 $ 13,945
======== ========
During 1998, the Company increased its deferred tax asset valuation allowance by
$1,111,000 due to state tax planning initiatives that, while reducing expected
future state taxes in aggregate, make it more likely than not that the Company
will not be able to fully realize the benefit of certain state net operating
loss
F-11
38
carryforwards. Management believes it is more likely than not that future
taxable income will be sufficient to realize fully the net deferred tax asset.
9. EMPLOYEE RETIREMENT PLANS
The Company has profit sharing and other retirement plans covering its
employees. The Company's contributions, which are discretionary, were
approximately $3,358,000 in 1998, $2,667,000 in 1997 and $4,520,000 in 1996.
Previously the Company entered into agreements with certain former and current
directors and key officers of the Company and its subsidiaries which provide for
nonfunded supplemental retirement benefits. No agreements have been entered into
since 1995. The Company has made current provisions for future payments due
under these agreements in 1998, 1997 and 1996 of $2,493,000, $1,479,000 and
$2,143,000, respectively. Included in the 1998 charge is approximately
$1,210,000 related to revaluation of the liability as a result of declining
interest rates. In January 1997, the Company entered into a springing note
payable whereby upon a change in control of the Company, amounts sufficient to
discharge the Company's obligations under these plans becomes due.
10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care and life insurance benefits for
eligible retired employees. Substantially all of the Company's employees may
become eligible for benefits if, after ten or more years of service, they reach
normal retirement age while working for the Company. The health care plan is
contributory and is adjusted periodically based on actual experience while the
life insurance plan is noncontributory. Neither plan is funded. The Company
accounts for these arrangements in accordance with Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions".
The Company made a plan modification during 1996 which became effective January
1, 1997 that increased its obligations for prior service costs by approximately
$472,000. Such amounts are being amortized over the remaining active service
periods of employees.
The following table presents a reconciliation of the Company's benefit
obligation:
(In thousands) 1998 1997 1996
Benefit obligation at beginning of year $16,424 $16,849 $20,703
Service cost 289 308 320
Interest cost 568 621 647
Net amortization (503) (471) (822)
Benefits paid (1,157) (883) (640)
Curtailment gain -- -- (3,359)
------- ------- -------
Benefit obligation at end of year $15,621 $16,424 $16,849
======= ======= =======
F-12
39
The following table presents a reconciliation of the plan's funded status at
December 31:
(In thousands) 1998 1997 1996
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION:
Retired employees $ 4,854 $ 4,884 $ 4,772
Fully eligible active employees 423 351 343
Other active employees 3,239 3,585 3,503
-------- ------- -------
8,516 8,820 8,618
-------- ------- -------
Unrecognized prior service cost reduction 7,153 7,194 7,665
Unrecognized net gain (loss) (48) 410 566
-------- ------- -------
Postretirement benefits $ 15,621 $16,424 $16,849
======== ======= =======
NET PERIODIC BENEFIT COST:
Service cost $ 289 $ 308 $ 320
Interest cost 568 621 647
Net amortization (503) (471) (822)
-------- ------- -------
$ 354 $ 458 $ 145
======== ======= =======
The introduction of the Medicare + Choice option for retiree health care as of
January 1, 1998 resulted in a decrease of $460,000 in the accumulated
postretirement benefit obligation, and a corresponding increase in unrecognized
prior service cost.
In addition to the net postretirement benefit expense, the Company recognized a
net curtailment gain in 1996 of $3,359,000 related to employee terminations due
to the Vanier sale.
The weighted average annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 8.5% for 1998,
decreasing 1.0% each year until 2001 when the trend rate will become level at
5.5%. The assumed health care cost trend rate has a significant effect on the
amounts reported. A 1% point change in the assumed health care cost trend rate
would have had the following effects on the 1998 service and interest cost and
the accumulated postretirement benefit obligation at December 31, 1998.
1 PERCENTAGE 1 PERCENTAGE
POINT INCREASE POINT DECREASE
Effect on service and interest cost $ 1,732 ($ 1,553)
Effect on APBO $ 17,655 ($16,403)
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 6.75% at December 31, 1998 and 7.25% at
December 31, 1997 and 1996.
11. COMMITMENTS AND CONTINGENCIES
Rental expense from continuing operations under operating leases was
approximately $4,126,000 in 1998, $3,713,000 in 1997 and $4,564,000 in 1996.
Minimum rental commitments from continuing operations under non-cancelable
leases other than capital leases are approximately: 1999 - $3,352,000; 2000
- -$2,646,000; 2001 - $2,143,000; 2002 - $906,000 and $69,000 thereafter.
