Item 1. Business --------
General
BWAY Corporation ("BWAY") is a holding company whose significant subsidiaries, Brockway Standard, Inc. ("BSI"), Milton Can Company, Inc. ("MCC") and BMAT, Inc. ("BMAT"), (collectively the "Company") are leading developers, manufacturers, and marketers of steel containers for the general line category of the North American container industry. The Company also provides related material center services (coating, lithography, and metal shearing) for its internal purposes and also external customers. On November 9, 1998 the Company acquired substantially all of the assets of United States Can Company's ("U.S. Can") metal services operations, making the Company a leading provider of material center services. The references in this report to market positions or market share are based on information derived from annual reports, trade publications and management estimates which the Company believes to be reliable.
In January 1989, BWAY and BSI were formed to purchase the metal container business of Owens-Illinois Corporation ("Owens-Illinois"). In June 1995, BWAY (formerly known as Brockway Standard Holdings Corporation) completed an initial public offering ("Initial Public Offering") of its common stock, par value $.01 per share (the "Common Stock"). The Company operates on a 52/53-week fiscal year ending on the Sunday closest to September 30 of the applicable year. For simplicity of presentation, the Company has presented year-ends as September 30 and all other periods as the nearest month end, with the exception of pages -.
Metal containers are currently utilized for three product categories: beverage, food and general line (which includes containers for such products as aerosol, paint and varnish, and automotive products). Management estimates, based on industry data published by the Can Manufacturers Institute and the United States Bureau of Statistics, that 1998 industry shipments totaled approximately 103 billion units to the beverage category, 32 billion units to the food category and 4 billion units to the general line category. Although the general line category constitutes approximately 3% of the unit volume of metal containers, management estimates that it represents approximately 10% of the metal can industry revenues. Few companies compete in all three product categories, and most of the companies which produce beverage and food cans do not compete in the general line product categories.
The Company's principal products include a wide variety of steel cans and pails used for packaging paint and related products, lubricants, cleaners, roof and driveway sealants, food (principally coffee, vegetable oil and vegetable shortening) and household and personal care aerosol products. The Company also manufactures steel ammunition boxes and provides material center services. The Company's products are typically coated on the inside to customer specifications based on intended use and are either decorated on the outside to customer specifications or sold undecorated. The Company markets its products primarily in North America. The Company's sales to customers located outside of the United States were less than 5 percent for both fiscal 1998 and fiscal 1999. Sales are made either by the Company's direct sales force, third party distributors or sales agents. Sales growth has been accomplished primarily through acquisitions in the general line and material center services categories and to a lesser extent, expanded market penetration in the sales of existing products and new product development.
Acquisitions
The Company completed two strategic acquisitions during fiscal 1996, one strategic acquisition during fiscal 1997 and one strategic acquisition during fiscal 1999.
The operating results for the following acquisitions have been included in the Company's consolidated financial
statements since the dates of acquisition.
Milton Can - On May 28, 1996, a subsidiary of BWAY ("BSNJ") acquired all of the outstanding stock of Milton Can Company, Inc. ("Milton Can") (the "BSNJ Acquisition"). This acquisition provided geographic expansion for the Company into the northeast United States, enabling the Company to provide expanded coverage for many of its products and to many of its customers. The acquired business had revenues of approximately $55 million for the year ended December 31, 1995, and operated three facilities. The Company paid the shareholders of Milton Can approximately $29 million in approximately equal portions of cash and BWAY stock, and the Company assumed approximately $12.3 million of debt of the acquired company, which was retired by the Company at the time of acquisition. The transaction was accounted for using the purchase method of accounting. Subsequent to the acquisition, as part of the Company's 3R strategic initiatives to rationalize, re-engineer and re-capitalize, the Company closed one facility and announced plans to close a second facility in fiscal 1999, acquired in the BSNJ Acquisition. The Elizabeth, New Jersey (Northeast Tinplate) facility was closed in the second quarter of fiscal 1999.
Davies Can - On June 17, 1996, a subsidiary of BWAY ("BSO") acquired substantially all of the assets of the Davies Can division of the Van Dorn Company, a wholly-owned subsidiary of Crown Cork & Seal Company, Inc. (the "BSO Acquisition"). This acquisition provided geographic expansion for the Company into the northeast and midwest United States, enabling the Company to provide expanded coverage for many of its products and to many of its customers. The acquired business had revenues of approximately $55 million for the year ended December 31, 1995, and operated three facilities. The Company paid approximately $42 million in cash for the assets. The transaction was accounted for using the purchase method of accounting. Subsequent to the acquisition, as part of the Company's 3R strategic initiatives, the Company closed two of the facilities acquired in the BSO Acquisition.
Ball Aerosol - On October 28, 1996, the Company acquired substantially all of the assets related to the metal aerosol can business from Ball Metal Food Container Corporation, a wholly owned subsidiary of Ball Corporation (the "Ball Aerosol Acquisition"). The assets consist of a facility in Cincinnati which includes a material center and substantially all the assets used in connection with the marketing, distribution, selling, manufacturing, designing, and engineering of metal aerosol cans. The Company paid approximately $42.4 million for the acquired business. The purchase method of accounting was used to establish and record a new cost basis for the assets acquired and liabilities assumed. The excess of the aggregate purchase price over the aggregate fair market value of net identifiable assets acquired was approximately $23 million.
U.S. Can Metal Services Operations - On November 9, 1998, the Company acquired substantially all of the assets and assumed certain of the liabilities of the United States Can Company's metal services operations (the "U.S. Can Acquisition"). The purchase price was approximately $27.7 million in cash after adjustments for working capital. The acquisition included three operating plants and one non-operating plant. The acquired facilities operated two different businesses, coating and lithography, which is part of the Company's core business, and tinplate metal services which is not a business of the Company.
The purchase method of accounting was used to establish and record a new cost basis for the assets acquired and liabilities assumed and an allocation of the purchase price was finalized at October 3, 1999. The operating results for the acquired business have been included in the Company's consolidated financial statements since the date of acquisition except for the tinplate services business, which was sold as described below. As of October 3, 1999, the excess aggregate purchase price over the aggregate fair market value of net identifiable assets acquired was $10.8 million and is being amortized over 40 years.
On November 17, 1998, the Company signed a binding letter of intent to sell the acquired tinplate services business. Anticipating the sale of the tinplate metal services business, the Company closed the Brookfield, Ohio location in March 1999 and closed the Chicago Metal operations in September 1999. The tinplate services business primarily purchases, processes, and sells nonprime steel to third party customers. The Company finalized the sale of the tinplate services business to Arbon Steel and Service Company in the fourth quarter of fiscal 1999. The Company excluded from results of operations tinplate metal services business losses of $4.4 million, including interest expense of $0.7 million, for the year ended October 3, 1999.
Management has committed to a plan to exit certain activities of the acquired facilities and integrate acquired assets and businesses with BWAY facilities. In connection with the recording of the purchase, the Company established a reorganization liability of approximately $11 million. The reorganization liability includes $1.8 million in severance, $5.5 million in facility closing costs, and $3.7 million in equipment demolition costs. The
reorganization liability represents the direct incremental costs expected to be incurred, which have no future economic benefit to the Company.
During fiscal 1999, the Company has charged $0.4 million in severance, $2.9 million in facility closing costs and $1.5 million in demolition costs. In connection with the plant closures, the plan called for the termination of 308 employees. The Company has one remaining facility, the Chicago Service Division, scheduled to close in the fourth quarter of fiscal 2000.
The operating results for the acquisitions have been included in the Company's consolidated financial statements since the dates of acquisition.
Products and Markets
The Company participates in the container market and related material center services business and currently holds leading positions in the sale of most of its general line products, other than aerosol cans, and holds a strong position in the sale of coffee and vegetable oil cans. The Company does not sell beverage containers. The Company also manufactures steel ammunition boxes. On November 9, 1998, the Company acquired substantially all of the assets of U.S. Can's metal services operations, making the Company a leading provider of material center services.
The following table sets forth the percentage of net sales of the Company contributed by the product lines indicated for fiscal 1999, 1998 and 1997. The Company's sales distribution by product line has been affected to some extent by the recent acquisitions.
Percentage of the Company's Net Sales - -------------------------------------
Year Ended September 30, ----------------------- Product 1999 1998 1997 ------- ---- ---- ---- General Line Containers 70% 80% 84% Food Cans 11% 13% 13% Material Center Services 16% 2% 0% Ammunition Boxes 3% 5% 3% ---- ---- ---- Total 100% 100% 100%
General Line Products
The primary uses for the Company's containers are for paint and related products, lubricants, cleaners, roof and driveway sealants, charcoal lighter fluid, household and personal care products. Specific products include round cans with rings and plugs (typical paint cans), oblong or ''F'' style cans (typical paint thinner cans), specialty cans (typical PVC or rubber cement cans, brake fluid and other automotive after-market products cans and an assortment of other specialty containers), and pails. The Company produces a full line of these products to serve the specific requirements of a wide range of customers. The Company's products are typically coated on the inside to customer specifications based on intended use, and are either decorated on the outside to customer specifications or sold undecorated. Most of the Company's products are manufactured in facilities that are strategically located to allow the Company to deliver product to customer filling locations for such products within a one day transit time.
Paint Cans. The Company produces round paint cans in sizes ranging from one- quarter pint to one gallon, with one-gallon paint cans representing the majority of all paint can sales.
Oblong or "F" Style Cans. Oblong or "F" style cans are typically used for packaging paint thinners, lacquer thinners, turpentine, deglossers and similar paint related products, charcoal lighter fluid, waterproofing products, and vegetable oil. The Company produces oblong cans in sizes ranging from three ounces to one imperial gallon.
Specialty Cans. Utility cans include small screw top cans, which typically have an applicator, or brush attached to a screw cap and is used for PVC pipe cleaner, PVC cement and rubber cement. Cone top cans are typically used for packaging specialty oils and automotive after-market products including brake fluid, gasoline additives and
radiator flushes. The Company also produces various specialty containers.
