Item 1. Business
FiberMark believes it is a leading manufacturer and converter of specialty fiber-based products with a wide range of consumer and industrial end-uses. Through its ten United States paper mills and converting facilities, the Company has focused on niche markets where it can provide high value-added products which meet rigorous technical specifications and customer service requirements.
The Company's products serve four distinct markets and are sold for worldwide distribution to customers who manufacture end-use products.
Overview
The Company has four distinctive categories of products. The following table provides an overview of the Company's product lines and facilities:
Strategy
The Company's strategy is to increase sales and earnings by consolidating and strengthening core product lines, by rationalizing production capacity and by pursuing selected strategic acquisitions. The following are the key elements of this strategy:
* Consolidate and Strengthen Core Product Lines. In the third quarter of 1996, the Company acquired CPG Investors, Inc. ("CPG") and Arcon Holdings Corp. ("Arcon"). CPG and Arcon have an array of products which complement FiberMark's core product lines. By consolidating these products and streamlining and focusing its marketing efforts, the Company believes that it will strengthen its core product lines in office products, technical specialty products, durable specialty products and filter products.
* Rationalize Overhead and Production Capacity. The Company believes that the acquisitions completed in 1996 provide opportunities for the Company to eliminate redundant overhead, rationalize inefficient facilities and optimize the manufacturing of the Company's products over its existing capital equipment base.
* Strategic Acquisitions. The Company intends to continue pursuing growth through the acquisition of complementary businesses which provide opportunities to enhance the Company's core product lines and create operating efficiencies.
* Invest in Capital Improvements. The Company seeks to reduce costs, increase capacity, enhance manufacturing capabilities and improve product quality through selected capital investments. The Company has invested approximately $20 million in new equipment, technology and leasehold improvements at its facilities over the past 12 months and plans to invest significant additional capital in facilities and equipment over the next 12 to 24 months.
* Increase Utilization of Recycled Fiber. The Company intends to continue to capitalize on its position as a leading manufacturer of specialty paper products with recycled fiber content. The Company's office product line contains between 25% and 100% recycled materials, depending on paper grades. The Company continually seeks to increase the recycled content of its products to reduce costs and better service customer demands for recycled content while still meeting performance expectations. See "Business ---Manufacturing--- Use of Recycled Fiber."
* Expand International Sales. While FiberMark historically has devoted increasing resources to its international marketing efforts, the CPG and Arcon businesses acquired in 1996 have not had a similar focus on these markets. FiberMark has an established network of international sales offices and sales agents which sell FiberMark's existing range of products. FiberMark believes that by using this sales and distribution network it will be able to generate incremental sales of product lines obtained in the acquisitions of CPG and Arcon.
Office Products
Market. The Company manufactures a wide range of materials used in the manufacture of office products. Management believes that the Company is the largest domestic supplier of pressboard, which is converted into data binders, notebook covers, report covers, ring binders, and file and index guides. The Company also pursues niche markets within the office supplies market where its capabilities and customer relationships give it a competitive advantage.
The total North American market for office supplies at the wholesale level was approximately $26.6 billion in 1995, as measured by the Business Products Industry Association. The Company competes in an approximately $3.0 billion segment of this market comprised primarily of market categories containing hanging files, expandable folders, date books, ring binders, report covers and file and index cards. Based on Business Products Industry Association statistics, the Company estimates that this market has grown at a compound annual growth rate of approximately 2.0% annually since 1991.
Products. The table below sets forth the primary office product materials produced by the Company.
The Company's largest product is a heavyweight paperboard (pressboard) which is densified through a proprietary manufacturing process developed by the Company. This densification process provides pressboard with the strength, rigidity, durability and appearance required for data binders, ring binders, notebook covers and report covers. The Company offers many pressboard products in acrylic coated and embossed form, providing additional durability and moisture and stain resistance. The Company has the capability to custom manufacture pressboard in a variety of colors and can finish its pressboard products to customer specifications, including glazing (densification), coating, embossing, laminating, sheeting, slitting and rewinding. The Company and its predecessors have offered their pressboard line of products for over 75 years and believes it has established significant brand awareness and loyalty among its customers.
The Company produces certain types of lightweight filing and cover materials for conversion into file folders, expanding wallets, notebook covers and report covers. The Company is continuing its focus on certain products for the lightweight filing and cover material market, such as colored file folder and report covers for the growing on-demand document printing market, with specific emphasis on products with substantial recycled content. The Company's lightweight filing and cover materials are generally manufactured using similar equipment and processes and are sold to many of the same customers as the Company's heavyweight office products. The Brattleboro paper machine upgrade, completed in October 1995, expanded the machines ability to use lower-cost recycled fiber and its capacity to produce lighter weight grades used in filing and cover applications. The Company is working to build this lightweight business through the strength of its relationships with office products converters. These lightweight materials, coupled with the increasing consumer demand for recycled paper products, provide an opportunity for the Company to increase its penetration in the office products market.
The Company manufactures a line of premium cover and text papers sold through paper distributors to commercial printers. These papers have good strength and may have colored or textured surfaces and are typically used for printed report covers and promotional and advertising materials.
Customers. The Company sells its office products through its own sales representatives to major domestic office product converters, including: Acco World Corporation, a division of American Brands Inc.; Ampad Corp.; Smead Manufacturing Company; Esselte Pendaflex Corp.; Mead Corp.; and Avery Dennison Corp. These customers collectively account for the majority of the Company's sales of office product materials with the remainder of the Company's sales being accounted for by smaller independent manufacturers. The Company has long-term relationships with all of its major customers in this market. The Company's customers produce office products from the Company's paper-based materials and sell end-use products through contract stationers, office product wholesalers, buying groups, ware house clubs, catalog sales, office products superstores, retail office supply stores and other outlets. The Company also markets its materials through direct sales representatives or manufacturer's representatives in Asia, Canada, Mexico, Central and South America and Europe.
Competition. In the office products supply market, the Company competes with a number of other producers of heavyweight pressboard, colored file folder paper and lightweight filing and cover materials, including International Paper Company ("International Paper"), Temple-Inland Inc., Brownville Specialty Products, Merrimac Paper Co., Inc. ("Merrimac"). The Company believes it holds a leading position in the domestic market for pressboard and a growing presence in the lightweight filing and cover materials market. In markets that use pressboard, the Company also competes with producers of vinyl and plastic office product materials. In the premium cover and text market, the Company also competes against divisions of Georgia Pacific Corp., Fox River Paper Co., Crown Vantage Inc. and a number of smaller paper manufacturers.
Technical Specialty Products
Market. The Company manufactures specialty paper products with customized physical performance characteristics which meet the unique requirements of specific end-use markets. Technical specialty products include paper used as insulation material in electrical transformer coils, acid-free picture mounting art board used for archival quality picture mounting and records storage applications, photographic packaging papers, printed circuit board papers, wet strength tag used primarily in the laundry and dry-cleaning industries and paper backings for sandpaper and other abrasives. The Company has been able to successfully enter niche markets in the technical specialties area in which it believes its manufacturing flexibility and technical expertise give it a competitive advantage in meeting rigorous customer requirements. The Company believes that it is a market leader in many of its markets, including electrical transformer papers, acid-free picture mounting art board and photographic packaging papers. Many of the Company's technical specialty products have been used in their current applications for many years and have proven to be cost-effective in meeting the performance requirements for which they are utilized. To supplement these products, the Company works to develop new products which have the potential to experience rapid growth due to superior performance, lower cost or both.
The company also believes that it is one of the two leading domestic producers of latex-reinforced material used in book covers and related products. These materials are used by customers in applications where durability and distinctive appearance are important, such as flexible covers for books, menus, photo albums, desktop calendars, appointment books and reports.
Products. The table below sets forth the Company's principal technical specialty products:
The Company is a leading supplier of electrical transformer papers with high dielectric strength which are wrapped around individual electrical transformer coils as insulating material. The Company is the major supplier of such paper to Bedford Materials, Inc., which operates the transformer insulation business formerly owned by Westinghouse Electrical Corp., and is one of two major suppliers to the other major U.S. manufacturer of electrical transformers.
The Company believes that it is a leading provider of acid-free board used as picture mounting art board and archival storage media. Acid-free picture mounting art board and storage media are designed to prevent the degradation and discoloration of artwork and documents caused by acidic exposure. The Company believes that these superior performance characteristics have resulted in wide acceptance of the Company's acid-free products.
The Company's photographic packaging papers are primarily dual composition papers used by Eastman Kodak Company ("Kodak") and Polaroid Corp. ("Polaroid") to package certain films. Such products must meet demanding standards for opacity in order to prevent premature exposure of the film. The
Company's strong position in the market for photographic packaging papers is based in part upon the Company's ability to manufacture multi-ply paper.
The Company also manufactures printed circuit board papers which are used in the manufacture of circuit boards for remote control devices and other electrical components. The Company's printed circuit board papers have the advantage of low density and high bulk, allowing circuit board manufacturers to lower their costs and increase their output by processing fewer sheets than they would with competing materials.
The Company's wet strength papers are primarily used as tags in the laundry and dry cleaning industries to identify clothing as it is processed through washing machines and dry cleaning equipment. These products, in addition to withstanding physically and chemically harsh processes, are manufactured in multiple colors that must not be transferred onto the clothing to which they are attached. The Company is a major producer of this paper in the United States and is now exporting to the United Kingdom, with opportunities to expand into other European markets.
Sandpaper and other abrasive backing papers are used in the manufacture of heavyweight sandpaper and other commercial abrasives. The Company's sandpaper and other abrasive backing papers are designed to meet customers' exacting specifications for tear strength, smooth surfaces and controlled electrostatic properties.