F-13
40
The Company has committed to purchase miscellaneous plant and equipment and
retain consultants in the assistance of the Company's implementation of an
enterprise wide software solution. As of December 31, 1998, the Company has
signed contracts requiring remaining future payments of $6,621,000 once the
equipment and software is delivered and installed according to the terms of the
contracts.
In connection with the Vanier Sale, Vanier agreed to indemnify the purchaser
against certain potential liabilities and losses, including environmental. The
Company has agreed to guarantee Vanier's indemnification obligations and certain
other obligations entered into in connection with the Vanier Sale. Based on
information currently available, management does not expect the resolution of
the contingencies related to the Vanier Sale to have a material effect on its
financial statements.
In the opinion of management, no litigation or claims are pending against the
Company which are likely to have an adverse material effect on its financial
statements.
12. STOCK COMPENSATION PLANS
The Company currently has two stock compensation plans: the 1991 Stock Incentive
Plan, which was adopted in 1991 ("1991 Plan") and the 1993 Director's Stock
Incentive Plan, which was adopted in 1994 ("1993 Plan").
1991 Plan
The 1991 Plan is a nonqualified plan which replaced the expiring 1981 Stock
Option Plan ("1981 Plan"). Under both the 1991 and 1981 Plans, options could be
granted at fair market value to key employees. Twenty-five percent of each grant
becomes exercisable in each succeeding year and the maximum term of the options
is ten years. The weighted average fair value at date of grant for options
granted under the 1991 Plan during 1998 and 1997 was $5.30 and $4.38,
respectively. The weighted average fair value at date of grant for reload
options granted under the 1981 Plan during 1998 and 1997 was $3.89 and $3.49,
respectively. Reload grants carry the same vesting schedule and term as the
original grant. The 1991 Plan provides for restricted stock awards. The company
issued 11,142 shares of restricted stock in 1998 and no shares of restricted
stock in 1997. The weighted average fair market value per share at the date of
grant of shares issued in 1998 was $22.44. The Board of Directors may grant
options that include a stock appreciation feature under which employees may
elect to receive cash in lieu of Common Stock for up to 25% of the option
exercised. During 1998 and 1997, no such options were granted. The Company has
reserved 1,267,406 and 1,317,023 shares of Common Stock for issuance under the
1991 Plan at December 31, 1998 and 1997, respectively.
1993 Plan
The 1993 Plan is a nonqualified plan that prior to January 1, 1998 provided
stock options to directors who elected to forego all or a portion of the
director's retainer fee for the following year in exchange for an option to
purchase Common Stock. The number of options to be issued was determined by
dividing the foregone director's fee by one-half of the fair market value of the
Common Stock on the date of grant. The exercise price was equal to one-half of
the fair market value of the Common Stock on the date of grant for options
granted and these options are fully vested at the date of grant. Effective
January 1, 1998 the Board of Directors and shareholders adopted an amendment to
the 1993 Plan which eliminated the ability of directors to receive options in
lieu of fees, permits the committee administering the plan to grant options at
its discretion and makes other operative changes. Options granted on or after
January 1, 1998 are granted at a price equal to the fair market value on the
date of grant. One-third of each grant becomes exercisable in each succeeding
year and the maximum term of the options is ten years. The weighted average fair
value at date of grant for options granted under the 1993 Plan during 1998 and
1997 was $5.50 and $11.53, respectively.
F-14
41
The 1993 Plan also provides for restricted stock awards. In general, each
director was issued 300 shares of Common Stock upon adoption of the plan and new
directors are issued 200 shares upon election. Additional awards of 100 shares
will be made to each director annually, but no director will receive more than
2,000 shares of restricted stock. The Company issued 1,300 shares of restricted
stock in 1998 and 1,000 shares of restricted stock in 1997. The weighted average
fair market value per share at the date of grant of shares issued in 1998 and
1997 was $22.07 and $23.50, respectively. The Company had issued 6,200 and 4,900
shares of restricted stock pursuant to the 1993 plan at December 31, 1998 and
1997, respectively.
The Company has reserved 410,270 and 212,918 shares of Common Stock for issuance
under the 1993 Plan at December 31, 1998 and 1997, respectively. The amendment
mentioned above increased the aggregate number of shares authorized for issuance
under the 1993 Plan from 225,000 to 425,000.