Aerosol Cans. Aerosol cans are typically used for packaging various household and industrial products, including paint and related products, personal care products, lubricants and insecticides. The Company produces a variety of sizes, which are generally decorated to customer specifications.
Pails. Pails are typically used for packaging paint and related products, roof and driveway sealants, marine coatings, vegetable oil, and water repellent. Pails may be either ''closed head'' for easy pouring products, or ''open head'' for more viscous products, with a lid which is crimped on after filling. The Company manufactures steel pails in sizes ranging from 2.5 to 7 gallons.
Food Products/Coffee Cans
The Company produces cans for coffee and vegetable oil, with coffee accounting for the majority of sales. The Company produces coffee cans in sizes commonly referred to as 1 pound, 2 pound and 3 pound, and various smaller specialty coffee can sizes and shapes. Coffee cans are generally sold to nationally known coffee processing and marketing companies. The Company does not sell sanitary food cans in which soups, stews, vegetables, pie fillings and other foods are actually cooked in the can.
Materials Center Services
The Company provides materials center services for its can assembly facilities and third party customers. To enhance its offering of materials center services, the Company has made significant capital investments in state-of-the-art lithography and coating equipment.
Ammunition Boxes
The Company manufactures a variety of ammunition boxes. These containers provide a hermetic seal, are coated with a corrosion-resistant finish and are used to package small arms ammunitions and other ordnance products. The Company sells ammunition boxes to the U.S. Department of Defense as well as to major domestic and foreign producers of ordnance.
Customers
The Company sells its products to a large number of customers in numerous industry sectors. Sales to the Company's ten largest customers accounted for approximately 42% of sales in fiscal 1999. During fiscal 1999, sales to any specific customer did not equal or exceed 10% of sales during the period.
Raw Materials
The Company's principal raw materials consist of tinplate, blackplate and cold rolled steel, various coatings, inks and compounds. Steel products represent the largest component of raw material costs. Essentially all of the Company's products are manufactured from tinplate steel, except for pails and ammunition boxes, which are manufactured from blackplate and cold rolled steel.
Various domestic and foreign steel producers supply the Company with tinplate steel. Procurement from suppliers depends on the suppliers' product offering, product quality, service and price. Because a significant number of reliable suppliers produce the steel used in the Company's process, management believes that it would be able to obtain adequate replacement supplies in the market should one of the current suppliers discontinue supplying the Company. The Company has historically worked with other companies to lower the overall cost of its steel purchases. The Company intends to pursue alternative strategies to lower raw material cost in fiscal 2000. During fiscal 1999, the Company increased its purchases of tinplate and cold rolled products from foreign sources, a practice the Company expects to continue during fiscal 2000. Tinplate consumers typically negotiate late in the calendar year for the next calendar year on terms of volumes and price. Terms agreed to have historically held through the following year, but there is no assurance that this practice will remain unchanged in the future.
Steel prices have historically been adjusted as of January 1 of a calendar year. Most tinplate, blackplate and cold rolled steel products have announced price increases for January 1, 2000.
In addition to steel products, the Company purchases various coatings, inks, and compounds used in the manufacturing process. Based on ready availability of these materials in the past and the number of current manufacturers, management does not anticipate any shortages or supply problems in the future.
Seasonality
Sales of certain of the Company's products are to some extent seasonal, with sales levels generally higher in the second half of the Company's fiscal year.
Environmental, Health and Safety Matters
The Company is subject to a broad range of federal, state and local environmental and workplace health and safety requirements, including those governing discharges to air and water, the handling and disposal of solid and hazardous wastes, and the remediation of contamination associated with the releases of hazardous substances. The Company believes that it is in substantial compliance with all material environmental, health and safety requirements. In the course of its operations, the Company handles hazardous substances. As is the case with any industrial operation, if a release of hazardous substances occurs on or from the Company's facilities or at offsite waste disposal sites, the Company may be required to remedy such release. There were no material capital expenditures relating to environmental compliance in fiscal 1999, and, other than certain expenses at the Company's Homerville, Georgia facility discussed below, none are expected for fiscal 2000.
Environmental investigations voluntarily conducted by the Company at its Homerville, Georgia facility in 1993 and 1994 detected certain conditions of soil and groundwater contamination, that management believes predated the Company's 1989 acquisition of the facility from Owens-Illinois. Such pre-1989 contamination is subject to indemnification by Owens-Illinois. The Company and Owens-Illinois have entered into supplemental agreements establishing procedures for investigation and remediation of the contamination. In 1994, the Georgia Department of Natural Resources ("DNR") determined that further investigation must be completed before DNR decides whether corrective action is needed. On August 25, 1999, DNR signed a consent order that had been submitted by the Company and Owens-Illinois. The consent order establishes a schedule for completing such investigation and remediation (all but a small portion of such investigation and remediation to be completed and funded by Owens-Illinois).
In addition, at Homerville, the Company entered into a consent order with DNR on April 22, 1999, related to certain industrial wastewater and cooling water discharges that exceeded allowable limits. The Company anticipates capital expenditures in the neighborhood of $200,000 in fiscal 2000 to comply with the consent order. Management does not believe that the final resolution of either matter at Homerville will have a material adverse effect on the results of operations or financial condition of the Company.
The Company (and in some cases, predecessors to the Company) have from time to time received requests for information or notices of potential responsibility pursuant to the Comprehensive Environmental Response, Compensation and Liability Act (`CERCLA") with respect to certain waste disposal sites utilized by former or current facilities of the Company or its various predecessors. To the Company's knowledge, all such matters which have not been resolved are, subject to certain limitations, indemnified by the sellers of the relevant Company affiliates, and all such unresolved matters have been accepted for indemnification by such sellers. Management believes that none of these matters will have a material adverse effect on the results of operations or financial condition of the Company. Because liability under CERCLA is retroactive, it is possible that in the future the Company may incur liability with respect to other sites.
Competition
The markets for the Company's products are competitive and the Company faces competition from a number of sources in most of its product lines. Competition is based primarily on price, quality, service, and, to a lesser extent, product innovation. The Company believes that its low cost of production and high quality products, the geographic location of the Company facilities which provide national coverage for most products to most customers, and its commitment to strong customer relationships enable it to compete effectively.
Manufacturers of steel containers have historically faced competition from other materials, primarily plastic, glass, and aluminum. Steel containers offer a number of significant advantages over alternative materials, including fire safety (critical in many products packaged in paint, oblong and specialty cans), the capacity for vacuum packaging (important to coffee producers) and ability to contain aggressive products (primarily certain solvent-based products).
Employees
As of October 3, 1999, the Company employed approximately 1,693 hourly employees and 483 salaried employees. Of the 1,693 hourly employees, 1,029 are non-union and the remaining 664 are covered by eight separate collective bargaining agreements. During fiscal 1999, in connection with the US Can Acquisition, certain subsidiaries of the Company added 80 salaried employees and 308 hourly employees. Of the 308 hourly employees approximately 270 are covered by collective bargaining agreements with either the Graphic Communications Workers International Union or the United Steelworkers of America.
During the second quarter of fiscal 1999, the Company ceased operations at the Brookfield, Ohio facility following the U.S. Can Acquisition. This closing resulted in the elimination of approximately 32 hourly positions and 14 salaried positions at this facility.
On August 3, 1999, the Company reached an agreement with the International Brotherhood of Teamsters, Local 714 at its Franklin Park (Chicago), Illinois facility affecting approximately 60 employees at this facility. The contract is retroactive to June 8, 1999 and is effective through March 3, 2003. The Company also negotiated extensions of its agreement with Local 458-3M of the Graphic Communication Workers International Union through October 31, 1999, affecting approximately 15 employees at this facility. On November 22, 1999, the Company implemented its last, best, and final offer for a new collective bargaining agreement, and since then the Union has been working under the implemented terms. On November 24, 1999, the Union filed an administrative action with the National Labor Relations Board challenging the lawfulness of the Company's implementation of its last, best, and final offer. The Company and the Union continue to meet in an effort to reach a collective bargaining agreement.
On August 11, 1999, the Company reached an agreement with United Steelworkers of America, Local 3911-11 with respect to the discontinuance of the Chicago Metal operations, effective September 30, 1999, at the Company's Chicago Service Division facility in Chicago, Illinois. The discontinued operations resulted in the elimination of approximately 56 hourly positions and 22 salaried positions at this facility. Subsequent to fiscal 1999, the Company negotiated an agreement with the Graphics Communications Workers International Union, Local 458-3M concerning the discontinuance of the Chicago Litho operations at the Company's Chicago Service Division facility, which is scheduled for closing in the fourth quarter of fiscal 2000.
Item 2.
Item 2. Properties ----------
The following table sets forth certain information with respect to the Company's headquarters and significant manufacturing plants as of November 30, 1999.
(1) On November 9, 1998 the Company acquired substantially all of the assets of U.S. Can Company's metal services operations. These properties were added as a result of that acquisition.
In June 1998, management approved a restructuring plan to close three facilities as part of the Company's rationalization initiatives. The facility in Solon, Ohio was closed during the fourth quarter of fiscal 1998 and sold during the second quarter of fiscal 1999. The Elizabeth, New Jersey (Northeast Tinplate) facility was closed during the second quarter of fiscal 1999 and subleased for the remainder of the lease term. The Dallas, Texas (Thompson) facility is scheduled to close during the second quarter of fiscal 2000. The Company is actively marketing the Thompson facility for sale.
Subsequent to the U.S. Can Acquisition in November 1998, the Company announced its plan to close the acquired Brookfield, Ohio facility. The Brookfield, Ohio plant was closed during the second quarter of fiscal 1999 and the Company is actively seeking to sublease that facility. The Company also announced plans to close the Chicago Metal and Chicago Litho operations at the Chicago Service Division facility in Chicago, Illinois, also acquired in the U.S. Can Acquisition, and is currently evaluating disposition alternatives. A third acquired facility located in Alsip, Illinois, which was not operating at the time of acquisition, is also being evaluated for disposition.