Using proprietary manufacturing processes, the Company combines pulp, latex, recycled rag fiber and other materials to produce flexible and durable specialty materials for use in a variety of book cover applications. The Company sells its book cover materials directly to customers in this market, who in turn coat, emboss and decorate the material and sell it to manufacturers of end-use products. The Company's primary latex product is manufactured using recycled rag fibers, resulting in increased durability and a leather-like texture and appearance. These products are used for day books, diaries, menu covers and soft-cover books. The Company is also a leading supplier of light-weight materials used in covering hardbound books.
Customers. The Company sells its technical specialty papers through its own sales force to a variety of customers. Major customers include: Bedford Materials, Inc. and the TMC division of Avery Dennison Corp. (electrical transformer paper); the Nielsen and Bainbridge division of Esselte Corp. and the Crescent Cardboard division of Potomac Corp. (acid free papers); Kodak and Polaroid (photographic packaging papers). Other clients include the AlliedSignal Corp. (printed circuit board paper), PermaFiber Corp. (wet strength tags), 3M (abrasive backings), Coating Technologies, Inc. (book cover) and various commercial printers. The Company works with its customers to develop new products and to provide technical support for existing products.
Competition. The Company's competitors in technical specialty papers vary by product type. Generally, the Company faces competition from both foreign and domestic specialty manufacturers. The Company's focus is to compete n products and markets which require manufacturing flexibility, product properties and quality levels not provided by integrated paper mills. The Company's key competitors include Kimberly Clark, The Sorg Paper Company, a subsidiary of Mosinee Paper Company, Arjo Wiggins USA, Inc., Robert Cordier AG and Merrimac. In the latex-reinforced book cover market, the Company primarily competes with Rexam DSI, Inc. and, to a lesser degree, with products of plastic-coated and coated cloth book cover materials.
Durable Specialty Products
Market. The primary markets for the Company's durable specialty products are tape substrates (primarily industrial and consumer masking tapes), binding tapes and hinge and reinforcing tapes, and book cover materials. There are seven major North American producers of pressure sensitive tape, who, together, account for approximately 80% of the industry's total sales. Most of these producers have self-saturating capabilities for general purpose tapes and look to suppliers like the Company for specialty paper backings.
The Company believes it is a leading supplier of binding tapes and hinge and reinforcing tapes converted from specialty papers and substitutes for the manufacture of notepads, books, expandable file folders and checkbooks.
The Company has also sought out for its durable specialty products niche markets in which it believes it can have a competitive advantage. The Company produces high strength materials used in the apparel industry as blue jean tags and for various other tag and label applications.
Products. The following table sets forth the Company's principal durable specialty products.
The Company is one of the largest producers of specialty tape substrates and a broad range of saturated, coated and non-woven papers. The Company's tape substrates are used in the manufacture of industrial and consumer masking tapes, barrier tapes, other pressure-sensitive tapes and bandoliering tapes. The Company's products have the strength and technical properties to meet various performance demands. These products include barrier-coated and heat resistant industrial masking tapes for the automotive paint and aircraft manufacturing industries and packaging tapes which withstand the rigors of the worldwide shipping. The Company's bandoliering tapes are used by the electronics industry to carry resistors, capacitators and other items during high-speed automated assembly of electronic devices.
The Company is a leading producer of high strength binding tapes and hinge and reinforcing tape using Tyvek(R) as a base material. These products are primarily used to protect, bind and decorate books and documents, checkbooks and notepads. The Company's Tyvek(R) tapes, marketed under the trade name Super ArcoFlex(TM), are used to decorate pad bindings and are able to withstand the stress incurred during cutting in high volume manufacturing. The Company also uses Tyvek(R) in the manufacture of supported gussets for red wallet expansion folders. Gussets are the accordion folder material between the two folder side sheets that allow the folder to expand. The Company has developed a method to strengthen the gussets by laminating coated Tyvek(R) to the cardboard forming the gusset and sells this material under the name Expanlin. The Company also sells coated Tyvek(R) to converters who laminate it to the cardboard themselves. The result is a material that is stronger, longer lasting and more reliable than unsupported gussets and, as a result, the Company believes that Expanlin has become the preferred material used in supported gussets by expansion folder manufacturers.
Other durable specialty products include imitation leatherstock which is sold to garment label manufacturers who cut and print the material with various brand and product information for use as blue jean tags. This material is expected to maintain its crisp appearance after repeated washing cycles. The Company has also developed a tag and label product line for manufacturers who require tags and labels with the strength of Tyvek(R). These products can be color-coated and are used as luggage tags by the airline industry, as flame-retardant labels for the automotive industry and other types of demanding packaging applications.
Customers. The Company offers its customers a broad product line with flexible product development and manufacturing capabilities. This flexibility has fostered long-term relationships with its client base. The Company sells its specialty tape substrates to many of the leading tape manufacturers, including American Tape Company and 3M. The Company believes that the international customer base for these products may increase as the Company's sales force is trained to sell these additional product lines. In the checkbook industry, the Company's major customer is Deluxe Check Printers, a division of Deluxe Corp. The Company sells blue jean tags and its other tag and label products to a variety of converters and end-users.
Competition. For tape backing the Company primarily competes against Kimberly-Clark, Inc. In the binding tape and hinge and reinforcing tape markets, the Company competes against several smaller competitors including Rexford Paper Co., Northeast Paper Converting Company and Southern Label Company, Inc. The Company believes it holds a leading position in the market for Tyvek(R) based binding tapes and hinge and reinforcing tapes. In other niche markets, the Company competes with various small competitors, none of which has a dominant market position.
Filter Products
Market. The Company is a major supplier of saturated and non-saturated filter papers used in fluid and air filters for the automotive and heavy duty truck and equipment industries. The Company estimates that the market for both saturated and non-saturated papers was approximately $160 million in 1995, of which approximately 90% was utilized in the automotive and heavy duty truck and equipment markets. The other major market for these products is for filters used to purify the solvents used in the dry cleaning industry. The five largest manufacturers account for over 60% of total sales to the U.S. automotive and heavy truck and equipment filter paper market. The market for automotive and heavy duty truck and equipment filters has grown at a compound annual growth rate of approximately 5.7% over the ten-year period from 1985-1995. The Company also manufactures industrial filter paper used in a variety of applications and processes.
Products. The table below sets forth the primary materials produced by the Company for use in filter applications.
The Company's major filter product is solvent-based saturated filter paper, which is controlled porosity paper saturated with phenolic and other resins to increase its strength and rigidity for use in various high temperature applications. This product is purchased by filter manufacturers who cut, pleat and cure the paper for use in oil, fuel and hydraulic fluid filters for heavy and light duty trucks and passenger cars. These filters are sold primarily to the replacement market but also to original equipment manufacturers. The Company manufactures many grades of saturated filter paper to specifications provided by its customers. The Company believes that it is one of the three largest producers of saturated filter paper in the United States.
The Company also produces non-saturated filter paper. This category includes non-saturated paper containing activated carbons and other fillers and edge filter media. Primary uses of non-saturated filter paper include oil filtration in heavy equipment and diesel trucks and home water filters. In addition, the Company produces industrial filter papers for various food service and industrial applications, including filtration of hot oil used in fast-food preparation, the manufacture of paints and lacquers and the processing of fruit juices.
The Company is nearing completion of a capital improvement plan that will increase its annual saturated filter paper capacity at its Richmond mill by over 50%. In addition, the Company has improved its manufacturing processes at these facilities to increase productivity and lower its costs.
Customers. The Company sells its filter products primarily through its own sales staff directly to its customers. Principal customers for the Company's saturated filter papers include the Fleetguard Filtration Systems division of Cummins Engine Co., Inc. ("Fleetguard"), the Delphi Automotive Systems division of General Motors Corp. ("General Motors"), AlliedSignal, Inc. (Fram filters), Purolator Products, Inc. and Miki Sangyo U.S.A. Inc., a trading company and the major supplier of filter paper used in filters supplied to the U.S. manufacturing sites of Nissan Motor Co., Ltd. and Honda Motor Co., Ltd. The Company's saturated filter paper is used to make filters which are used on vehicles manufactured by General Motors, Chrysler Corp. and Ford Motor Corp. Fleetguard is also the Company's primary customer for non-saturated filter papers. The Company has long-term relationships with its customers and believes that these relationships with its customers are based on its ability to provide superior service and technical support.
The Company's major customers for its industrial filter paper products include National Filters, Inc. and Lubrizol Corp. for commercial manufacturing applications, Seneca Foods Corp. for food processing applications and the KFC North America division of PepsiCo Inc. in the hot oil filter market. In addition, the Company supplies industrial filter papers to various smaller manufacturers and users.
Competition. The Company's primary competition in solvent-based saturated filter papers comes from Ahlstrom Filtration, Inc. ("Ahlstrom"), a division of A. Ahlstrom Corp. In addition, the Hollingsworth & Vose Company is the dominant manufacturer of water-based saturated filter papers, a market in which the Company has a smaller presence. To the extent that industry efforts to develop water-based alternatives to solvent-based saturated filter papers are successful, the Company's solvent- based filterpapers may face increased competition from such water-based alternatives.
In the markets for non-saturated filter papers and industrial filter papers, the Company competes primarily with Ahlstrom, Knowlton Specialty Papers, Inc. and Lydall, Inc. In each of these markets, producers tend to manufacture custom designed products on an exclusive basis for their customers.
Manufacturing
Mills and Converting Facilities. The Company operates ten facilities of which eight are owned and two are leased. The Company intends to close the former Arcon facility in Oceanside by early 1997 and relocate those operations to the Company's facility in Quakertown.
Office Products. The Company's main mill for the production of office products is located in Brattleboro. Mills located at Warren Glen and Hughesville also produce office products materials. Recent improvements have included an upgrade to the Brattleboro mill which is expected to increase its capacity, and will enable it to utilize a higher percentage of recycled fiber and produce a new range of lighter weight products. The Company has also recently completed a series of capital improvements at its Warren Glen mill, which have increased productivity, reduced costs and waste and increased the ability of the mill to use recycled fiber.
