ITEM 1. BUSINESS
RECENT DEVELOPMENTS
The Company announced on February 20, 1997 that it had entered into a definitive merger agreement with WBT Holdings, LLC, a limited liability company owned by several trusts for the benefit of members of the family of the late Walter Bunzl, of which Bennett Kight, a director of the Company, is a co-trustee (the "Merger Agreement"). The Merger Agreement provides for a merger between the Company and a wholly-owned subsidiary of WBT Holdings, LLC, in which shareholders of the Company (except for WBT Holdings and its affiliates) will receive a per share cash price of $46.52. In addition, WBT Holdings, LLC, has executed a definitive acquisition agreement with Bunzl plc, an international paper and plastics group quoted on the London Stock Exchange, pursuant to which, following the merger, the Company will sell to Bunzl plc the bonded fibers business of the Company for $72,450,000 in cash subject to certain adjustments. Consummation of any transaction would be subject to
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normal regulatory filings, shareholder approval and certain other conditions.
GENERAL
American Filtrona Corporation was incorporated in New York in 1954 and in 1971 moved its domicile from New York to Virginia, where it is now incorporated. The Company develops and manufactures various fiber products in the United States and various plastic products in the United States and Canada. The Company's principal products are: fiber filters for cigarettes and cigars; fiber ink reservoirs and tips for writing instruments and other bonded fiber specialties; and a variety of plastic products, converted from plastic resins and films and used in food packaging, lighting fixtures, signs and displays and many other applications. In 1996, bonded fiber products represented 38% of the Company's consolidated net sales and plastic products represented 62% of consolidated net sales. The Company employs approximately 1,200 persons.
The Company's business is described more fully below.
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BONDED FIBER PRODUCTS
TOBACCO FILTERS
At its Richmond, Virginia plants the Company manufactures from fibers a variety of tobacco filters for cigarettes and cigars. The Company sells these filters primarily to major cigarette manufacturers that either produce or are capable of producing their own filters and have far greater financial resources. Therefore, to retain its relative position in the industry the Company depends upon its research to develop specialty or patented filters and upon its customer service.
The Company believes that it is presently one of three independent manufacturers of tobacco filters in the United States. The vast majority of filters are manufactured by the cigarette companies themselves. In 1996, the Company's cigarette filters were used on only about 2% of all cigarettes sold in the United States and only about 3% of cigarettes manufactured in the United States.
The Company's patented FILTRONA(R) SCS filter has had good acceptance since its introduction in mid-1970 and accounted for about 11% of the Company's 1996 bonded fibers sales. FILTRONA(R) SCS IV, the latest generation of filters resulting from specialized production equipment designed by the Company, is used by R. J. Reynolds Tobacco Company ("Reynolds"), a subsidiary of RJR Nabisco Inc., on its "Vantage" brand cigarettes. The "Vantage" cigarette,
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which is the main brand on which this filter is used, is one of the leading cigarette brands in the United States.
The Company produces filters for "Merit Ultima" brand cigarettes for subsidiaries of Philip Morris Companies, Inc. (collectively, "Philip Morris"), using Philip Morris' concept and design and utilizing the Company's process capabilities and technology. The Company also produces filters for "Next" and "Philip Morris One" brand cigarettes that are sold by Philip Morris in Japan. In 1996 Philip Morris also temporarily outsourced to the Company the production of additional filters for use on certain of its export brands. FILTRONA(R) TWA specialty filters continue to be supplied and are used by Brown & Williamson Tobacco Corporation ("B&W") on "Barclay" and "Kool Ultra" brand cigarettes. FILTRONA(R) cigarette filters are also used on some smaller U.S. and foreign cigarette and cigar brands. The Company also sells conventional acetate filters to B&W for use on most of its "Misty" and "Capri" brand cigarettes. Charcoal dual filters are sold to domestic cigarette manufacturers for export sales to the Far East, particularly Japan.
During 1996, the Company had approximately 27 tobacco filter customers, the largest of which was Philip Morris, with approximately 15% of the Company's net sales and approximately 39% of the Company's bonded fibers sales. Any significant loss of the Philip Morris business could have a materially adverse effect on the Company's sales and income.