Plans' Activity
The following table summarizes activity adjusted for stock splits in the
Company's stock option plans for each of the last three years:
1998 1997 1996
--------------------------------- ------------------------------ -----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- -------------- ---------- -------------- ------- --------------
Outstanding at January 1 741,710 $ 18.93 505,647 $ 17.61 394,881 $ 15.93
Issued at fair value 466,743 $ 21.63 310,612 $ 20.49 159,532 $ 20.86
Issued at less than fair
value -- -- 6,385 $ 11.75 6,740 $ 11.13
Exercised (39,823) $ 15.14 (66,084) $ 15.61 (38,039) $ 12.67
Cancelled (102,228) $ 20.60 (14,850) $ 18.35 (17,467) $ 17.63
---------- --------- --------
Outstanding at Dec 31 1,066,402 $ 20.09 741,710 $ 18.93 505,647 $ 17.61
========== ========= ========
Exercisable at Dec 31 391,957 $ 18.52 348,934 $ 17.82 208,302 $ 15.63
========== ========= ========
The following table summarizes information about stock options at December 31,
1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- --------------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
$ 7.33 - $19.50 208,050 4.69 $ 15.69 193,873 $15.50
$ 19.81 - $19.81 281,500 7.50 $ 19.81 65,881 $19.81
$ 20.25 - $21.00 90,569 6.26 $ 20.75 43,795 $20.75
$ 21.56 - $21.56 336,800 9.94 $ 21.56 -- --
$ 22.25 - $27.50 149,483 7.83 $ 23.02 88,408 $23.07
--------- ---------
$ 7.33 - $27.50 1,066,402 7.66 $ 20.09 391,957 $18.52
========= =========
F-15
42
Compensation cost charged to operations was $278,700 in 1998, $98,500 in 1997
and $87,900 in 1996. Had compensation cost been determined on the basis of fair
value pursuant to SFAS 123, net income and earnings per share would have been
reduced as follows:
1998 1997 1996
Net Income
As reported $ 11,787 $ 19,242 $ 21,054
Pro forma $ 11,066 $ 18,958 $ 20,810
Basic earnings per share
As reported $ 0.74 $ 1.17 $ 1.28
Pro forma $ 0.69 $ 1.15 $ 1.27
Diluted earnings per share
As reported $ 0.74 $ 1.16 $ 1.28
Pro forma $ 0.69 $ 1.15 $ 1.26
The effect on 1998, 1997 and 1996 net earnings is not representative of the
effect on net earnings in future years because it does not take into
consideration compensation expense related to grants made prior to 1995. The
fair value of options at date of grant was estimated using the Black-Scholes
Model with the following weighted average assumptions:
1998 1997 1996
Expected life (years) 4.97 3.56 5.00
Interest rate 4.57% 5.83% 6.40%
Volatility 33.00% 30.00% 28.00%
Dividend yield 3.69% 3.67% 3.25%
13. STOCKHOLDERS' EQUITY
The Company has authorized 500,000 shares of Preferred Stock without par value.
No shares have been issued.
On October 25, 1989, the Board of Directors adopted a Share Rights Plan and
declared a dividend of one Right for each outstanding share of Common Stock on
November 6, 1989. Such Rights become exercisable or transferable apart from the
Common Stock, twenty days after a person or group (Acquiring Person) has
acquired beneficial ownership of 20% of the Common Stock or after a person or
group has acquired beneficial ownership of 10% of the Common Stock and, after
reasonable inquiry and investigation, has been declared by the Board of
Directors to be an "Adverse Person". Each Right then may be exercised to acquire
a number of shares of Common Stock equal to one share of Common Stock multiplied
by a fraction, the numerator of which is the number of shares of Common Stock
outstanding on the date that an Acquiring Person or an Adverse Person was first
determined to be such (Stock Acquisition Date) and the denominator of which is
the number of Rights outstanding on the Stock Acquisition Date that are not
owned by the Acquiring Person or Adverse Person. The price to be paid for each
share of Common Stock acquired by exercise of Rights is 20% of market value on
the Stock Acquisition Date. In general, the Rights may be redeemed by the
Company at a price of $0.01 at any time until twenty days following the Stock
Acquisition Date. The Rights will expire on November 6, 1999.