The cylinder paper machines in use at the Brattleboro and Warren Glen mills are configured to produce a broad range of highly densified heavyweight pressboard products of various weights, colors and finishes. The machine in the Brattleboro mill features computer-controlled monitoring of color, weight, thickness and moisture content. The configuration of the cylinder machine allows the production of multiple-ply products, resulting in greater strength and stiffness than a comparable one-ply product made on a Fourdrinier paper machine. In addition, this process enables the Company to use lower-cost recycled fiber pulp in the interior layers and higher-cost virgin pulp layers on the exterior of a product providing greater strength and the surface appearance desired by consumers. Finishing capabilities at the Brattleboro mill include glazing, coating, embossing, rewinding, laminating and sheeting.
Technical Specialty Products. The Company manufactures technical specialty products at a number of its facilities, including its Hughesville, Warren Glen, Richmond, Fitchburg, Owensboro and Beaver Falls facilities. The Hughesville mill manufactures primarily technical specialty papers, including photographic packaging, electrical transformer paper and wet-strength tag. The Company's mill located in Beaver Falls specializes in the production of proprietary latex-impregnated materials for use as book covers and similar products. The stock preparation process at the Beaver Falls mill allows blending of latex, cork, cotton fiber, pulp and other materials into a variety of products with specific performance characteristics. The mill has a fiber reclamation system enabling it to utilize recycled fiber.
Durable Specialty Products. Durable specialty products are manufactured in the Company's Owensboro mill and its Quakertown and Oceanside converting facilities. The Company's main converting facility for durable specialty products is located at Quakertown. A significant portion of the saturating base paper used in this facility is provided by the Owensboro mill. In addition, substantially all capacity currently located in Oceanside will be relocated to the Quakertown facility.
Filter Products. The Company's filter products are produced primarily at its Richmond, Rochester and Fitchburg mills. The Richmond mill uses a methanol-based resin saturating process that allows the saturation of base paper off the paper machine. The Rochester mill uses an in-line saturating process. The Company manufactures its non-saturated filter papers at its Fitchburg mill.
Raw Materials. The Company uses a wide array of raw materials to formulate its products, including virgin hardwood and softwood pulp, secondary wood fiber from pre-and post-consumer waste, secondary cotton fiber from the apparel industry, synthetic fibers (such as nylon and fiberglass), synthetic latex and a wide variety of chemicals, pigments and dyes. These materials are procured from numerous suppliers in the United States and Canada. The Company does not produce pulp. Pulp and secondary fiber prices are subject to substantial cyclical price fluctuations. The Company experienced a significant increase in raw material costs during 1994 and 1995, but was able to partially recover these increases with selling price increases, cost containment efforts and the early benefits of the paper machine upgrade performed in 1995. There can be no assurance that the Company will be able to pass any future increases in the price of pulp through to its customers in the form of price increases. The Company's sole source of supply of the Tyvek(R) used in production of certain of its products is DuPont.
The Company has a long-standing relationship with DuPont as an approved converter of Tyvek(R) and has never experienced a disruption in supply. Although management believes that it has a good relationship with DuPont, there can be no assurance that the Company will be able to continually purchase adequate supplies of Tyvek(R). Any
material interruption in the Company's supply of Tyvek(R) could have a material adverse effect on the results of operations and financial condition of the Company.
Use of Recycled Fiber. The Company believes that materials with recycled content continue to grow in consumer acceptance. The Company has made significant capital investments in recycling equipment and systems. The use of the Company's cylinder paper machines in the manufacturing process for pressboard products allows the use of recycled fiber in the product interior, while virgin pulp is used on the product exterior providing greater strength as well as the product appearance desired by customers. In addition to using recycled fiber, the end-use products manufactured from the Company's pressboard materials are themselves recyclable.
The Company's office products are manufactured with 25% to 100% recycled fiber, of which up to 50% may be post-consumer waste. Post-consumer waste refers to paper waste from end-users of paper products, and is generally considered the standard by which government agencies and environmentally conscious consumers evaluate recycled content. In particular, government agencies have established and are continuing to update standards for recycled content (both pre- and post-consumer waste) in the procurement of office supplies. The Company anticipates that demand for office product materials with recycled content will continue to grow.
Research and Development. The Company's expenditures on research and development were $1.2 million, $1.0 million, and $1.1 million in 1996, 1995 and 1994, respectively. The Company has a research and development staff with expertise in chemistry, papermaking and materials science. This staff works closely with the Company's customers to develop, test and produce new product formulations designed to meet customer specifications.
Employees
As of December 31, 1996, the Company employed a total of 1,009 employees, of which 303 were salaried and 706 were hourly. Of the salaried employees 124 were in manufacturing, 57 in sales and marketing, 15 in research and development and 107 in professional or administrative support.
The hourly employees at the Oceanside and Quakertown locations are all non-union. The remaining hourly employees are either members of the United Paperworkers International Union, the International Brotherhood of Boilermakers, Iron Shipworkers, Blacksmiths, Forgers and Helpers or the International Brotherhood of Electrical Workers. The table below sets out the expiration dates of the Company's labor contracts by facility.
Facility Expiration Date -------- --------------- Owensboro, KY April 1, 1996 Fitchburg, MA April 30, 1998 Warren Glen, NJ May 23, 1999 Hughesville, NJ May 23, 1999 Rochester, MI June 26, 1999 Richmond, VA April 28, 2000 Beaver Falls, NY (Latex Mill) June 30, 2000 Brattleboro, VT August 31, 2002
TheCompany believes that, in general, it has good relations with its employees and their unions. The labor contract governing the 30 employees in the bargaining unit at the Company's Owensboro mill expired on April 1, 1996 and the employees have continued to work under the terms of the expired contract. The employees at this mill are represented by the International Brotherhood of Boilermakers, Iron Shipworkers, Blacksmiths, Forgers and Helpers. The Company has made a final offer which
includes substantial revisions to the work rules at the Owensboro mill which are intended to bring such work rules more into line with labor agreements in place throughout the paper industry. The union's representatives have not accepted this final offer. The employees in the bargaining unit have voted not to strike. In the event of a work stoppage, management believes that the Company could continue to operate the Owensboro mill. In any event, the Company believes that it has sufficient production capacity throughout its various mill facilities to adequately meet its production requirements.
Cogeneration Project
The Company has entered into agreements with Kamine/Besicorp Beaver Falls L.P. ("Kamine"), pursuant to which the Company's Latex Fiber Products Division is the host for a gas-fired, 79- megawatt combined-cycle cogeneration facility developed by Kamine in Beaver Falls, New York. Construction of the facility has been completed, although it is not operational. The Company has a firmcontract with Kamine to receive a series of cash payments totaling $7.0 million between May 1995 and May 1997. The present value of these cash payments, in the amount of $6.5, was recorded as income in the first quarter 1995. Cash payments of $2.0 million and $3.0 million were received in May 1996 and May 1995, respectively.
Environmental Regulation and Compliance
Like similar companies, the Company's operations and properties are subject to a wide variety of federal, state and local laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials, substances and wastes, the remediation of contaminated soil and groundwater, and the health and safety of employees, (collectively, "Environmental Laws"). As such, the nature of the Company's operations exposes it to the risk of claims with respect to environmental protection and health and safety matters and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims.
The Company and its predecessors have made substantial investments in pollution control facilities to comply with existing Environmental Laws. The Company made expenditures for environmental purposes of $1.7million, $2.5 million and $1.3 million in 1996, 1995, and 1994, respectively. While the Company believes that it has made sufficient capital expenditures to maintain compliance with existing Environmental Laws, any failure by the Company to comply with present and future Environmental Laws could subject it to future liability or require the suspension of operations. In addition, such Environmental Laws could restrict the Company's ability to expand its facilities or could require the Company to acquire costly equipment or incur significant expenses to comply with environmental regulations.
The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA") and similar state laws provide for responses to, and liability for, releases of certain hazardous substances from a facility into the environment. These obligations are imposed on the current owner or operator of a facility from which there has been a release, the owner or operator of a facility at the time of the disposal of hazardous substances at the facility, on any person who arranged for the treatment or disposal of hazardous substances at the facility, and any person who accepted hazardous substances for transport to a facility selected by such person. Liability under CERCLA can be strict, joint and several. Pursuant to the Environmental Laws, there are currently pending investigations at certain of the Company's plants relating to the release of hazardous substances, materials and/or wastes. In addition, various predecessors of the Company have been named as potentially responsible parties ("PRPs") by the United States Environmental Protection Agency ("EPA") for costs incurred and to be incurred in responding to the investigation and clean-up of various third-party sites. The Company has not received any notification or inquiry from EPA or any other agency concerning these sites. Management believes that the Company will have no liability in connection with the clean-up of these sites. However, no assurance can be given that such predecessors will perform their responsibilities in connection with such sites and, in the event of such nonperformance, the Company may incur material liabilities in connection with such sites, and no assurance can be given that the Company will not receive PRP notices in connection with these or other sites in the future.
In connection with the acquisition of CPG, the former owners of CPG have agreed to indemnify (subject to certain limitations) the Company for certain identified and potential environmental liabilities arising from the historical use of the property acquired in the acquisition of CPG or from CPG's conduct prior to the acquisition of CPG. Management believes that the amount of the escrow established as security for these and other indemnity obligations of the former CPG owners will be sufficient to cover environmental liabilities expected to be incurred in connection with the acquisition of CPG. However, no assurance can be given that the limited indemnity provided by the former owners of CPG will be sufficient to cover all material environmental liabilities associated with the acquisition of CPG.
Based upon its experience to date, the management of the Company believes that the future cost of compliance with existing Environmental Laws, and Liability for known environmental claims pursuant to such laws, will not have a material adverse effect on the Company's financial condition and results of operation. However, future events, such as new information, changes in existing Environmental Laws or their interpretation, and more vigorous enforcement policies of regulatory authorities, may give rise to additional expenditures or liabilities that could be material to the Company's financial condition and results of operations.