On August 20, 1999, the Company sold and leased back its Cincinnati, Ohio manufacturing facility. The sales price was $10.4 million. After deducting closing costs of $0.6 million, the Company recorded a deferred gain on the sale of $2.3 million, which will be amortized over the life of the lease. The amortization of the deferred gain recorded in earnings for the year ending October 3, 1999 was $13 thousand. The lease term is 20 years with annual lease payments of approximately $1.1 million. The lease has two 5-year renewal terms that run consecutively after the basic term. The lease is accounted for as an operating lease for financial reporting purposes.
The Company believes its properties are generally in good condition, well maintained and suitable for their intended use.
Item 3.
Item 3. Legal Proceedings -----------------
The Company is involved in certain proceedings relating to environmental matters as described under Item 1. "Business - Environmental, Health and Safety Matters."
The Company is also involved in legal proceedings from time to time in the ordinary course of its business. There are no such currently pending proceedings, which are expected to have a material adverse effect on the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders ---------------------------------------------------
No matters were submitted during the fourth quarter of fiscal 1999 to a vote of security holders of the Company through the solicitation of proxies or otherwise.
PART II
Item 5.
Item 5. Market for the Company's Common Equity and Related Stockholder Matters ----------------------------------------------------------------------
As of December 3, 1999, there were 87 holders of record of the Common Stock. Because BWAY is a holding company, its ability to pay dividends is substantially dependent upon the receipt of dividends or other payments from its subsidiaries. The Company's Credit Agreement dated June 17, 1996, as amended (the "Credit Agreement"), among BWAY and certain subsidiaries, BT Alex.Brown (formerly Bankers Trust Company) and Bank of America (formerly NationsBank, N.A.) and various other lenders, restricts the ability of BWAY and its subsidiaries to pay dividends or make other restricted payments in an amount greater than $8.7 million, and places certain restrictions on the Company with regard to incurring additional indebtedness, other than certain specified indebtedness. In addition, the Company's Indenture dated April 11, 1997 (the "Indenture") also restricts the ability of BWAY and its subsidiaries to pay dividends or make other payments, and places certain restrictions on the Company with regard to incurring additional indebtedness, other than certain specified indebtedness. Any future determination to pay dividends will be made by the Board of Directors in light of the Company's earnings, financial position, capital requirements, credit agreements, indentures, business strategies and such other factors as the Board of Directors deems relevant at such time. The Company has not otherwise paid any cash distributions or other dividends on the Common Stock and presently intends to retain its earnings to finance the development of its business for the foreseeable future.
The Company repurchased $1.0 million of its common stock during fiscal 1999 under the Company's common stock repurchase program.
The Company's Common Stock was traded on the Nasdaq National Market under the symbol "BWAY" through November 19, 1996. Since November 20, 1996, the Company's common stock has been traded on the New York Stock Exchange under the symbol "BY". The table below sets forth the high and low sales price information for the Common Stock for each quarter of fiscal 1998 and fiscal 1999.
On August 19, 1997 the Company's Board of Directors declared a three-for-two stock split of the Company's Common Stock effected in the form of a stock dividend which was paid on September 22, 1997 to stockholders of record on September 2, 1997. All price information set forth below has been adjusted to reflect the stock dividend.
Item 6.
Item 6. Selected Financial Data -----------------------
The selected historical consolidated financial data as of and for each of the years in the five years ended September 30, 1999 have been derived from the audited consolidated financial statements of the Company. The results of operations include the results of acquisitions described under "Business-- Acquisitions" contained in Item 1 of this report and have been included in the Company's consolidated financial statements from the date of the respective acquisitions. The selected consolidated financial data is qualified by, and should be read in conjunction with, ''Management's Discussion and Analysis of Financial Condition and Results of Operations'' contained in Item 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations - -------------
The following discussion should be read in conjunction with the Company's consolidated financial statements and related notes thereto included elsewhere in Item 8 of this report.
General
Industry
The Company currently derives substantially all of its revenues from the sale of steel containers manufactured at the Company's plants and related material center services. The packaging market in which the Company competes is generally mature and stable. Management believes that companies that have managed sustained growth in these markets have typically accomplished this growth primarily through acquisitions. Industry consolidation has occurred during recent years.
Sales Growth
The Company's net sales have grown from approximately $402.2 million in fiscal 1997 to approximately $467.1 million in fiscal 1999, primarily as a result of the U.S. Can Acquisition during this period. The U.S. Can Acquisition has strengthened and expanded the Company's position in key product and geographic markets and, through consolidation, have enabled the Company to achieve operating synergies.
Raw Materials
The largest component of cost of sales is tinplate steel, which is currently supplied by large, national manufacturers and, to a lesser extent, foreign manufacturers. Tinplate prices have historically been negotiated once per year, with changes effective January 1, and have typically remained stable for the subsequent one-year period. The Company has historically worked with other companies to lower the overall cost of its steel purchases. The Company intends to pursue alternative strategies to lower raw material cost in fiscal 2000. During fiscal 1999, the Company increased its purchases of tinplate and cold rolled products from foreign sources, a practice the Company expects to continue during fiscal 2000. Tinplate consumers typically negotiate late in the year for the next calendar year on terms of volumes and price. Terms agreed to have historically held through the following year, but there is no assurance that this practice will remain unchanged in the future.
Steel prices have historically been adjusted as of January 1 of a calendar year. Most tinplate, blackplate and cold rolled steel producers have announced price increases effective January 1, 2000. The Company has historically arranged for raw material price increases which are lower than those publicly announced by its suppliers, although there can be no assurances that this practice will continue.
Gross Profit Margins
Continuous advances in manufacturing productivity and cost reduction have been critical to the industry and the Company's ability to improve gross profit margins. The Company's objective is to improve margins by maximizing synergies through employment of the Company's 3R strategic initiative to Rationalize, Reengineer and Recapitalize acquired businesses and by capital investments. The Company's gross profit margin as a percentage of net sales declined to 13.4% in fiscal 1999 from 16.1% in fiscal 1998. The decline resulted primarily from sales associated with the U.S. Can Acquisition where gross profit margins as a percentage of net sales has historically been lower than the Company's existing businesses, costs associated with the Company's rationalization initiatives and costs associated with capital project implementations.
Results of Operations
Year ended September 30, 1999 (fiscal 1999) compared to year ended September 30, 1998 (fiscal 1998).
Net Sales. Net sales for fiscal 1999 were $467.1 million, an increase of $66.0 million or 16.5% from $401.1 million in fiscal 1998. The increase in net sales was primarily attributable to the fiscal 1999 U.S. Can Acquisition. The Company's net sales for fiscal 1999, excluding the effect of the U.S. Can Acquisition, declined approximately 2.5% from fiscal 1998.
Cost of Products Sold. Cost of products sold (excluding depreciation and amortization) in fiscal 1999 was $404.5 million, an increase of $67.9 million, or 20.2%, from $336.6 million in fiscal 1998. The increase is primarily attributable to increased sales from the U.S. Can Acquisition, start-up costs of new equipment and plant rationalization costs. Cost of products sold as a percent of sales increased to 86.6% in fiscal 1999 from 83.9% in fiscal 1998. The increase is primarily attributable to the incremental sales from the U.S. Can Acquisition where cost of products sold as a percent of sales has historically been higher than the Company's existing operations, to start-up costs for new equipment (particularly within the Company's material center business) and to costs associated with the Company's rationalization initiatives at can assembly operations, primarily in the Northeast and Southwest. The rationalization process for the Company's Northeast and Southwest facilities is progressing at a slower rate than initially planned. Ongoing delays in construction, equipment relocations and the hiring and training of new employees has contributed to the increase in costs and is expected to continue through the first half of fiscal 2000. The Company is focused on rationalizing these facilities in the most cost effective manner possible; however, the aforementioned delays coupled with production startup and efficiencies have hampered this process. These additional costs more than offset realized savings resulting from the Company's purchasing initiatives.
Income before Income Taxes, Extraordinary Item and Cumulative Effect of Change in Accounting. Income before income taxes, extraordinary item and cumulative effect of change in accounting for fiscal 1999 was $10.9 million, an increase of $5.4 million, from $5.5 million in fiscal 1998, when the Company recorded a restructuring charge of $11.5 million. Fiscal 1999 income before income taxes, extraordinary items and cumulative effect of change in accounting decreased by $6.1 million from fiscal 1998, excluding the effect of the fiscal 1998 restructuring charge. This decrease resulted primarily from higher costs of products sold (lower gross margins) as described above, higher interest expense, and higher depreciation and amortization, partially offset by lower selling and administrative expenses. Additionally, the Company recognized in fiscal 1998 a $1.9 million gain on curtailment of postretirement benefits. Depreciation and amortization increased from $13.5 million in fiscal 1998 to $17.2 million in fiscal 1999 due the U.S. Can Acquisition and as a result of capital spending. Selling and administrative expense of $19.7 million for fiscal 1999 decreased from $22.7 million in fiscal 1998. Interest expense, net, increased to $14.7 million in fiscal 1999 from $13.0 million in fiscal 1998 primarily due to increased borrowings under the Company's credit agreement to finance the U.S. Can Acquisition and fund the Company's capital expenditure program. (See Liquidity and Capital Resources).
Net Income. Net Income for fiscal 1999 was $5.6 million, an increase of $4.1 million from fiscal 1998. The change results from the factors discussed above.
Year ended September 30, 1998 (fiscal 1998) compared to year ended September 30, 1997 (fiscal 1997).
Net Sales. Net sales for fiscal 1998 were $401.1 million, a decrease of $1.1 million or 0.3% from $402.2 million in fiscal 1997. The Company's sales were adversely affected during fiscal 1998 by a generally weaker paint and related products season.