F-16
43
14. BUSINESS SEGMENT INFORMATION
Net External Net Internal Depreciation & Capital Identifiable Operating
(In Thousands) Sales Sales Amortization Expenditures Assets Profit
YEAR ENDED DECEMBER 31, 1998
Extrusion Coating & Laminating $124,167 $ 799 $ 3,326 $ 8,198 $ 65,420 $ 13,817
Soft Packaging 88,553 6,443 2,247 2,159 36,318 5,568
Labels 59,973 4,452 3,368 3,850 37,752 10,272
-------- ------- ------- ------- -------- --------
Total Specialty Packaging Business 272,693 11,694 8,941 14,207 139,490 29,657
Printed Office Products 188,577 14 3,148 3,921 48,419 7,198
Corporate -- -- 196 2,305 113,335 (4,704)
-------- ------- ------- ------- -------- --------
Total $461,270 $11,708 $12,285 $20,433 $301,244 $ 32,151
======== ======= ======= ======= ======== ========
YEAR ENDED DECEMBER 31, 1997
Extrusion Coating & Laminating $118,738 $ 1,318 $ 2,977 $ 7,301 $ 60,032 $ 13,513
Soft Packaging 83,700 8,267 2,335 1,308 33,967 3,810
Labels 55,657 6,237 3,296 2,533 36,873 9,844
-------- ------- ------- ------- -------- --------
Total Specialty Packaging Business 258,095 15,822 8,608 11,142 130,872 27,167
Printed Office Products 195,220 2 2,815 5,884 68,310 8,475
Corporate -- -- 274 58 131,312 (4,870)
-------- ------- ------- ------- -------- --------
Total $453,315 $15,824 $11,697 $17,084 $330,494 $ 30,772
======== ======= ======= ======= ======== ========
YEAR ENDED DECEMBER 31, 1996
Extrusion Coating & Laminating $108,005 $ 525 $ 2,703 $ 4,584 $ 55,084 $ 14,223
Soft Packaging 75,050 8,835 2,011 1,694 39,591 6,581
Labels 49,411 6,547 3,353 2,152 37,147 6,349
-------- ------- ------- ------- -------- --------
Total Specialty Packaging Business 232,466 15,907 8,067 8,430 131,822 27,153
Printed Office Products 335,809 77 6,424 15,554 80,845 11,459
Corporate -- -- 351 217 125,104 (2,463)
-------- ------- ------- ------- -------- --------
Total $568,275 $15,984 $14,842 $24,201 $337,771 $ 36,149
======== ======= ======= ======= ======== ========
The Company operates two businesses: specialty packaging and printed office
products. The Company's specialty packaging business is comprised of three
segments: the extrusion of polyethylene and other materials onto papers and
nonwovens used in packaging and other products, the manufacture of soft packages
including Tyvek(R) mailers, and the manufacture of labels. The Company's printed
office products business is comprised of a single segment, which supplies
custom-printed envelopes and labels, digital document services and business
forms.
In all material respects, the Company accounts for intercompany sales and
transfers as if the sales or transfers were to third parties.
Operating profit for each segment is adjusted income before interest and taxes,
which is income before interest and taxes adjusted to include, in lieu of
corporate expense allocations, a capital charge equal to 2.5% of the invested
capital used in the business segment, which has been netted with Corporate.
Identifiable assets are those assets used in each segment's operation. Corporate
assets consist of cash and cash equivalents, certain non-current assets used by
multiple segments, including enterprise-wide software, other current and
non-current assets not used by segments, and net assets of discontinued
operation.
F-17
44
Following is a reconciliation of operating profit to Income before Income Taxes
(in thousands) 1998 1997 1996
Operating profit $32,151 $ 30,772 $36,149
Interest Expense (7,122) (6,529) (7,841)
Interest Income 4,428 4,200 1,433
------- -------- -------
Income before Income Taxes $29,457 $ 28,443 $29,741
======= ======== =======
ENTERPRISE-WIDE INFORMATION
The Company's revenue was attributed to the following geographic areas:
(In thousands) 1998 1997 1996
Domestic $453,948 $445,914 $560,814
Foreign 7,322 7,401 7,461
-------- -------- --------
Total $461,270 $453,315 $568,275
======== ======== ========
All of the Company's assets are located within the continental United States,
No customer accounted for greater than 10% of the Company's revenues.
F-18
45
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
American Business Products, Inc.
We have audited the accompanying consolidated balance sheets of American
Business Products, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and financial statement schedules are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on the financial statements and financial statement schedules 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, such consolidated financial statements present fairly, in all
material respects, the financial position of American Business Products, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
- --------------------------
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 11, 1999
F-19
46
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.2 Restated Bylaws, amended and restated on October 27, 1998 and
February 10, 1999.
10.1(v) Agreement, dated March 24, 1998, between American Business
Products, Inc. and Christopher R. Williams.
10.1(w) Agreement, dated July 27, 1998, between American Business
Products, Inc. and Sharon K. Gruber.
10.1(x) Indemnification Agreement, dated August 19, 1998, between
American Business Products, Inc. and Richard G. Smith.
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
24 Power of Attorney
27 Financial Data Schedules (for SEC use only)
Cover Letter