Executive Officers
The Company's Executive Officers are:
Name Age Position ---- --- -------- Alex Kwader 54 President and Chief Executive Officer Bruce P. Moore 49 Vice President and Chief Financial Officer
Stephen A. Steidle 52 Vice President and General Sales Manager
Alex Kwader has been the President and Chief Executive Officer of the Company since August 1991 and a Director since November 1991. Since 1970, Mr. Kwader has been employed by the Company and Boise Cascade Corporation ("BCC"), a diversified paper products corporation, in various management positions. He served as Senior Vice President of the Company from March 1990 to August 1991 and as Vice President from the Company's inception in June 1989 until March 1990. Mr. Kwader was also General Manager of the Pressboard Division from June 1989 until August 1991, serving in the same capacity for the BCC Pressboard Division from 1986 until June 1989. From 1980 to 1985, he served as General Manager of the BCC Latex Fiber Products Division. Mr. Kwader holds a B.S. in Mechanical Engineering from the University of Massachusetts and a M.S. from Carnegie Mellon University and attended the Harvard Business School Executive Program.
Bruce P. Moore has served as Vice President of the Company since its inception in June 1989 and as Chief Financial Officer since December 1990. From 1980 to 1989, Mr. Moore was employed by BCC in various management positions, including controller and General Manager of the Latex Fiber Products Division. Mr. Moore holds a B.A. in Business Administration from Siena College and attended the Stanford University Executive Program.
Stephen A. Steidle has served as Vice President and General Sales Manager for the office products and book cover markets since February 1994. He has held sales management positions with the Company and BCC for more than 10 years and has a total of 25 years of service with the Company and BCC. Mr. Steidle began his career as Safety Director of the Personnel Department at BCC's St. Helens mill in Oregon. Mr. Steidle received a B.A. in Psychology from the University of Maine and an M.B.A. from the University of Maine.
Item 2.
Item 2. Properties
TheCompany owns and operates seven specialty paper mills and one converting facility and also leases one specialty paper mill and one converting facility. The leased converting facility located in Oceanside, NY is scheduled to be consolidated into the Company's owned converting facility in Quakertown, PA during 1997. The following table depicts all of the Company's properties as of December 31, 1996.
Location Owned/Leased Sq. Feet Land Acres - -------- ------------ -------- ---------- Paper Mills: Brattleboro, VT Owned 200,000 39 Fitchburg, MA Owned 255,000 161 Warren Glen, NJ Owned 299,000 162 Hughesville, NJ Owned 88,000 166 Beaver Falls, NY Owned 100,000 167 Owensboro, KY Owned 47,000 15 Rochester, MI Leased 96,000 17 Richmond, VA Owned 64,000 --
Converting Facilities: Quakertown, PA Owned 165,000 7 Oceanside, NY Leased 31,000 --
The Corporate headquarters is located at the Brattleboro, VT site. The Company owns a production facility in Lowville, NY which it leases to a customer. Foreign sales offices are maintained in Hong Kong, Taipei, R.O.C., Tokyo, Japan, and Annecy, France.
Item 3.
Item 3. Legal Proceedings
The Company is involved in legal proceedings arising in the ordinary course of business. The Company does not believe that the outcome of any of these proceedings will have a material adverse effect on the operations or financial condition of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter ended December 1996.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock was first traded on March 11, 1993 on the NASDAQ National Market System under the symbol SPBI. The following table shows the high and low sale prices per share of the Common Stock as reported on the NASDAQ National Market System.
Year Ended December 31, 1995 High Low - ---------------------------- ---- --- First Quarter $12.25 $10.00 Second Quarter $13.50 $11.50 Third Quarter $13.00 $10.00 Fourth Quarter $13.50 $10.75
Year Ended December 31, 1996 High Low - ---------------------------- ---- --- First Quarter $15.00 $11.75 Second Quarter $15.25 $12.75 Third Quarter $19.50 $13.00 Fourth Quarter $21.25 $16.25
The Company had approximately 73 stockholders of record of its Common Stock as of March 6, 1997. The Company's transfer agent and registrar has indicated that the Company had approximately 1876 beneficial owners of its Common Stock as of March 6, 1997. The Company has never paid any cash dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future.
Item 6.
Item 6. Selected Consolidated Financial Data
The data set forth below should be read in conjunction with the financial statements and notes included elsewhere in this Annual Report on Form 10-K.
1) The increase in net sales for the year ended December 31, 1994 reflects the impact of the acquisition of the Endura Products Division on June 30, 1994. The division contributed $18.1 million to the Company's net sales for the last six months of 1994. For the year ended December 31, 1995, the division contributed $37.3 million to the Company's net sales.
2) General and administrative expenses for 1992 reflect a $487,000 gain as a result of reimbursement by BCC to the Company of certain environmental remediation costs.
3) Other expenses (income) for the 1996, 1995 and 1994 periods include $1,719,000, $1,718,000 and $1,146,000 respectively, of amortized income related to a deferred gain on a sale/leaseback transaction. On April 29, 1994, the Company sold and leased back certain operating assets at the Brattleboro, Vermont mill. The sale of these assets resulted in a book gain of $17,187,000. This gain is being amortized over the ten-year life of the lease.
4) From its inception through December 31, 1991, the Company generated net operating losses. For the year ended December 31, 1992, the Company generated net income and recognized an income tax provision of $583,000 and a partially offsetting extraordinary tax credit of $573,000 from partial utilization of net operating loss carry-forwards. For the year ended December 31, 1993, the Company generated net income and recognized an income tax provision of $1,921,000. For the year ended December 31, 1994, the Company generated net income and recognized an income tax provision of $2,768,000. For the year ended December 31, 1995, the Company generated net income and recognized an income tax benefit of ($424,000) due primarily to the release of valuation allowances.
5) Extraordinary items for 1993 include a $3,518,000 loss related to the early extinguishment of debt and a fee in connection with the termination of an interest rate collar agreement, net of an income tax benefit of $1,415,000. Extraordinary items for 1994 include a $248,000 loss related to the early extinguishment of debt, net of an income tax benefit of $99,000. Extraordinary items for 1996 include a $495,000 loss related to the early extinguishment of debt, net of an income tax benefit of $198,000.
6) CPG and Arcon were both acquired on October 31, 1996. These two acquisitions in aggregate added $20,200,000 in net sales for 1996.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
On April 29, 1994, the Company entered into a financing agreement and lease agreement with The CIT Group/Business Credit, Inc. and The CIT Group/Equipment Financing, Inc., respectively (collectively "CIT"). Pursuant to the lease agreement, the cylinder paper machine and certain related operating assets at the Company's mill in Brattleboro, Vermont were sold to CIT and leased back to the Company. The Company received proceeds of $25.0 million from the sale of such assets, of which $12.7 million and $5.3 million were used to repay in full the Company's outstanding term loan and revolving line of credit with Wells Fargo Bank. Pursuant to this financing agreement CIT also provided the Company with a revolving credit facility of $15.0 million and a term loan of $17.0 million. The term loan was predicated on the completion of an acquisition which was scheduled to close in June 1994.
On June 30, 1994, the Company acquired the assets of a saturated specialty business (Endura) from W.R. Grace & Co. for a total purchase price of $26.4 million plus $1.0 million of acquisition expenses paid. Twenty million dollars of the purchase price was financed by the term loan and revolving loan credit facility described above. The balance of the purchase price was paid using $7.4 million of cash reserves of the Company.
On March 22, 1995, the Company sold the assets of its Lewis mill and the Company's gasket business to Armstrong World Industries Inc. ("Armstrong") for $12,933,000 (the "Sale"). As part of the Sale, inventory in the amount of $1,080,000 was sold at book value to Armstrong. The net book value of the assets sold was $19,311,000 and total expenses relating to the Sale were $1,924,000. This transaction resulted in a loss of $8,302,000 before taxes. The Company used a substantial portion of the proceeds to retire outstanding indebtedness. The remaining proceeds were added to working capital.
On October 31, 1996, the Company acquired all of the outstanding stock of CPG. CPG operates five paper mills and manufactures a diverse portfolio of specialty fiber-based products for industrial and technical markets. Annual sales revenue approximates $95.0 million.
On October 31, 1996, the Company also acquired all of the outstanding stock of Arcon. Arcon operates one converting facility and manufactures colored binding and stripping tapes and edge cover materials sold primarily into the office products, checkbook and book binding markets. Annual sales revenue approximates $28.0 million.
Both of the 1996 acquisitions were financed with proceeds from the issuance of $100,000 million in senior notes. These notes are non-amortizing, have a ten year term and carry a fixed interest rate of 9.375%. The aggregate purchase price for both CPG and Arcon, including acquisition costs, was approximately $91.5 million. Additionally, the Company incurred approximately $4.5 million in financing costs. The balance of the proceeds from the senior note offering was added to the cash reserves of the Company.
The Company's income from operations improved from $5.7 million in 1993 (7.1% of sales) to $12.9 million in 1996 (10.3% of sales). This improvement is largely attributable to the added sales volume that resulted from the 1994 and 1996 acquisitions. Additionally, the Company is benefiting from improved manufacturing efficiencies due to equipment upgrades at several of its facilities.
The Company's financial results are dependent upon a number of factors, including the level of orders from key customers, levels of inventory maintained by such customers, fluctuations in the price of raw materials and actions by competitors. In addition, the Company's results will continue to be influenced--as they have been in the past--by the level of growth in the overall economy and in the markets served by the Company.
Results of Consolidated Operations
The following table sets forth, for the periods indicated, certain operating data as a percentage of net sales.
Year Ended December 31, 1996 Compared To Year Ended December 31, 1995
Net sales increased 6.2% to $124.8 million in 1996 from $117.5 million in 1995.