Cost of Products Sold. Cost of products sold (excluding depreciation and amortization) in fiscal 1998 was $336.6 million, a decrease of $4.8 million, or 1.4%, from $341.4 million in fiscal 1997. The decrease is primarily attributable to lower unit volume combined with lower operating costs. Cost of products sold as a percent of net sales decreased to 83.9% in fiscal 1998 from 84.9% in fiscal 1997. The decrease is primarily attributable to the Company's strategic initiative to lower operating costs and improve margins, and from a more favorable pricing
environment. Although certain employee termination costs in connection with plant rationalizations, administrative workforce reductions, and other plant exit costs associated with acquisitions were accrued for through purchase accounting adjustments, the Company incurred during fiscal 1997 and fiscal 1998 other non-recurring costs which, in accordance with current accounting pronouncements, were charged against operating income.
Restructuring and Impairment Charge. In June 1998, the Company recorded a restructuring and impairment charge related to the closure of three plants, the elimination of an internal transportation department and the write-off of equipment at several operating locations which were impaired due primarily to changes in manufacturing processes. The 1998 restructuring and impairment charge totaled $11.5 million and consisted of the following: $7.8 million related to the closure of the plants and transportation department and $3.7 million related to other asset impairments. The $7.8 million related to the plant and transportation department closures includes $2.1 million for severance costs, $2.2 million for other facility closure costs and $3.5 million for asset impairments related to the plant shut-downs.
Income before Income Taxes, Extraordinary Item and Cumulative Effect of Change in Accounting. Income before income taxes, extraordinary items and cumulative effect of change in accounting for fiscal 1998 was $5.5 million, a decrease of $16.8 million, or 75%, from $22.3 million in fiscal 1997, due primarily to the Company recording a restructuring charge of $11.5 million (before taxes). Depreciation and amortization increased from $13.0 million in fiscal 1997 to $13.5 million in fiscal 1998 as a result of increased capital spending. Selling and administrative expense of $19.7 million for fiscal 1997 increased $3.1 million in fiscal 1998, primarily due to building corporate infrastructure to support acquisitions and continued execution of growth plans. Interest expense, net, increased to $13.0 million in fiscal 1998 from $10.6 million in fiscal 1997 due to interest on borrowings for ongoing working capital and a higher effective interest rate associated with the Company's issuance in the third quarter of fiscal 1997 of $100 million of unsecured senior subordinated notes (see Liquidity and Capital Resources).
Net Income. Net Income for fiscal 1998 was $1.5 million, a decrease of $11.6 million from fiscal 1997. The decline resulted from the factors mentioned above.
Seasonality
Sales of certain of the Company's products are to some extent seasonal, with sales levels generally higher in the second half of the Company's fiscal year.
Liquidity and Capital Resources
On November 2, 1998 the Company and its lenders executed an amendment to the Company's Credit Agreement, which modified certain restrictive financial covenants and provided greater flexibility with respect to certain investments in joint ventures. Additionally, the Company exercised its option to increase the available borrowing limit to $125 million. As part of the November 2, 1998 amendment, the lenders waived the Company's financial covenant violation (interest coverage ratio) for the quarter ended September 27, 1998. The Credit Agreement currently provides that the Company and its subsidiaries can borrow up to $125 million, and gives the Company an option to increase its borrowing limit by an additional $25 million, provided certain conditions are met. Interest rates under the Credit Agreement are based on rate margins ("Rate Margin") for either the prime rate as announced by Bank of America (formerly NationsBank, N.A.) from time to time or LIBOR plus an applicable rate spread, at the option of the Company. The applicable rate margin is determined on a quarterly basis by a review of the Company's leverage ratio. Loans under the Credit Agreement are unsecured and can be repaid at the option of the Company without premium or penalty. The Credit Agreement is subject to certain restrictive covenants, including financial covenants which require the Company to maintain a certain minimum level of net worth and certain leverage ratios. In addition, the Company is restricted in its ability to pay dividends and make other restricted payments. The Credit Agreement expires June 17, 2002.
Subsequent to fiscal 1999 year end, the Company and its lenders executed an amendment to the Company's credit agreement which modifies the interest coverage ratio. The Company is in compliance with all of the Credit Agreement covenants at fiscal 1999 year end.
During the third quarter of fiscal 1997, the Company issued $100 million of 10 1/4% Senior Subordinated Notes due 2007. The notes have an interest rate of 101/4%, payable semi-annually on April 15 and October 15. Net proceeds of approximately $96 million from the issuance of the notes were used to reduce borrowings on the
Company's Credit Agreement. The Company completed the registration of its 101/4% Senior Subordinated Notes due 2007, Series B under the Securities Act in February 1998 and consummated its offer to exchange these Series B notes for all outstanding Series A notes in March 1998.
During fiscal 1999, net cash provided by operating activities was $24.5 million which was comprised primarily of net income ($5.6 million), depreciation and amortization ($17.3 million) and deferred income taxes ($7.1 million). Changes in assets and liabilities reduced net cash provided by operating activities by $6.1 million.
During fiscal 1998, net cash provided by operating activities was $25.6 million which was comprised primarily of net income ($1.5 million), depreciation and amortization ($13.5 million), and a restructuring and impairment charge ($11.5 million). Changes in assets and liabilities reduced net cash provided by operating activities by $1.9 million.
During fiscal 1999, the Company used $46.5 million for investing activities. The Company made $33.2 million of capital expenditures primarily for equipment to improve manufacturing processes, new coating and lithography equipment to support growth, and hardware and software to address the Year 2000 issue and improve administrative and manufacturing systems. The Company used $27.7 million for the U.S. Can Acquisition.
During fiscal 1998, the Company used $32.9 million for investing activities. The Company made $33.8 million of capital expenditures primarily for equipment to improve manufacturing processes, new coating and lithography equipment to support growth, and hardware and software to address the Year 2000 issue and improve administrative and manufacturing systems.
During fiscal 1999, net cash provided by financing activities was $20.4 million. Net borrowings under the Company's Credit Agreement were $24.9 million. Net purchases of treasury stock were $.8 million. Additionally, unpresented bank drafts increased $2.9 million.
During fiscal 1998, net cash provided by financing activities was $8.2 million. Net borrowings under the Company's Credit Agreement were $8.1 million. The Company purchased $11.1 million of treasury stock during fiscal 1998, and issued $1.0 million of treasury stock for options exercised. Additionally, unpresented bank drafts increased $11.6 million.
Cash and cash equivalents were $2.3 million at the beginning of fiscal 1999, and were $.7 million at the end of fiscal 1999.
Cash and cash equivalents were $1.4 million at the beginning of fiscal 1998, and were $2.3 million at the end of fiscal 1998.
At October 3, 1999, the Company was restricted in its ability to pay dividends and make other restricted payments in an amount greater than approximately $8.7 million. The Company's subsidiaries are restricted in their ability to transfer funds to the Company, except for funds to be used to effect approved acquisitions, pay dividends in specified amounts, reimburse the Company for operating and other expenditures made on behalf of the subsidiaries and repay permitted intercompany indebtedness.
Management believes that cash provided from operations, borrowings available under the Credit Agreement, and borrowings under the Indenture will provide it with sufficient liquidity to meet its operating needs and continue the Company's capital expenditure initiatives for the next twelve months.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of potential problems with computer systems or any equipment with computer chips that use dates where the date has been stored as just two digits (e.g. 98 for 1998). On January 1, 2000, any clock or date-recording mechanism that utilize date sensitive software using only two digits to represent the year may recognize a date using 00 as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing significant disruption of operations, including among other things a temporary inability to process transactions, send invoices, or engage in similar activities. The Year 2000 issue can arise at any point in the Company's supply, manufacturing, processing, distribution and financial chains. Any disruptions in the above stated
chains of the Company could have a material adverse affect on the Company's financial condition and results of operations.
The Company determined that it would be required to replace or modify significant portions of its business application software so that its computer systems would properly utilize dates beyond December 31, 1999. The Company presently believes that with conversions to new systems and modifications to existing software the Year 2000 issue can be mitigated with regard to the Company's material business application software. However, if such modifications and conversions are not made, or are not timely, the Year 2000 issue could have a material adverse impact on the operations of the Company.
During 1998, the Company initiated the implementation of Enterprise Resource Planning (ERP) software to replace the Company's core business applications, which support sales and customer service, manufacturing, distribution, and finance and accounting. The ERP software was selected to add functionality and efficiency in the business processes of the Company in the normal course of upgrading its systems to address its business needs. In addition, the Company established a Year 2000 Steering Committee in May 1998 to analyze and assess the remainder of its business not addressed by the ERP software. The Steering Committee has executive officers of the Company as its members. The Steering Committee is responsible for the formulation of the Company's Year 2000 project.
The scope of the Steering Committee's responsibilities covers all material computer systems, computer and network hardware, production process controllers, office equipment, access control, maintenance machinery, telephone systems, products it sells, critical vendors and customers.
The Steering Committee identified those IT systems that were considered mission critical to the business. Of the identified mission critical systems, the Company is currently instituting remediation through a global ERP software implementation. All other systems are presently being replaced or upgraded to adequately address the Year 2000 issue. Approximately 99% of the mission critical systems have been remediated as of December 1, 1999. The Company anticipates that the remaining mission critical implementations, along with other non-compliant systems will be completed by December 31, 1999. Critical systems have been tested on an ongoing basis during the second half of calendar 1999 to ensure Year 2000 Compliance.
During 1999, the Company has performed a comprehensive review and evaluation of embedded systems within its manufacturing facilities. This evaluation is ongoing and is intended to inventory and evaluate embedded systems and their Year 2000 compliance and associated risk. Upgrades and replacements have been performed as needed and incurred as a part of normal maintenance programs. Associated costs were not significant. The Company cannot fully eliminate the potential impact on all embedded system non-compliance; however, at present the overall risk appears to be low.
The Company has communicated with all of its significant suppliers and large customers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company can give no guarantee that the systems of other companies on which the Company's systems rely will be converted on time or that a failure to convert by another company or a conversion that is incompatible with the Company's systems would not have a material adverse effect on the Company.