The Company acquired CPG and Arcon on October 31, 1996. These acquisitions added $20.2 million in sales revenue over the final two months of 1996. In March 1995 the Company sold its gasket business to Armstrong. This caused its gasket product revenue to decline by $6.7 million in 1996 as compared to 1995.
For the balance of the Company's markets, office products sales declined by 5.1% ($2.9 million) to $54.4 million in 1996 from $57.3 million in 1995. Sales of saturated specialties decreased by 9.4% ($3.4 million) to $32.8 million in 1996 from $36.2 million in 1995. Book cover sales declined by .6% ($.1 million) to $15.7 million in 1996 from $15.8 million in 1995. These sales declines were primarily due to sluggish economic conditions which existed in the Company's markets during the first half of 1996.
Gross profit margin increased to 18.3% in 1996 from 14.8% in 1995. This improvement is primarily due to lower prices for pulp and recycled fiber and to improved manufacturing efficiencies resulting from equipment upgrades.
General and administrative expenses increased to $9.9 million (7.9% of sales) in 1996 from $8.4 million (7.1% of sales) in 1995. This increase is primarily due to the acquisition of CP Gand Arcon.
Income from operations increased to $12.9 million (10.4% of sales) in 1996 from $9.0 million (7.7% of sales) in 1995. This improvement is due to the higher sales level brought about by the acquisitions, lower raw material prices and improved manufacturing efficiencies.
Other income was $1.1 million in 1996 as compared to $1.2 million in 1995. On April 29, 1994 the Company sold and leased back certain operating assets at the Brattleboro, Vermont mill. The sale of these assets resulted in a deferred gain of $17.2 million which is being amortized at the rate of $1.7 million per year. This other income is offset in part by amortization of organizational and financing costs and goodwill.
Interest expense increased to $1.8 million in 1996 as compared to $.9 million in 1995. This increase is due to the debt incurred to fund the 1996 acquisitions.
Income taxes were $4.7 million or 38.5% of the taxable income in 1996. In 1995 there was an income tax benefit of $40 million which reflects the reversal of a $3.0 million valuation allowance.
Year Ended December 31, 1995 Compared To Year Ended December 31, 1994
Net sales increased 11.5% to $117.5 million from $105.4 million in 1994. Net sales for 1995 included the first full year of sales from the Endura Products Division which was acquired by the Company on June 30, 1994.
Sales of office products materials increased 2.2% ($1.2 million) to $56.1 million in 1995 from $54.9 million in 1994. This increase was primarily due to strong order levels which the Company believes were principally related to positive economic conditions during the first half of 1995. Sales of Endura products were $37.3 million, compared to $18.1 million in sales in 1994. Such sales commenced upon the acquisition of this product line in June 1994. Sales of gasket materials decreased 52.3% ($9.1 million) to $8.3 million in 1995 from $17.4 million in 1994, as a result of our sale of the Lewis mill and gasket business in March of 1995. Sales of book cover materials increased 5.3% ($0.8 million) to $15.8 million in 1995 from $15.0 million in 1994.
Gross profit margin decreased to 14.8% in 1995 from 16.4% in 1994. This decline was primarily due to higher purchase prices for pulp and recycled fiber and higher lease expenses related to sale-leaseback financing entered into in April 1994. These increased costs were offset in part by higher selling prices and the benefits of an upgrade to the Brattleboro, Vermont paper machine in October 1995 which allowed greater use of lower-cost recycled fiber to manufacture the office products line. See "Manufacturing-Brattleboro Mill."
General and administrative expenses decreased to $8.4 million (7.1% of net sales) in 1995 from $8.6 million (8.2% of net sales) in 1994. This decrease resulted from reduced levels of expenses due to the sale of the Company's gasket business and lower premiums for Directors and Officers insurance.
Income from operations increased to $9.0 million (7.7% of net sales) in 1995 from $8.7 million (8.2% of net sales) in 1994. This increase resulted primarily from lower levels of general and administrative expenses described above, offset in part by higher costs for pulp and secondary fiber.
Other income was $1.2 million in 1995 as compared to $0.7 million in 1994. Other income in 1995 was positively impacted by the amortization of $1.7 million in deferred gain on the sale-leaseback transaction. On April 29, 1994, the Company sold and leased back certain operating assets at the Brattleboro, Vermont mill. The sale of these assets resulted in a deferred gain of $17.2 million which is being amortized over the ten-year life of the lease.
Interest expense decreased to $0.9 million in 1995 from $1.4 million in 1994. This decrease was due to lower levels of debt resulting primarily from debt repayment using proceeds from the Lewis mill sale.
Income tax benefit was $0.4 million in 1995. This represents an effective tax rate of (5.6%) and reflects the reversal of a $3.0 million valuation allowance. Income tax expense was $2.8 million in 1994 which represented an effective tax rate of 34.6% and reflects utilization of $21.4 million of net operating loss carry-forwards.
Liquidity And Capital Resources
As of December 31, 1996, the outstanding balance of the Company's senior note issue was $100 million. These notes have a ten-year term, are non-amortizing, and carry a fixed interest rate of 9.375%. Additionally, the Company has a $15.0 million revolving credit facility with $0.0 million outstanding as of December 31, 1996. This revolving credit facility is being increased to $20.0 million during the first quarter of 1997.
The Company's historical requirements for capital have been primarily for servicing debt, capital expenditures and working capital. Cash flows from operating activities totaled approximately $17.1 million, $8.1 million and $4.2 million in 1996, 1995 and 1994, respectively. Cash flows from investing activities include additions to property, plant and equipment of $8.5 million, $4.9 million and $1.6 million in 1996, 1995 and 1994, respectively. The Company believes that cash flow from operations, plus amounts available under credit facilities, will be sufficient to fund its capital requirements, debt service and working capital requirements for the foreseeable future.
The Company intends to pursue strategic acquisitions, such as those completed in 1994 and 1996, that will enhance its range of products. Any such acquisition could require the Company to secure independent debt or equity financing to complete the transaction.
Inflation
The Company attempts to minimize the effect of inflation on earnings by controlling operating expenses. During the past several years, the rate of general inflation has been relatively low and has not had a significant impact on the Company's results of operations. The Company purchases raw materials which are subject to cyclical changes in costs that may not reflect the rate of general inflation.
Seasonality
The Company's business is seasonal, with the third quarter of each year typically having the lowest level of net sales and operating income. This seasonality is the result of a lower level of purchasing activity in the third quarter, since many converters shut down their operations during portions of July.
New Accounting Standards
In 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1, "Environmental Remediation Liabilities." This statement is required to be adopted by the Company in 1997. The Company has yet to analyze in detail the potential impact on its financial statements upon adoption of this pronouncement.
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share." This statement is required to be adopted by the Company in 1997. The Company has yet to analyze the potential impact on its financial statements upon adoption of this pronouncement.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data of the Company required by this item are filed as exhibits hereto, are listed under Item 14(a)(1) and (2), and are incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None
PART III
Item 10.
Item 10. Directors and Executive Officers
See the section entitled "Executive Officers" in Part I, Item 1 hereof for information regarding the Company's executive officers.
The information required by this item with respect to the Company's directors is presented under the caption entitled "Election of Directors" of the Company's Definitive Proxy Statement, which will be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Company's Annual Meeting of Stockholders to be held on May 15, 1997 (the "Proxy Statement"), and is incorporated herein by reference.
The information required by this item concerning compliance with Section 16(a) of the Exchange Act is presented under the caption entitled "Compliance with Section 16(a) of the Securities Exchange Act of 1934" of the Proxy Statement, and is incorporated herein by this reference.
Item 11.
Item 11. Executive Compensation and Other Information
The information required by this item is incorporated herein by reference to the information presented under the caption entitled "Executive Compensation and Other Information" of the Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference to the information presented under the caption entitled "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the information presented under the caption entitled "Certain Transactions" of the Proxy Statement.
PART IV
Item 14.
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K
(a)(2) Index to Consolidated Financial Statements
The consolidated financial statements required by this item are submitted beginning on page 25 of this Form 10-K.
INDEPENDENT AUDITORS' REPORT
Board of Directors FiberMark, Inc.
We have audited the accompanying consolidated balance sheet of FiberMark, Inc. as of December 31, 1996 and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of FiberMark, Inc. as of December 31, 1995 and 1994 were audited by other auditors whose report dated January 26, 1996 expressed an unqualified opinion on those financial statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FiberMark, Inc. as of December 31, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
January 31, 1997
Vt. Reg. No. 92-0000241
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of FiberMark, Inc.
We have audited the consolidated balance sheets of FiberMark, Inc. (formerly Specialty Paperboard, Inc.) (the "Company") as of December 31, 1995 and the related consolidated statements of income, stockholders' equity and cash flows for each of the two years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basi, 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 resonable basis for our opinion.
In our opinion, the consolidated Financial statements referred to above present fairly, in all materail respects, the consolidate financial position of FiberMark, Inc. (formerly Specialty Paperboard, Inc.) at December 31, 1995 and the consolidated results of its operations and cash flows for each of the two years in the period ended December 31, 1995 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand COOPERS & LYBRAND L.L.P.
Boston, Massachusetts January 26, 1996
FIBERMARK, INC. Consolidated Balance Sheets December 31, 1996 and 1995
(In Thousands)
See accompanying notes to consolidated financial statements.
FIBERMARK, INC. Consolidated Statements of Income Years ended December 31, 1996, 1995 and 1994
(In Thousands Except Per Share Amounts)
See accompanying notes to consolidated financial statements.
FIBERMARK, INC. Consolidated Statements of Stockholders' Equity Years ended December 31, 1996, 1995 and 1994
(In Thousands Except Share Amounts)
See accompanying notes to consolidated financial statements.
FIBERMARK, INC. Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994
(In Thousands)
See accompanying notes to consolidated financial statements.