The Company is currently utilizing, and will continue to utilize, internal and external resources to implement, reprogram or replace, and test software and related assets affected by the Year 2000 issue. The Company completed the majority of its efforts in this area by the end of fiscal 1999, leaving adequate time to assess and correct any significant issues that may materialize. As of the end of fiscal 1999, the Company has incurred approximately $22 million for ERP system upgrades and replacements related to the Year 2000 project. The total remaining cost of the ERP system and the Year 2000 project is estimated at $3 - 5 million and is being funded through operating cash flows. Of the total project cost, approximately $23 - 25 million is attributable to the purchase and implementation of the new hardware and software, which will be capitalized. The remainder will be expensed as incurred and is not expected to have a material effect on the results of operations during any quarterly or annual reporting period.
The Company's Year 2000 Steering Committee has developed contingency plans intended to mitigate the possible disruptions that may result from the Year 2000 issue. The company's contingency plans include the use of alternative suppliers and other appropriate measures necessary to operate its factories. The Company has made reasonable efforts to ensure key suppliers and customers have instituted some measure of readiness and has requested and received written response from each. In key operating areas, the Company has conducted meetings with suppliers to review Year 2000 plans and contingency options. Based on the Company's evaluation of supplier readiness, the Company does not believe stock piling of raw materials or increases in inventory levels is necessary. Internal contingency plans provide the necessary readiness to address most supply chain, manufacturing and delivery interruptions. The Company has instituted a formal communication network to handle all internal and external communications during January 2000. This network will provide on-call internal and external support to effect timely remediation of Year 2000 issues. The contingency plans and the related cost estimates will be revised as additional information becomes available or additional needs arise.
The Company believes that the most reasonable and likely worst-case scenario for the Company with respect to the Year 2000 issue is the failure of a critical vendor, including but not limited to a utility or steel supplier, to provide required goods and/or services after December 31, 1999. Such a failure could result in temporary production outages and lost sales and profits. The Company believes that because of the geographic dispersion of its operations, it is unlikely an isolated third-party failure would have a material adverse effect on the Company's results of operations, financial condition, or cash flow. The Company also believes that the formulation of its contingency plans should provide reasonable measures to reduce the severity and length of any possible disruptions and losses. However, because the Company's Year 2000 issue compliance is dependent upon key third party readiness, there can be no assurance that the Company's Year 2000 issue compliance efforts will preclude a Year 2000 issue or a series of issues outside its direct control from adversely affecting its results of operations, financial condition, or cash flow. In addition, although not anticipated, any failure by the Company to correct critical internal computer systems before Year 2000 could also have such an adverse effect.
The discussion of the Company's efforts, and management's expectations and estimates, concerning the Year 2000 issue contain forward-looking statements. The costs of the project and the timetable in which the Company plans to complete the Year 2000 compliance requirements are based on management's estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from these plans. In addition, there can be no assurances that there will be no adverse impact on the Company's relationships with its customers, vendors, or other persons internal to the Company's operations. Specific factors that might cause such material differences include, but are not limited to, unanticipated problems identified in the ongoing Year 2000 issue compliance review, costs for contingency plans, the availability and cost of internal and external resources to implement, reprogram, and replace and test the Company's software and other Year 2000 issue sensitive assets, the ability to locate and correct all relevant computer codes, and similar uncertainties.
Environmental Matters
For information regarding environmental matters, see Item 1. "Business - Environmental, Health and Safety Matters."
Effect of Inflation
Historically, the Company has generally been able to recover increased costs of raw materials through price increases for the Company's products, although there can be no assurances that this practice will continue. This ability, together with cost reductions achieved through line rationalization and productivity improvements, has mitigated the impact of inflation on the Company's results of operations. Management currently believes that inflation will not have a material adverse impact on the Company.
Recent Accounting Pronouncements
In fiscal 1999, the Company adopted the provisions of SFAS 131, "Disclosures about Segments of an Enterprise and Related Information". This statement requires public companies to report financial and descriptive information about their reportable operating segments. The Company determined that it has a single reportable segment.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" This statement, effective for the Company's quarter beginning October 2, 2000, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The statement requires the Company to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company has not completed the process of evaluating the impact that will result from adopting SFAS 133. The Company is therefore unable to discuss the impact that adoption of SFAS 133 will have on its financial position and results of operations when the standard is adopted.
Note: This document contains forward-looking statements as encouraged by the Private Securities Litigation Reform Act of 1995. All statements contained in this document, other than historical information, are forward-looking statements. These statements represent management's current judgement on what the future holds. A variety of factors could cause business conditions and the Company's actual results to differ materially from those expected by the Company or expressed in the Company's forward-looking statements. These factors include without limitation, timing and cost of plant start-up and closure, the Company's ability to successfully integrate acquired businesses and implement its 3R strategic initiatives; labor unrest; changes in market price or market demand; changes in raw material costs or availability; loss of business from customers; unanticipated expenses; changes in financial markets; potential equipment malfunctions; the Company's ability to identify and remedy Year 2000 issues; the timing and costs of plant start-up and closures and the other factors discussed in the Company's filings with the Securities and Exchange Commission.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ----------------------------------------------------------
The Company's Credit Agreement permits the Company to borrow up to $150 million provided certain conditions and restrictive financial covenants are met. Borrowings under the Credit Agreement bear interest at either the prime rate or LIBOR plus an applicable spread percentage at the option of the Company. The interest rate spread over LIBOR is determined each quarter based on the ratio of EBITDA to total debt. At October 3, 1999 the applicable spread was 1.5%. At October 3, 1999, the Company had borrowings under the Credit Agreement of $46.5 million that were subject to interest rate risk. Each 1.0% increase in interest rates would impact pretax earnings by $0.5 million at the $46.5 million debt level of October 3, 1999.
Item 8.
Item 8. Financial Statements and Supplementary Data -------------------------------------------
See the attached Consolidated Financial Statements pages through.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure - --------------------
Inapplicable.
PART III
Item 10.
Item 10. Directors and Executive Officers --------------------------------
Incorporated by reference to the Company's 1999 Proxy Statement to be filed with the Commission.
Item 11.
Item 11. Executive Compensation ----------------------
Incorporated by reference to the Company's 1999 Proxy Statement to be filed with the Commission.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management --------------------------------------------------------------
Incorporated by reference to the Company's 1999 Proxy Statement to be filed with the Commission.
Item 13.
Item 13. Certain Relationships and Related Transactions ----------------------------------------------
Incorporated by reference to the Company's 1999 Proxy Statement to be filed with the Commission.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ----------------------------------------------------------------
The following documents are filed as a part of this report:
(a) (1) The Consolidated Financial Statements included in Item 8 hereof and set forth on pages through. (2) The Financial Statement Schedules listed in the Index to the Financial Statement Schedules. (3) The exhibits listed in the Index to Exhibits.
(b) Reports on Form 8 - K.
The Company did not file any Reports on Form 8 - K during the fourth quarter of fiscal 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BWAY CORPORATION
By /s/ Warren J. Hayford ------------------------------------------------- Warren J. Hayford Chairman of the Board and Chief Executive Officer
Date: December 17, 1999 --------------------------
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 in the capacities indicated on December 16, 1999.
INDEPENDENT AUDITORS' REPORT
Board of Directors of BWAY Corporation:
We have audited the accompanying consolidated balance sheets of BWAY Corporation and subsidiaries (the "Company") as of October 3, 1999 and September 27, 1998 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended October 3, 1999. Our audits also included the financial statement schedules listed in the Index to the financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of October 3, 1999 and September 27, 1998 and the results of its operations and its cash flows for each of the three years in the period ended October 3, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects, the information set forth therein.
Atlanta, Georgia November 24, 1999
BWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
BWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
See notes to consolidated financial statements.
BWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
See notes to consolidated financial statements.
BWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
See notes to consolidated financial statements.
BWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
BWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
See notes to consolidated financial statements.
BWAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF OCTOBER 3, 1999 AND SEPTEMBER 27, 1998 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED OCTOBER 3, 1999 - --------------------------------------------------------------------------------
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Operations - BWAY Corporation ("BWAY") is a holding company whose subsidiaries, Brockway Standard, Inc., Milton Can Company, Inc., Brockway Standard (New Jersey), Inc., BMAT, Inc., and Brockway Standard (Canada), Inc. (collectively the "Company") manufacture and distribute metal containers and provide materials center services in the United States and Canada.
Principles of Consolidation - The consolidated financial statements of the Company include the accounts of BWAY and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
Fiscal Year - The Company operates on a 52/53-week fiscal year ending on the Sunday closest to September 30 of the applicable year.
Common Stock - On September 22, 1997, the Company increased the number of shares of common stock outstanding through a 3-for-2 stock split, effected in the form of a common stock dividend on the Company's issued and outstanding shares. Accordingly, per share and share data have been adjusted to give retroactive effect to the stock split for all periods presented.
Cash and Cash Equivalents - For purposes of the presentation of the consolidated statements of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
Inventories - Inventories are carried at the lower of cost or market, with cost determined under the last-in, first-out (LIFO) method of inventory valuation.
Property, Plant, and Equipment - Property, plant, and equipment is recorded at cost. Depreciation is provided over the estimated useful lives of the assets on a straight-line basis for financial reporting purposes. Expenditures for major renewals and replacements are capitalized. Expenditures for maintenance and repairs are charged to income as incurred. When property items are retired or otherwise disposed of, amounts applicable to such units are removed from the related asset and accumulated depreciation accounts and any resulting gain or loss is credited or charged to income. Useful lives are as follows:
Buildings and improvements 10-30 years Machinery and equipment 5-15 years Furniture and fixtures 5-7 years Computer systems 1-7 years
Interest is capitalized in connection with the installation of major machinery and equipment acquisitions. The capitalized interest is recorded as part of the cost of the asset to which it relates and is amortized over the asset's estimated useful life. In fiscal 1999,1998, and 1997, $0.6 million, $1.5 million, and $.3 million of interest cost was capitalized, respectively.
Computer Information Systems - Costs directly associated with the initial purchase, development, and implementation of computer information systems are capitalized and included in property, plant, and equipment. Such costs are amortized on a straight-line basis over the expected useful life of the systems, principally five to seven years. Ongoing maintenance costs of computer information systems are expensed as incurred.
Intangible Assets - Intangible assets consist of identifiable intangibles (trademarks, customer lists, and covenants not-to-compete) and goodwill. Identifiable intangibles are amortized over the term of the agreement (5 to 7 years) or estimated useful life (2 to 17 years). Goodwill is amortized on a straight-line basis over the estimated useful life (20 to 40 years).
Deferred Financing Costs - Deferred financing costs are being amortized over the term of the related loan agreement using the straight-line method, which approximates the effective yield method.
Revenue Recognition - The Company recognizes revenue at the time the product is shipped to the customer.
Accrued Rebates - The Company enters into contractual agreements for rebates on certain products with its customers. As sales occur, a provision for rebates is recorded as a reduction to arrive at net sales and is accrued on the balance sheet.
Income Taxes - The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") 109, "Accounting for Income Taxes." SFAS 109 requires, among other things, the use of the liability method of computing deferred income taxes. Under the liability method, the effect of changes in corporate tax rates on deferred income taxes is recognized currently as an adjustment to income tax expense. The liability method also requires that deferred tax assets or liabilities be recorded based on the difference between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of - The Company reviews for impairment, on a quarterly basis, long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of any asset may not be reasonable based on estimates of future undiscounted cash flows. In the event of an impairment, the asset is written down to its fair market value. Impairment of goodwill and write-down, if any, is measured based on estimates of future undiscounted cash flows including interest charges. Assets to be disposed of are recorded at the lower of net book value or fair market value less cost to sell at the date management commits to a plan of disposal and are classified as Assets Held for Sale on the Consolidated Balance Sheet.
Disclosures About Fair Value of Financial Instruments - A summary of the fair value of the Company's financial instruments and the methods and significant assumptions used to estimate those values is as follows:
Short-term Financial Instruments - The fair value of short-term financial instruments, including cash and cash equivalents, trade accounts receivable and payable, certain accrued liabilities, and current
maturities of long-term debt approximates their carrying amounts in the financial statements due to the short maturity of such instruments.
Long-Term Debt - The fair value of the variable rate Credit Agreement borrowings approximates the carrying amount since the currently effective rates reflect market rates. The fair value of publicly traded fixed rate subordinated notes payable is based on the quoted market price.
Accounting Change - On November 20, 1997, the Financial Accounting Standards Board's ("FASB") Emerging Issues Task Force ("EITF") issued a consensus on the accounting treatment of certain information systems and process reengineering costs. The Company was involved in a business information systems and process reengineering project that was subject to this pronouncement. Based on the EITF consensus, $2.0 million of the previously capitalized costs associated with this project were expensed in the first fiscal quarter of 1998 as a change in accounting.
Accounting for Stock Options - The Company adopted SFAS 123, "Accounting for Stock-Based Compensation," as of September 28, 1997. As permitted under the statement, the Company has continued to account for stock-based compensation under the intrinsic value method prescribed in Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees." Compensation cost for employees' and directors' stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the exercise price amount an employee or director must pay to acquire the stock.
Earnings Per Common Share - Earnings per common share are based on the weighted average number of common shares and common stock equivalents outstanding during each year presented, including vested and unvested shares issued under the Company's previous management stock purchase plan and the dilutive effect of the shares from the amended plan. Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options.
Segments - In fiscal 1999, the Company adopted the provisions of SFAS 131, "Disclosures about Segments of an Enterprise and Related Information. This statement requires public companies to report financial and descriptive information about their reportable operating segments. The Company determined that it has a single reportable segment.
New Accounting Pronouncement - In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." This statement, effective for the Company's quarter beginning October 2, 2000, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The statement requires the Company to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company has not completed the process of evaluating the impact that will result from adopting SFAS 133. The Company is therefore unable to discuss the impact that adoption of SFAS 133 will have on its financial position and results of operations when the standard is adopted.
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 and disclosure of contingent 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 those estimates.
2. ACQUISITIONS
Ball Aerosol - On October 28, 1996, the Company acquired substantially all of the assets related to the metal aerosol can business from Ball Metal Food Container Corporation, a wholly owned subsidiary of Ball Corporation. The assets consist of a facility in Cincinnati which includes a material center and substantially all the assets used in connection with the marketing, distribution, selling, manufacturing, designing, and engineering of metal aerosol cans. The Company paid approximately $42.4 million for the acquired business. The purchase method of accounting was used to establish and record a new cost basis for the assets acquired and liabilities assumed. The excess of the aggregate purchase price over the aggregate fair market value of net identifiable assets acquired was approximately $23 million.
U. S. Can Metal Services Operations - On November 9, 1998, the Company acquired substantially all of the assets and assumed certain of the liabilities of the United States Can Company's metal services operations ("U.S. Can Metal Services"). The purchase price was approximately $27.7 million in cash after adjustments for working capital. The acquisition included three operating plants and one non-operating plant. The acquired facilities operated two different businesses, coating and lithography which is part of the Company's core business, and tinplate metal services which is not a business of the Company. On November 17, 1998, the Company signed a binding letter of intent to sell the tinplate services business. Anticipating the sale of the tinplate metal services business, the Company closed the Brookfield, Ohio location in March, 1999 and closed the Chicago Metal location in September, 1999
The purchase method of accounting was used to establish and record a new cost basis for the assets acquired and liabilities assumed, and an allocation of the purchase price was finalized at October 3, 1999. The operating results for U.S. Can Metal Services have been included in the Company's consolidated financial statements since the date of acquisition except for the tinplate services business which was sold as described below. As of October 3, 1999, the excess aggregate purchase price over the aggregate fair market value of net identifiable assets acquired was $10.8 million and is being amortized over 40 years.
The Company completed the sale of the tinplate services business in the fourth quarter of fiscal 1999. In connection with the sale, the Company received a note receivable recorded at $2.4 million. No gain was recognized. The tinplate services business primarily purchased, processed and sold nonprime steel to third party customers. The Company excluded tinplate metal services business losses of $4.4 million, including interest expense of $0.7 million, from results of operations for the year ended October 3, 1999.
Management committed to a plan to exit certain activities of the acquired facilities and integrate acquired assets and businesses with BWAY facilities. In connection with the recording of the purchase, the Company established a reorganization liability of approximately $11 million. The reorganization liability includes $1.8 million in severance, $5.5 million in facility closing costs, and $3.7 million in equipment demolition costs. The reorganization liability represents the direct incremental costs expected to be incurred, which have no future economic benefit to the Company.
During fiscal 1999, the Company has charged $0.4 million in severance, $2.9 million in facility closing costs and $1.5 million in demolition costs. In connection with the plant closures, the plan called for the termination of 308 employees. As of October 3, 1999, 191 employees have been terminated. The Company has one remaining facility scheduled to close in the fourth quarter of fiscal 2000.
The reorganization liability, which is included in other current liabilities, at October 3, 1999 includes the following (in thousands):
Facility closure costs $2.6 Severance and benefits costs 1.3 Demolition costs 2.3 ---- $6.2 ====
The operating results for the U. S. Can Metal Services and Ball Aerosol acquisitions have been included in the Company's consolidated financial statements since the dates of acquisition.
The following unaudited pro forma results assume the acquisitions of U.S. Can Metal Services, excluding tinplate services, and Ball Aerosol occurred at the beginning of the fiscal year ended October 3, 1999 and September 28, 1997, after giving affect to certain pro forma adjustments. The adjustments were made to reflect the goodwill amortization cost in excess of the net assets acquired, increased interest expense, and the estimated related income tax effects
(In thousands, except per share amounts) Year Ended --------------------------------------------- October 3, September 27, September 28, 1999 1998 1997 (U. S. Can Metal Services) (Ball Aerosol)
Net sales $476,149 $401,089 $406,476 Net income 5,374 1,519 13,202 Basic earnings per common share 0.58 0.16 1.34 Diluted earnings per common share 0.57 0.15 1.32
The unaudited pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the beginning of the period presented, nor is it necessarily indicative of future operating results.
3. INVENTORIES
Inventories consist of the following (in thousands):
October 3, September 27, 1999 1998
Inventories at FIFO cost: Raw materials $ 7,950 $ 6,555 Work-in-progress 30,543 22,695 Finished goods 10,538 10,696 ------- ------- 49,031 39,946 LIFO reserve 546 (223) Market reserve (546) ------- ------- Inventories, net $49,031 $39,723 ======= =======
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following (in thousands):
October 3, September 27, 1999 1998
Land $ 1,649 $ 2,979 Building and improvements 12,631 16,202 Machinery and equipment 131,283 107,041 Furniture, fixtures, and information technology 26,114 11,022 Construction-in-progress 17,041 30,259 -------- -------- 188,718 167,503 Less accumulated depreciation (44,002) (33,543) -------- --------
Property, plant, and equipment - net $144,716 $133,960 ======== ========
5. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
October 3, September 27, 1999 1998
Customer lists $ 7,753 $ 7,486 Tradename 4,704 4,704 Noncompete agreements 4,509 4,494 ------- ------- 16,966 16,684 Less accumulated amortization (6,192) (4,639) ------- -------
Intangible assets, net $10,774 $12,045 ======= =======
6. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
Included in accounts payable and accrued salaries and wages at October 3, 1999 and September 27, 1998 are bank drafts issued and outstanding for which no rights of offset exist to cash and cash equivalents, as follows (in thousands):
October 3, September 27, 1999 1998
Bank drafts issued and outstanding included in: Accounts payable $20,464 $22,027 Accrued salaries and wages 1,136 2,426 ------- -------
Bank drafts $21,600 $24,453 ======= =======
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
Senior Subordinated Notes
On April 11, 1997, the Company received the net proceeds of approximately $96 million from a private placement of $100 million 10 1/4% Senior Subordinated Notes due 2007 (the "Notes").