FIBERMARK, INC. Notes to Consolidated Financial Statements December 31, 1996 and 1995
(1) Description of Business
Specialty Paperboard, Inc. changed its name to FiberMark, Inc. ("FiberMark"). FiberMark operates in a single segment as a manufacturer and converter of specialty fiber-based products. The Company's market focus is in four core product areas: office products, technical specialties, durable specialties and filter products. FiberMark is headquartered in Brattleboro, Vermont and operates ten paper mills and converting facilities located in the eastern and midwestern regions of the United States.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include FiberMark, Inc. and its wholly owned subsidiaries, Endura Products Division ("Endura") beginning July 1994 and Arcon Holdings Corporation ("Arcon") and CPG Investors Inc. ("CPG") beginning November 1996. All significant intercompany transactions and accounts have been eliminated in consolidation.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the average cost method at FiberMark and Endura and the first-in, first-out (FIFO) method at Arcon and CPG.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation for financial reporting purposes is provided using the straight-line method based upon the useful lives of the assets, generally estimated at 3-40 years. When assets are sold or retired, the cost and accumulated depreciation are removed from the accounts and any gain or loss is included in income. Improvements are capitalized and included in property, plant and equipment while expenditures for maintenance and repairs are charged to expense. Leasehold improvements are amortized over the shorter of the life of the improvement or the lease term.
Other Intangible Assets and Goodwill
Intangible assets include organization and debt issue costs and goodwill. Organization costs of $593,801 and $725,754, net of accumulated amortization of $310,168 and $178,213 as of December 31, 1996 and 1995, respectively, arose in conjunction with the acquisition of the Endura Products Division and are amortized on a straight-line basis over seven years. Debt issue costs of $4,500,000, net of accumulated amortization of $33,000 as of December 31, 1996 are related to the issuance of the Series B Senior Notes and are amortized using the interest method over the life of those notes.
FIBERMARK, INC. Notes to Consolidated Financial Statements
Other Intangible Assets and Goodwill, continued
Goodwill of $46,950,000 and $500,000, net of accumulated amortization of $244,000 and $26,000 as of December 31, 1996 and 1995, respectively, represents the cost in excess of net assets of acquired companies and is amortized on a straight-line basis over thirty years. Amortization of intangibles, including goodwill, amounted to $812,000, $576,000, and $712,000 as of December 31, 1996, 1995 and 1994, respectively. The Company periodically evaluates the recoverability of intangibles resulting from business acquisitions and measures the amount of impairment, if any, by assessing current and future levels of income and cash flows as well as other factors, such as business trends and prospects and market and economic conditions.
Deferred Gain
The deferred gain incurred in connection with the sale-leaseback transaction is being amortized on a straight-line basis over the life of the lease (see note 7).
Research and Development
The Company expenses research and development costs as incurred. The costs amounted to $1.2 million, $1.0 million, and $1.1 million for the years ended December 31, 1996, 1995, and 1994, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. 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.
Net Earnings Per Share
The net earnings per share is computed by dividing earnings available for common shares by the weighted average number of common shares outstanding during the year. Common stock equivalents are not included in this calculation as their inclusion dilutes the computation by less than 3%.
FIBERMARK, INC. Notes to Consolidated Financial Statements
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of the Statement did not have a material impact on the Company's financial position, results of operations, or liquidity.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year's presentation.
(3) Cogeneration Project
In 1993, the Company entered into agreements with Kamine/Besicorp Beaver Falls L.P. ("Kamine") pursuant to which the Company's Latex Fiber Products Division would host a gas-fired, 79-megawatt combined-cycle cogeneration facility developed by Kamine in Beaver Falls, New York. Construction of the facility has been completed. The Company received $4.4 million in cash in 1993. The Company has a firm contract with Kamine to receive a series of cash payments totaling $7.0 million between May 1995 and May 1997. The present value of these cash payments, in the amount of $6.5 million, was recorded as income in the first quarter of 1995. Cash payments of $2 million and $3 million were received in May 1996 and 1995, respectively.
(4) Inventories
Inventories consist of the following at December 31, 1996 and 1995 ($000):
1996 1995 ---- ----
Raw materials $ 11,356 $ 5,248 Work in process 6,667 5,788 Finished goods 8,783 4,937 Stores inventory 1,568 636 Operating supplies 919 247 ------------- ---------- Total inventories $ 29,293 $ 16,856 ------------- ---------- ------------- ----------
FIBERMARK, INC. Notes to Consolidated Financial Statements
(5) Property, Plant and Equipment
Property, plant and equipment consists of the following at December 31, 1996 and 1995 ($000):
1996 1995 ---- ---- Land $ 6,816 $ 1,694 Buildings and improvements 16,666 9,245 Machinery and equipment 65,995 28,208 Construction in progress 11,234 2,620 ----------- ---------- 100,711 41,767 Less accumulated depreciation and amortization (11,015) (8,216) ----------- ----------
Net property, plant and equipment $ 89,696 $ 33,551 ----------- ---------- ----------- ----------
Depreciation expense was $2,839,000, $2,766,000 and $3,294,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
(6) Debt
The Company's long-term debt is summarized as follows at December 31, 1996 and 1995 ($000):
The Series B Senior notes are redeemable at the Company's option in whole or in part, on or after October 15, 2001 at redemption prices ranging from 100% to 104.688% of face value. Up to 35% of the notes are redeemable at the Company's option on or prior to October 15, 1999 using the net proceeds of a public equity offering at a redemption price equal to 109.375% of the principal amount plus accrued and unpaid interest thereon subject to certain other conditions as described in the agreement.
In conjunction with the issuance of the Series B Senior Notes, (see note 11), the Company repaid the senior term debt from CIT then outstanding. As a result, the Company expensed $297,000 of deferred financing costs, net of income tax expense of $198,000. The loss has been reflected in the consolidated statements of income as an extraordinary item.
FIBERMARK, INC. Notes to Consolidated Financial Statements
Approximately, $1,796,807, $1,362,000 and $1,060,000 of interest was paid during the years ended December 31, 1996, 1995 and 1994, respectively.
The Company has $15,000,000 in available funds through a revolving credit line with the CIT Group, Inc., at December 31, 1996 and 1995. The revolving credit line is subject to a commitment fee payable at the rate of 1/2 of 1% per annum on the daily average unused portion of this line. This fee is payable on a quarterly basis. In addition, the Company is required to pay an annual Collateral Management Fee of $35,000 in connection with periodic examinations, analyzing and evaluating the collateral.
In April 1994, the Company expensed $248,000 of deferred debt financing costs, upon early retirement of the Senior term debt. This amount has been treated as an extraordinary item in the consolidated statement of income for the year ended December 31, 1994.
(7) Leases
Deferred Gain and Sale-Leaseback
In April 1994, FiberMark entered into a sale-leaseback agreement with the CIT Group, Inc. ("CIT"). FiberMark sold CIT $7,813,000 in fixed assets for a purchase price of $25,000,000. As a result FiberMark recorded a deferred gain of $17,187,000 which is amortized on a straight-line over the life of the ten year lease. In 1996, 1995 and 1994 the Company amortized $1,719,000, $1,718,000 and $1,146,000, respectively, of the deferred gain into income. At December 31, 1996, accumulated amortization of deferred gain totaled $4,583,000.
In connection with the sale-leaseback transaction, CIT leased back the fixed assets to FiberMark utilizing a ten-year operating lease. The lease requires quarterly payments of $843,000 for the first five years and quarterly payments of $690,000 for the remaining five years of the lease. Rental expense was $4,426,189, $3,066,585 and $2,044,930 for the years ending December 31, 1996, 1995 and 1994, respectively.
In December 1995, FiberMark amended the sale-leaseback agreement whereby FiberMark sold a newly constructed wet end machine ("Kobayashi") for $10 million. No gain or loss was recorded on the transaction. FiberMark received $5.0 million of the purchase price from CIT in December 1995, the remaining $5.0 million was placed in escrow and paid during 1996 when all specifications were met. CIT leased back the Kobayashi machine to FiberMark using the remaining 8.5 years of the operating lease discussed above. The amended lease required additional payments including a first quarter payment of $113,000 and quarterly payments of $339,901 for the next 33 quarters.
Other Leases
The Company assumed obligations under operating leases for certain machinery, equipment and facilities purchased from CPG on October 31, 1996. Rental expense was $150,000 for the two months ended December 31, 1996. As of December 31, 1996, obligations to make future minimum lease payments were as follows:
Payments to be made in the years ending December 31 ($000):
1997 $ 990 1998 735 1999 700 2000 500 2001 300 Thereafter 1,020 -------- $ 4,245 ========
FIBERMARK, INC. Notes to Consolidated Financial Statements
(8) Preferred Stock
At December 31, 1996 and 1995, the Company has 2,000,000 shares of preferred stock authorized with none issued. The Company, without stockholder approval, can issue preferred stock with voting, conversion, and other rights.
(9) Income Taxes
The components of the provision for income taxes before extraordinary items for the years ended December 31, 1996, 1995 and 1994 are as follows ($000):
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1996 and 1995 are presented below ($000):
FIBERMARK, INC. Notes to Consolidated Financial Statements
(9) Income Taxes, continued
SFAS No. 109 requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. For the year ended December 31, 1995, the Company reduced the valuation allowance to $0. Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized through future taxable earnings.
A reconciliation of income taxes from continuing operations at the United States statutory rate to the effective rate for the years ended December 31, 1996, 1995 and 1994 are as follows:
Income taxes paid during 1996, 1995 and 1994 were $3,698,000, $3,130,000 and $1,728,000, respectively.
(10) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About the Fair Value of Financial Instruments", requires disclosure of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of the following disclosure the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced sale or liquidation. Management has determined that the carrying values of its financial assets and liabilities approximate fair value at December 31, 1996.
FIBERMARK, INC. Notes to Consolidated Financial Statements
(11) Acquisitions
1996 Acquisitions
The Company purchased all of the outstanding stock of Arcon Holdings ("Arcon") as of October 31, 1996. Concurrently with the transfer of the purchase price to the stockholders of Arcon, the stockholders agreed to repay all amounts owed under Arcon's revolver and term loans and repurchase and cancel warrants then outstanding.