Interest on the Notes is payable semi-annually in arrears on April 15 and October 15 of each year, commencing on October 15, 1997. The Notes are general unsecured senior subordinated obligations of the Company and are effectively subordinated to all secured indebtedness, as defined, of the Company to the extent of the value of the assets securing any such indebtedness. The Notes are redeemable, in whole or in part, at the option of the Company, on or after April 15, 2002 at the prices specified in the Notes (105.125% on April 15, 2002 declining annually to 100% on April 15, 2005). In addition, until April 15, 2000, the Company may, at its option, redeem up to 33 1/3% of the aggregate principal amount of the Notes originally issued at a redemption price equal to 110 1/4% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption, with the net cash proceeds of one or more public or private sales of common stock of the Company, subject to certain provisions of the indenture. Upon the occurrence of a Change in Control, as defined in the Notes, the Company will be required to make an offer to repurchase the Notes at 101% of the principal amount plus accrued and unpaid interest to the date of repurchase. The Notes contain certain restrictive covenants, including limitations on asset sales, additional indebtedness, and mergers. Under the Notes' convenants, the Company is restricted in its ability to pay shareholder dividends and other restricted payments in an amount greater than $8.7 million at October 3, 1999.
During fiscal 1998, the Company filed a registration statement and exchanged the Notes for the Company's 10 1/4% Senior Subordinated Notes due 2007, Series B (the "Exchange Notes"). BWAY is a holding company with no independent operations, although it incurs expenses on behalf of its operating subsidiaries. BWAY has no significant assets other than the common stock of its subsidiaries. The Exchange Notes are fully and unconditionally guaranteed on a joint and several basis by certain of the Company's direct and indirect subsidiaries. The subsidiary guarantors are wholly owned by BWAY and constitute all of the direct and indirect subsidiaries of BWAY except for four subsidiaries that are, individually and in the aggregate, inconsequential. Separate financial statements of the subsidiary guarantors are not presented because management has determined that they would not be material to investors.
Credit Agreement
In October 1997, the Company amended its Credit Agreement with Deutsche Bank (formerly Bankers Trust Company) and Bank of America (formerly NationsBank, N.A.) (the "Credit Agreement"). The amendment lowered the borrowing limit from $150 million to $100 million. The amendment provides the Company with lower interest rate margins and greater flexibility with regard to investments in acquisitions, joint ventures and other subsidiaries. The amendment also provides the Company with a second option to increase the borrowing limit by another $25 million for a maximum borrowing limit of $150 million, provided certain conditions are met and provided that only one $25 million increase occur in any twelve-month period. The amendment also extends the expiration of the Credit Agreement one year to June 17, 2002.
On November 2, 1998, the Company and its lenders executed another amendment to the Credit Agreement which modified certain restrictive covenants and provided greater flexibility with respect to investments in joint ventures. Additionally, the Company exercised its option to increase the available borrowing limit to $125 million from $100 million. The Credit Agreement currently allows the Company to borrow up to $125 million or $150 million if certain conditions are met. The interest rates under the Credit Agreement are based on rate margins for either prime rate as announced by Bank of America from time to time ("Prime") or LIBOR plus an applicable rate spread, at the option of the Company. The applicable rate margin is determined on a quarterly basis by a review of the Company's leverage ratio. The Company's borrowing rate is 7.2% at October 3, 1999, and 7.0% atSeptember 27, 1998. Loans under the Credit Agreement are unsecured and can be prepaid at the option of the Company without premium or penalty. The Credit Agreement is subject to certain restrictive covenants, including covenants which require the Company to maintain a certain minimum level of net worth and a maximum ratio for leverage indebtedness. Under this agreement, BWAY is restricted in its ability to pay shareholder dividends and other restricted payments in an amount greater than approximately $8.7 million at October 3, 1999 and to incur additional indebtedness. The Company's subsidiaries are restricted in their ability to transfer funds to the Company, except for funds to be used to effect approved acquisitions, pay dividends, reimburse the Company for operating and other expenditures made on behalf of the subsidiaries and repay permitted intercompany indebtedness.
Scheduled maturities of long-term debt as of October 3, 1999 are as follows (in thousands):
The fair value of long-term debt at October 3, 1999 and September 27, 1998 was estimated at $148.1 million and $126.6 million, respectively.
8. STOCKHOLDERS' EQUITY
Earnings Per Share - The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for income before the cumulative effect of change in accounting:
Stock Option Plans
In June 1995, the Company adopted the Company's 1995 Long-Term Incentive Plan and the Formula Plan for Non-Employee Directors (the "Formula Plan") for certain directors, officers, employees, and consultants of the Company and its subsidiaries. In February 1997, the Company i) adopted the Amended and Restated 1995 Long-Term Incentive Plan which increased the aggregate number of shares of common stock authorized for issuance thereunder from 735,000 to 1,125,000, and ii) froze the Formula Plan with only 45,000 of the available 150,000 shares of common stock being granted thereunder. In February 1998, the Company adopted the Second Amended and Restated 1995 Long-Term Incentive Plan (the "Amended Plan") which further increased the aggregate number of shares of common stock authorized for issuance thereunder from 1,125,000 to 1,425,000. In February 1998, the Company adopted the third amendment and restatement of the Amended Plan (as so amended and restated, the "Current Plan") which further increased the aggregate number of shares of common stock authorized for issuance thereunder from 1,425,000 to 1,825,000.The options generally become exercisable in installments of 33% per year on each of the first through third anniversaries of the grant. The Current Plan will terminate on May 31, 2005 unless sooner terminated by the Board. Termination of the Current Plan will not affect grants made prior to termination. The Current Plan authorizes grants of stock options to participants from time to time as determined by the Management Resources, Nominating and Compensation Committee of the Board. Options granted under the Current Plan may be incentive stock options as described in Section 422 of the Internal Revenue Code, non-qualified stock options, or a combination thereof.
As of October 3, 1999, September 27, 1998, and September 28, 1997, 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: expected dividends of 0.0%, expected volatility 52.33% in 1999, 37.67% in 1998, and 30% in 1997, risk-free interest of 6.58%, and expected lives of 6.0 years.
A summary of the status of the Company's two stock option plans as of October 3, 1999 and changes during fiscal 1997, 1998, and 1999 is presented below:
The following table summarizes information about stock options outstanding at October 3, 1999:
The fair value of options granted during the years ended October 3, 1999, September 27, 1998, and September 28, 1997 was $3.8 million, $4.4 million, and $.4 million, respectively. The Company applies Accounting Principles Board Opinion 25 and related Interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, the Company's net income and earnings per share for each of the three years in the period ended October 3, 1999 would have been reduced to the pro forma amounts indicated below:
Shareholder Rights Plan
The Company has a Shareholder Rights Plan, amended through November 26, 1997 (the "Rights Plan"), under which a preferred share purchase right is presently attached to and trades with each outstanding share of the Company's common stock. The rights become exercisable and transferable apart from the common stock after a person or group other than an Exempt Person (as defined in the Rights Plan), without the Company's consent, acquires beneficial ownership of, or the right to obtain beneficial ownership of, 15% or more of the Company's common stock or ten business days after a person or group announces or commences a tender offer or exchange offer that could result in 15% ownership. Once exercisable, each right entitles the holder to purchase one fifteen-hundredth share of Junior Participating Series A Preferred Stock at an exercise price of $60 per share subject to adjustment to prevent dilution. The rights have no voting power and no current dilutive effect on earnings per common share. The rights expire on June 15, 2005 and are redeemable at the discretion of the Board of Directors at $.01 per share.
If a person acquires 15% ownership, except in an offer approved by the Company under the Rights Plan, then each right not owned by the acquirer or related parties will entitle its holder to purchase, at the right's exercise price, additional shares of common stock or common stock equivalents. In addition, after an acquirer obtains 15% ownership, if the Company is involved in certain mergers, business combinations, or asset sales, each right not owned by the acquirer or related persons will entitle its holder to purchase, at the right's exercise price, additional shares of common stock of the other party to the transaction.
9. INCOME TAXES
The Company files a consolidated federal income tax return. Deferred income taxes are provided to recognize the differences between the carrying amount of assets and liabilities for financial statement purposes and the amounts used for income tax purposes.
Components of net deferred tax liability are as follows (in thousands):
The provision for income taxes is reconciled with the federal statutory rate as follows (dollars in thousands):
The components of the provision for income taxes are as follows (in thousands):
As of October 3, 1999, the Company has recognized deferred tax benefits of $1.1 million related to alternative minimum tax carryforwards which have no expiration date.
10. LEASE COMMITMENTS
The Company leases warehouses, office space, equipment, and vehicles under operating leases. Rent expense during each of the last three fiscal years was approximately $4.5 million (1999), $3.4 million (1998), and $4.2 million (1997).
On August 20, 1999, the Company sold and leased back its Cincinnati manufacturing facility. The sales price was $10.4 million. After deducting closing costs of $0.6 million, the Company recorded a deferred gain on the sale of $2.3 million which will be amortized over the life of the lease. The amortization of the deferred gain recorded in earnings for the year ending October 3, 1999 was $13,000. The lease term is 20 years with annual lease payments of approximately $1.1 million. The lease has two 5 year renewal terms that run consecutively after the basic term. The lease is accounted for as an operating lease for financial reporting purposes.
At October 3, 1999, future minimum rental payments under noncancelable operating leases are as follows (in thousands):
11. PROFIT SHARING AND PENSION PLANS
The Company has qualified profit sharing and savings plans for specified employees. These plans are contributory defined contribution plans which provide for employee contributions with a Company matching provision, and for certain employees a deferred profit sharing component funded by the Company. The Company's net contributions to the profit sharing and savings plans for each of the last three fiscal years were approximately $1.3 million (1999), $.9 million (1998), and $.7 million (1997).
BSNJ has a noncontributory defined benefit pension plan covering a majority of its salaried employees. The plan provides benefit payments using a formula based on an employee's compensation and length of service. BSNJ funds the plan in amounts equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974, plus additional amounts as BSNJ actuarial consultants advise to be appropriate and as management approves from time to time. The Company froze this plan effective December 31, 1996. On January 1, 1998, the Company amended the plan to cover substantially all nonunion employees. The plan provides for a contribution of 4% of each participant's wages. Participant account balances earn interest at 6% per annum.