The Company also purchased all of the issued and outstanding common stock of CPG Investors Inc. ("CPG") on October 31, 1996. Concurrently with the transfer of the purchase price to the stockholders of CPG, the stockholders agreed to repay all amounts owed under CPG's revolving and term loans.
The aggregate purchase price of CPG and Arcon was approximately $91,500,000 which includes costs of the acquisitions. The acquisitions were financed through the issuance of senior notes in the amount $100,000,000 and were accounted for using the purchase method. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based upon their respective fair values. This treatment resulted in approximately $46,668,000 of cost in excess of net assets acquired. Such excess, or goodwill, is being amortized on a straight-line basis over thirty years. The 1996 consolidated results include Arcon and CPG's results of operations from the date of the acquisitions through the end of the year.
The following summarized unaudited proforma results of operations for the years ended December 31, 1996 and 1995, assumes the Arcon and CPG acquisitions occurred as of the beginning of the respective periods (dollars in thousands except per share amounts):
Unaudited ------------------------- 1996 1995 ---- ---- Net sales $ 227,822 $ 239,464 Net income 12,757 10,822 Net income per common share 3.16 2.68
The unaudited pro forma results are not necessarily indicative of actual results of operations that would have occurred had the acquisitions been consummated as of the above dates, nor are they necessarily indicative of future operating results.
1994 Acquisition
On June 30, 1994, the Company acquired through its wholly owned subsidiaries, substantially all of the assets and liabilities of the Endura Products Division of W.R. Grace ("Endura"). Endura is engaged in the manufacture, conversion, saturation and coating of specialty papers at facilities located in Quakertown, Pennsylvania and Ownesboro, Kentucky. The results of operations for Endura have been included in the consolidated results of operation since the acquisition date. Under the terms of the purchase agreement, the total purchase price was approximately $26,400,000 plus $1,000,000 of acquisition expenses paid. A portion of the purchase price was financed by CIT pursuant to a $17,000,000 term loan. The balance of the purchase price was paid using $3,000,000 provided by CIT to the Company under a revolving line of credit and using cash reserves of the Company.
FIBERMARK, INC. Notes to Consolidated Financial Statements
(11) Acquisitions, continued
1994 Acquisition, continued
The acquisition was accounted for using the purchase method. Accordingly, the purchase price was allocated to the net assets acquired based on the fair values resulting in goodwill of approximately $526,000 which is being amortized over 30 years.
The following summarized unaudited pro forma results of operations for the year ended December 31, 1994, assumes the Endura acquisition occurred as of the beginning of the respective period (dollars in thousands except per share amounts): Unaudited --------- Net sales $ 124,656 Net income 5,510 Net income per common share 1.37
The unaudited pro forma results are not necessarily indicative of actual results of operations that would have occurred had the acquisition been consummated as of the above dates, nor are they necessarily indicative of future operating results.
(12) Sale of Assets
On March 22, 1995, the Company sold the assets of its Lewis Mill and the Company's gasket business to Armstrong World Industries Inc. ("Armstrong") for $12,933,000 (the "Sale"). As part of the sale, inventory in the amount of $1,080,000 was sold at book value to Armstrong. The net book value of the assets sold was $19,311,000 and total expenses relating to sale are estimated at $1,924,000. At December 31, 1995, $1,744,000 of these expenses had been paid; the remaining expenses were accrued in 1995 and paid in 1996. This transaction resulted in a loss of $8,302,000 before taxes. Approximately $160,000 of the purchase price was held by Armstrong pending the receipt of a New York State tax clearance certificate. This payment was received by the Company in May 1995. The Lewis mill was part of a two-mill division located at the Company's Latex Fiber Products Division in Beaver Falls, New York.
(13) Related Party Transactions
The Company paid a management fee of $250,000 for the years ended December 31, 1996, 1995 and 1994, to an equity owner, MDC Management Company ("MDC"). The Company has a management agreement with MDC which calls for an annual fee of $250,000 through 1996. In 1996 the Company also paid MDC $250,000 in conjunction with the CPG and Arcon acquisitions.
FIBERMARK, INC. Notes to Consolidated Financial Statements
(14) Retirement Plans
The Company has a defined contribution plan (salaried and hourly) and a defined benefit (hourly) retirement plan for FiberMark employees (excluding Arcon and CPG employees).
Defined Contribution Plan
The defined contribution plan is a 401(k) ERISA and IRS-qualified plan covering substantially all employees that permits employee salary deferrals up to 16% of salary with the Company matching 50% of the first 6%. Defined contribution expense for the Company was $229,000, $193,000, and $163,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Defined Benefit Plan
The defined benefit plan is an ERISA and IRS-qualified plan based upon the negotiated benefit and years of service in the collective bargaining agreement between the Unions and the Company. Plan assets are invested in an insurance company general account. The Company annually contributes at least the minimum amount as required by ERISA.
FIBERMARK, INC. Notes to Consolidated Financial Statements
(14) Retirement Plans, continued
Pension expense was approximately $116,000 for the year ended December 31, 1994. The benefit obligations as of December 31, 1996 and 1995 were calculated using an average discount rate of 7.5% and 7.0%, respectively. A long-term rate of return of 9% was used to calculate the 1996 and 1995 net periodic pension expense.
CPG employees are covered by a noncontributory defined benefit plan. This is an ERISA and IRS-qualified plan which has benefits based on stated amounts for each year of credited service. The plan's assets consist principally of equity securities, government and corporate debt securities and other fixed income obligations.
The following table presents the funded status of the Company's pension plan and the net pension liability included in the consolidated balance sheet (in thousands):
The benefit obligation as of December 31, 1996 was calculated using a discount rate of 7.5%. A long-term rate of return of 9% was used to calculate the net periodic pension expense.
FIBERMARK, INC. Notes to Consolidated Financial Statements
(15) Postretirement Benefits Other Than Pensions
CPG has benefit plans which provide certain health care and life insurance benefits to eligible employees when they retire. Salaried employees generally become eligible for retiree medical benefits after reaching age 62 and with 15 years of service or after reaching age 65. The medical plan for salaried employees provides for an allowance, which must be used towards the purchase of a Medicare supplemental insurance policy, based on a retiree's length of service. The allowance may be adjusted to reflect annual changes in the Consumer Price Index ("CPI"); however, once the initial allowance has doubled, there will be no further increases. Salaried employees hired after January 1, 1993 are not eligible to participate in this retiree medical plan. Upon satisfying certain eligibility requirements, approximately 45% of the hourly employees are eligible upon retirement to receive a medical benefit, which is an allowance to be used toward the purchase of a Medicare supplemental insurance policy and cannot exceed a specified annual amount. The postretirement benefit obligations related to employees who retired prior to the Acquisition were not assumed by the Company and remain the responsibility of prior owners.
Net periodic postretirement benefits cost for the two months ended December 31, 1996 included the following components (in thousands):
The following table sets forth the accumulated postretirement benefit obligation included in other liabilities on the Company's consolidated balance sheet (in thousands):
The assumed health care cost trend rate used in measuring future benefit costs was 9%, gradually declining to 6% by 1999 and remaining at that level thereafter. A 1% increase in this annual trend rate would increase the accumulated postretirement benefit obligation at December 31, 1996 by $81,368 and the postretirement benefits expense for the two months ended December 31, 1996 by less than $11,000. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7.5%. The assumed annual increase in the CPI was 3%.
FIBERMARK, INC. Notes to Consolidated Financial Statements
(16) Significant Business Concentrations
Approximately 41%, 47%, and 47% of the Company's total 1996, 1995 and 1994 sales, respectively, were concentrated in five customers. In 1996, 1995 and 1994 revenue from a single customer was $15,425,000 (12% of total sales), $18,933,000 (16% of total sales), and $18,905,000 (18% of total sales), respectively. Sales to a second customer accounted for 10%, 10%, and 11% of total sales in 1996, 1995 and 1994, respectively.
Approximately 12%, 13%, and 11% of the Company's products were sold to foreign customers (excluding Canada) in 1996, 1995 and 1994, respectively. The principal international markets served by the Company include Asia/Pacific Rim, Latin America, Mexico and Europe.
(17) Stock Option and Bonus Plans
The Company has three stock option plans which provide for grants of nonqualified or incentive stock options. The 1992 Amended and Restated Stock Option Plan ("1992 Plan") is fully granted at 200,948 shares of common stock to management of the Company. Options granted under the 1992 Plan typically vest at a rate of 20% per year and are exercisable for a period of ten years from the grant date.
The 1994 Stock Option Plan ("1994 Plan") is fully granted at 200,000 shares of common stock to selected officers and employees of the Company. Options granted under the Plan vest at a rate of 20% per year commencing on the one year anniversary of the grant date and 1.66% at the end of each month thereafter. The options are exercisable for a period of ten years from the grant date.
The 1994 Director Stock Option Plan ("Directors' Plan") authorizes the grant of up to 150,000 shares of common stock to directors who are not otherwise full-time employees of the Company. The Plan was amended in 1996 to increase the authorized shares from 50,000 to 150,000 shares and to allow for an accelerated vesting schedule not to exceed five years. Options will vest and become exercisable based upon target levels set for the fair market value of the common stock or in the event of a merger or asset sale. The options are exercisable for a period of eight years from the date of grant.