Effective July 31, 1998, the Company amended the plan to terminate the plan on that date. All participants became fully vested in their accounts on July 31, 1998. On July 29, 1999 the Company received approval to distribute the assets in the plan to the participants. Substantially all assets were distributed in November, 1999.
The periodic net expense (income) is comprised of the following:
The following table shows the plan's funded status and amounts recognized in the balance sheet:
Most of BSNJ's union employees are covered under multi-employer defined benefit plans administered by the union. Total contributions charged to expense for such plans are $.3 million for the year ended October 3, 1999, $.4 million for the year ended September 27, 1998, and $.7 million for the year ended September 28, 1997.
In connection with the acquisition of MCC, the Company assumed three defined benefit postretirement medical plans. These plans are noncontributory and provide certain medical benefits after retirement to covered union employees.
In June 1997, the Company and employees belonging to one union representing approximately 50% of the employees at MCC reached a new collective bargaining agreement. One of the provisions of the new agreement eliminates postretirement medical benefits provided by the Company which resulted in the recording of a curtailment gain of approximately $5.8 million.
In fiscal 1998, the Company reached new collective bargaining agreements with unions representing approximately 34% of the hourly employees at the Cincinnati, Ohio facility. The provisions of the new agreements substantially eliminate unvested postretirement medical benefits provided by the Company which resulted in the recording of curtailment gains of approximately $1.9 million.
As of October 3, 1999, in accordance with the terms of two applicable collective bargaining agreements, the Company continues to offer postretirement medical coverage to certain union employees who retire from employment at MCC.
For measurement purposes, a 10% annual rate of increase in the post 65 per capita cost of covered health care benefits and a 8.5% annual rate of increase in the pre 65 per capita cost of covered health care benefits were assumed for 1999 and 1998. The rates were assumed to decrease by .5% per year to 5% and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in assumed health care cost trends would have the following effects:
12. RELATED PARTY TRANSACTIONS
BSNJ leases its primary operating facility under an operating lease from a partnership in which certain members of the Company's management are partners. The lease, which is for a five-year period ended September 30, 1999 with renewal options and carried a monthly lease payment of $52,547. The Company exercised the first five year option through September 30, 2004 with a monthly lease payment of $56,391 beginning in fiscal year 2000.
13. RESTRUCTURING AND IMPAIRMENT CHARGE
On June 3, 1998, the Board of Directors approved a restructuring plan to improve operating efficiencies. The plan involves the rationalization of three existing facilities, the shift of related production to other facilities, and the elimination of an internal transportation department. The facilities closed in fiscal 1999 were Solon (Ohio) and Northeast Tin Plate (New Jersey). The facility scheduled for closure in fiscal 2000 is Farmer's Branch (Texas).
The 1998 restructuring and impairment charge totaled $11.5 million and consisted of the following: $7.8 million related to the closure
of the plants and transportation department and $3.7 million related to other asset impairments. The $7.8 million related to the plant and transportation department closure includes $2.1 million for severance costs, $2.2 million for other facility closure costs and $3.5 million for asset impairments related to the plant shut-downs.
During fiscal 1998, the Company charged the restructuring reserve approximately $1.7 million for severance benefits, $6.6 million for other asset impairments and $.5 million for facility closing costs. In conjunction with the plant closures, the plan called for the termination of 234 employees. As of October 3, 1999, 210 employees have been terminated. During fiscal 1999, the Company charged $.3 million in severance and $1.9 million in facility closing costs. The remaining balance in the 1998 restructuring liability is $.5 million at October 3, 1999.
In connection with the fiscal 1999 acquisition of U.S. Can Metal Services, the Company provided a reserve for costs to exit the tinplate services business. See Note 2.
14. ASSETS HELD FOR SALE
In connection with the closure of the plants in 1998 and 1999, $3.4 million of real property is held for sale at October 3, 1999. This property includes $.6 million of land and $2.8 million of buildings. Additionally, the Company holds $1.4 million in equipment for sale at October 3, 1999.
During the second quarter of fiscal 1999, the company sold the Solon, Ohio facility for $4.5 million resulting in a net gain of $.2 million.
At September 27, 1998, $5.4 million of real property is held for sale. This property included land of $.8 million and buildings of $4.6 million.
In connection with the fiscal 1999 acquisition of U.S. Can Metal Services, the Company provided a reserve for costs to exit the tinplate services business. See Note 2.
15. CONTINGENCIES
Environmental
The Company continues to monitor and evaluate on an ongoing and regular basis its compliance with applicable environmental laws and regulations. Liabilities for noncapital expenditures are recorded when environmental remediation is probable and the costs can be reasonably estimated. The Company believes that it is in substantial compliance with all material federal, state, and local environmental requirements.
The Company (and, in some cases, predecessors to the Company) has, from time to time, received requests for information or notices of potential responsibility pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") with respect to certain waste disposal sites utilized by former or current facilities of the Company or its various predecessors. To the Company's knowledge, all such matters which have not been resolved are, subject to certain limitations, indemnified by the sellers of the relevant Company affiliates, and all such unresolved matters have been accepted for indemnification by such sellers. Because liability under CERCLA is retroactive, it is possible that in the future the Company may incur liability with respect to other sites.
Environmental investigations voluntarily conducted by the Company at its Homerville, Georgia facility in 1993 and 1994 detected certain conditions of soil and groundwater contamination, that management believes predated the Company's 1989 acquisition of the facility from Owens-Illinois. Such pre- 1989 contamination is subject to indemnification by Owens-Illinois. The Company and Owens-Illinois have entered into supplemental agreements establishing procedures for investigation and remediation of the contamination. In 1994, the Georgia Department of Natural Resources ("DNR") determined that further investigation must be completed before DNR decides whether corrective action is needed. On August 25, 1999, DNR signed a consent order that had been submitted by the Company and Owens-Illinois. The consent order establishes a schedule for completing such investigation and remediation by Owens-Illinois. Separately, the Company entered into a consent order with DNR on April 22, 1999, related to certain industrial wastewater and cooling water discharges that exceeded allowable limits. The Company anticipates capital expenditures of approximately $200,000 in fiscal 2000 to comply with the consent order. Management believes that none of these matters will have a material adverse effect on the results of operations or financial condition of the Company in light of both the potential indemnification obligations of others to the Company and the Company's understanding of the underlying potential liability.
Letters of Credit
At October 3, 1999, a bank had issued standby letters of credit on behalf of BWAY in the aggregate amount of $1.3 million in favor of BWAY's workers' compensation insurer.
16. CUSTOMERS
The Company sells its metal containers to a large number of customers in numerous industry sectors. To reduce credit risk, the Company sets credit limits and performs ongoing credit evaluations. Sales to the Company's ten largest customers amounted to approximately 42% (1999), 36% (1998), and 38% (1997) of the Company's sales including sales to one customer of 8.5% (1999), 9.5% (1998), and 10% (1997).
Although the Company's exposure to credit risk associated with nonpayment is affected by conditions with the customers' industries, the balances are substantially current and are within terms and limits established by the Company.
The Company sells its products and services primarily in North America. In fiscal 1999, 1998, and 1997, the Company's sales to customers located outside the United States were less than five percent of total net sales. The following is a summary of revenue for the Company's products and services:
Year Ended ----------------------------------------- October 3, September 27, September 28, 1999 1998 1997
General line containers $326,970 $320,871 $337,806 Food cans 51,380 52,142 52,280 Material center services 74,736 8,022 Ammunition boxes 14,013 20,054 12,064 -------- -------- --------
$467,099 $401,089 $402,150 ======== ======== ========
17. QUARTERLY INFORMATION (UNAUDITED) (In thousands, except per share data)
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule I - Condensed Financial Statements of BWAY Corporation. . S-2
Schedule II - Condensed Valuation and Qualifying Accounts BWAY Corporation And Subsidiaries . . . . . . . . . . . S-6
S-1
SCHEDULE I - CONDENSED FINANCIAL STATEMENTS OF BWAY CORPORATION
CONDENSED BALANCE SHEETS (In Thousands)
S-2
SCHEDULE I - CONDENSED FINANCIAL STATEMENTS OF BWAY CORPORATION
CONDENSED STATEMENTS OF INCOME (In Thousands)
S-3
SCHEDULE I - CONDENSED FINANCIAL STATEMENTS OF BWAY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (In Thousands)
S-4
S-5
SCHEDULE II - CONDENSED VALUATION AND QUALIFYING ACCOUNTS BWAY CORPORATION AND SUBSIDIARIES (In Thousands)
S-6
____________________________ * Management contract or compensatory plan or arrangement. ** Confidential treatment requested.
(1) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 33-91114).
(2) Incorporated by reference to the Company's Form 10-K for the fiscal year ending October 1, 1995 (File No. 0-26178).
(3) Incorporated by reference to the Company's Form 10-Q for the period ending March 31, 1996 (File No. 0-26178).
(4) Incorporated by reference to the Company's Form 10-Q for the period ending June 30, 1996 (File No. 0-26178).
(5) Incorporated by reference to the Company's Current Report on Form 8-K filed on November 12, 1996 (File No. 0-26178).
(6) Incorporated by reference to the Company's Registration Statement on Form S-4 (File No. 333-26013).
(7) Incorporated by reference to the Company's Registration Statement on Form S-8 (File No. 333-39225).
(8) Incorporated by reference to the Company's Form 10-K for the fiscal year ending September 29, 1996 (File No. 0-26178).
(9) Incorporated by reference to the Company's Form 10-Q for the period ending December 28, 1997 (File No. 0-26178).
(10) Incorporated by reference to the Company's Form 10-Q for the period ending March 29, 1998 (File No. 0-26178).
(11) Incorporated by reference to the Company's Form 10-K for the fiscal year ending September 28, 1997 (File No. 0-26178).
(12) Incorporated by reference to the Company's Current Report on Form 8-K filed on November 9, 1998 (File No. 0-26178).
(13) Incorporated by reference to the Company's Form 10-Q for the period ending July 4, 1999 (File No. 0-26178).
(14) Incorporated by reference to the Company's Form 10-K for the fiscal year ending October 3, 1999 (File No. 0-26178).