FIBERMARK, INC. Notes to Consolidated Financial Statements
(17) Stock Option and Bonus Plans, continued
The following table sets forth the stock option transactions for the three years ended December 31, 1996:
The Corporation has adopted the disclosure-only provisions of Statement of Financial Standards No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for stock options granted under the plans during 1996 and 1995 as the options were all granted at exercise prices which equaled the market value at the date of the grant. Compensation for the options granted prior to December 31, 1992 at $5.00 per share was measured as of the grant date based upon a fair market value of $8.00 per share as determined by the Board of Directors and is being recognized as expense over the vesting period. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards during 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net income would have been reduced to the proforma amounts indicated below:
1996 1995 ---- ---- Net income, as reported $ 7,217 $ 7,953 Net income, pro forma 7,075 7,918
FIBERMARK, INC. Notes to Consolidated Financial Statements
(17) Stock Option and Bonus Plans, continued
1996 1995 ---- ---- Earnings per share, as reported $ 1.79 $ 1.97 Earnings per share, pro forma 1.75 1.96
Pro forma net income reflects only options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting periods and compensation cost for options granted prior to January 1, 1995 is not considered.
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995: risk-free interest rate of 6%; dividend yield of $0; expected volatility of 45; and expected lives of ten (10) years.
Effective January 1, 1994, the Compensation Committee adopted the Executive Bonus Plan, which provides for bonus payments of a percentage of base salary based upon achievement by the Company of certain levels of earnings per share. The Executive Bonus Plan utilizes a sliding scale so that the percentage of base salary paid as bonus compensation increases as the earnings per share of the Company increase. The Executive Bonus Plan is designed to directly align the interests of the executive officers and the stockholders. Although the Executive Bonus Plan is subject to annual review by the Committee, the Committee expects it to remain in place for a five-year term.
(18) Commitments and Contingencies
Environmental Matters
The Company is subject to various federal, state and local environmental requirements, particularly relating to air and water quality. The Company and its predecessors have spent substantial sums for pollution control facilities to comply with existing regulations. While the Company believes it has made sufficient capital expenditures to maintain compliance with existing laws and regulations, any failure by the Company to comply with present and future regulations could subject it to future liability or require the suspension of operations.
Other Matters
The Company is involved in various legal proceedings in the ordinary course of business. Management believes that the outcome of these proceedings will not have a material adverse effect on the Company's financial condition, results of operations or cash flows.
FIBERMARK, INC. Notes to Consolidated Financial Statements
(19) Unaudited Quarterly Summary Information
The following is a summary of unaudited quarterly summary information for the years ended December 31, 1996 and 1995 ($000 except per share data).
(1) In the fourth quarter of 1996 the Company acquired Arcon Holdings Corporation and CPG Investors, Inc. Net income before extraordinary items for the fourth quarter of 1996 was $2,557,000; per share net income before extraordinary items was $0.63.
(2) The first quarter of 1995 includes the present value of the Cogeneration receivable of $6,512,000 booked as other income and a net book loss of $8,159,000 resulting from the sale of the Lewis mill. An additional loss of $143,000 was booked in the fourth quarter of 1995.
(3) In the third quarter of 1995, the Company recognized a tax benefit related to the release of tax valuation allowances.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of FiberMark, Inc.:
Under date of January 31, 1997, we reported on the consolidated balance sheet of FiberMark, Inc. as of December 31, 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended, which are included in the Annual Report on Form 10-K. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules in item (14(a)(2) herein. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audit.
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/ KPMG Peat Marwick LLP
KPMG PEAT MARKWICK LLP
Burlington, Vermont January 31, 1997
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of FiberMark, Inc.
In connection with our audits of the consolidated financial statements of FiberMark, Inc. (formerly Specialty Paperboard, Inc.) as of December 31, 1995 and 1994 and for each of the two years in the period ended December 31, 1995, which consolidated financial statements are included in the Annual Report on Form 10-K, we have also audited the consolidated financial statement schedule listed in Item 14(a)(2) herein.
In our opinion, this consolidated financial statements schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts January 26, 1996
FIBERMARK, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (In thousands)
Item 14(a)(3) Exhibits
Number
2.1(9) Merger Agreement dated as of August 28, 1996 by and among the Registrant (the "Company"), CPG Acquisition Co. ("Acquisition") and CPG Investors Inc. ("Investors").
2.2(9) Stock Purchase Agreement dated as of August 28, 1996 by and among the Company, Arcon Coating Mills, Inc. ("Arcon Mills"), Arcon Holdings Corp. ("Holdings"), the stock- holders of Holdings and various other parties.
2.3(9) Certificate of Merger merging Acquisition with and into Investors filed with the Secretary of State of Delaware on October 31, 1996.
3.1(1) Restated Certificate of Incorporation of the Company as amended through March 25, 1997.
3.2 Certificate of Ownership and Merger of Fibermark, Inc. with and into Specialty Paperboard, Inc. filed with the Secretary of State of Delaware on March 26, 1997.
3.3(1) Restated By-laws.
4.1(1) Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2(1) Specimen stock certificate.
4.3(9) Indenture dated as of October 15, 1996 (the "Indenture") among the Company, Acquisition, Specialty Paperboard/Endura, Inc. ("Endura") and the Wilmington Trust Company ("Wilmington").
4.4 Intentionally Omitted
4.5(9) Specimen Certificate of 9 3/8% Series A Senior Note due 2006 (included in Exhibit 4.3 hereof).
4.6(9) Specimen Certificate of 93/8% Series B Senior Note due 2006 (included in Exhibit 4.3 hereof).
4.7(9) Form of Guarantee of Senior Notes issued pursuant to the Indenture (included in Exhibit 4.3 hereof).
10.1(5) Lease Agreement dated April 29, 1994, between CIT Group/Equipment Financing Inc. ("CIT/Financing") and the Company.
10.2(5) Security Agreement dated April 29, 1994, between CIT/Financing and the Company.
10.3(5) Grant of Security Interest in Patents, Trademarks and Leases dated April 29, 1994, between the Company and CIT/Financing.
10.4(5) Bill of Sale dated April 29, 1994, to CIT/Financing.
10.5(9) Amended and Restated Financing Agreement dated December 31, 1996, between The CIT Group/Business Credit, Inc. ("CIT/Credit") and the Company.
10.6(1)(3) Form of Indemnity Agreement entered into between the Company and its directors and executive officers.
10.7(1)(3) The Company's 1992 Amended and Restated Stock Option Plan and related form of Option Agreement.
10.08(1) Paper Procurement Agreement, between the Company and Acco-U.S.A.
10.09(8) Paper Procurement Agreement, between the Company and Pajco/Holliston, dated February 23, 1995.
10.10(1) Energy Service Agreement (Latex mill), dated as of November 19, 1992, between Kamine and the Company.
10.11(1) Restated Ground Lease, dated as of November 19, 1992, between Kamine and the Company.
10.12(1) Beaver Falls Cogeneration Buyout Agreement, dated as of November 20, 1992, between Kamine, Kamine Beaver Falls Cogen. Co., Inc. and the Company.
10.13(2) Amendment No. 1 to the Energy Service Agreement (Latex mill), dated as of May 7, 1993, between Kamine and the Company.
10.14(2) Consent and Agreement (Energy Services Agreement), dated as of May 7, 1993, by the Company.
10.15(2) First Amendment of Restated Ground Lease, dated as of May 7, 1993, between Kamine and the Company.
10.16(2) Memorandum of Lease, dated as of May 7, 1993, between Kamine and the Company.
10.17(2) Lessor Consent and Estoppel Certificate, dated as of May 7, 1993, between the Company and Deutsche Bank AG, New York Branch, Ansaldo Industria of America, Inc. and SV Beavers Falls, Inc.
10.18(7)(3) The Company's 1994 Stock Option Plan and related forms of Option Agreements.
10.19(7)(3) The Company's 1994 Directors Stock Option Plan and related form of Option Agreement.
10.20(9)(3) Amendment to the Company's 1994 Directors Stock Option Plan.
10.21(4)(3) The Company's Executive Bonus Plan.
10.22(9) Deed of Lease between James River Paper Company, Inc. and CPG-Virginia Inc. dated as of October 31, 1993.
10.23(9) Amended and Restated Agreement of Lease between Arnold Barsky doing business as A&C Realty and Arcon Mills Inc. dated June 1, 1988.
10.24(9) Lease Agreement dated November 15, 1995 between IFA Incorporated and Custom Papers Group Inc. ("Custom Papers Group").
10.25(9) Master Lease Agreement dated January 1, 1994 between Meridian Leasing Corp. and Custom Papers Group
10.26(9) Master Equipment Lease Agreement dated February 3, 1995 between Siemens Credit Corp. and CPG Holdings Inc.
11.1 Calculation of per share earnings.
21.1 List of subsidiaries of the Company.
23.1 Consent of Independent Auditors.
24.1 Power of Attorney. Reference is made to the signature page.
(1) Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-1 (No. 33-47954), which became effective March 10, 1993.
(2) Incorporated by reference to exhibits filed with the Company's report on Form 10-Q for the quarter ended June 30, 1993, filed August 13, 1993.
(3) Indicates management contracts or compensatory arrangements filed pursuant to Item 601(b)(10) of Regulation S-K.
(4) Incorporated by reference to exhibits filed with the Company's report on Form 10-K for the year ended December 31, 1993 (No. 0-20231).
(5) Incorporated by reference to exhibits filed with the Company's report on Form 10-Q for the quarter ended March 31, 1994, filed May 14, 1994.
(6) Incorporated by reference to exhibits filed with the Company's report on Form 8-K, filed July 14, 1994.
(7) Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-8 filed July 18, 1994.
(8) Incorporated by reference to exhibits filed with the Company's report on Form 10-K for the year ended December 31, 1994 (No. 0- 20231).
(9) Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-4 (No. 333-17471) which became effective on February 11, 1997.
SPECIALTY PAPERBOARD, INC. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Brattleboro, County of Windham, State of Vermont, on the 25th day of March, 1996.
SPECIALTY PAPERBOARD, INC. By /s/ Alex Kwader Alex Kwader President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Alex Kwader and Bruce P. Moore, or any of them, his or her attorney-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report, and to file the same, with exhibits thereto and other documents in connections therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. This Form 10-K may be executed in multiple counterparts, each of which shall be an original, but which shall together constitute but one agreement.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.