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Reports and speculation with respect to the alleged harmful physical effect of cigarette smoking have been published since the early 1950's. In the United States, cigarette advertising has been restricted, various warning statements have been required to be placed on cigarette packaging and in advertising, prohibitions against smoking in public and certain non-public areas have been enacted and various other official and unofficial steps have been taken to discourage cigarette smoking. In addition, litigation is pending against leading U.S. manufacturers of consumer tobacco products seeking damages for health problems alleged to have resulted from the use of tobacco in various forms. Also, sales and other taxes affecting cigarettes, levied by the federal government and various states and municipalities, have been increasing in recent years. The Food and Drug Administration (the "FDA") has promulgated regulations regarding the advertising and marketing of cigarettes which become effective by their own terms in July 1997. The FDA's jurisdiction over cigarette advertising and marketing is currently being challenged in the federal courts. A number of foreign countries have also increased taxes and taken steps to restrict cigarette advertising and to discourage cigarette smoking. The Company believes, however, that its emphasis on tobacco filters with high filtration efficiency or other special properties might reduce to some degree any adverse effect that these developments might have on the Company's sales and earnings. Moreover, any increase in the Company's U.S. cigarette filter market share could further counteract such adverse effects.
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WRITING INSTRUMENT PRODUCTS
The Company manufactures ink reservoirs, writing tips and wicks from fibers at its primary Richmond, Virginia plant, utilizing the same types of raw materials and machinery as are used for the manufacture of tobacco filters. Ink reservoirs for marking pens, markers and highlighters are sold under the trade name TRANSORB(R). Virtually all of the major domestic handwriting reservoir customers using ink reservoirs have converted to the TRANSORB(R) XPE reservoir and the range of applications has been expanded to include highlighters and "pocket" markers. The Company's market share with the Japanese handwriting instrument manufacturers has grown based on acceptance of this product. The Company has also introduced the TRANSORB(R) XPT reservoir, a large diameter ink reservoir. Writing tips for porous point pens and markers are sold under the trade name TRANSTIP(R). Wicks for ink transfer to the ball tip in roller ball pens are sold under the trade name TRANSWICK(R).
Approximately 77 writing instrument manufacturers purchase these products from the Company, generally under purchase orders and not under long-term contracts. During 1996, the largest such customer accounted for about 4% of the Company's net sales.
No published data or statistics are available on domestic or foreign competitors in supplying ink reservoirs and writing tips to the writing instrument industry in the United States. However, the Company believes it has about 16 such competitors and is the leading United States supplier of ink reservoirs to the felt tip
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and fine line pen market. The Company relies on customer service and know-how to maintain its relative position in this business.
OTHER BONDED FIBER PRODUCTS
The Company produces miscellaneous other fiber elements that can be used in liquid reservoirs and applicators and various filtration applications in the health care, personal care and household products industries, including wicks for diagnostic test devices and pipette tip filters. Sales of these other fiber products in 1996 were about 3% of the Company's net sales.
DISTRIBUTION AND PROMOTION
All of the Company's domestic sales of tobacco filters and substantially all of its domestic and export sales of ink reservoirs and writing tips are made to industrial customers from the Richmond, Virginia plants. Approximately 94% of the Company's 1996 sales of bonded fiber products were made to domestic customers.
The Company relies on personal contact with its customers for the promotion of its bonded fiber products. Advertising is used only occasionally in the development of new markets for certain specialty products.
PLASTIC PRODUCTS
The Company's plastic products business is conducted by eight subsidiaries: Southern Plastics Company ("Southern Plastics"), an
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extruder located in Columbia, South Carolina; Porth Plastic Company ("Porth"), an extruder located in Des Plaines, Illinois; A&B Plastics, Inc. ("A&B"), an extruder located in Yakima, Washington; Duall Plastics, Inc. ("Duall"), an extruder located in Athol, Massachusetts; A&B Plastics-Southwest, Inc. ("A&B Southwest"), an extruder located in Phoenix, Arizona; Tri-Lite Plastics, Inc., an extruder located in Fallsington, Pennsylvania ("Tri-Lite"); Tri- Lite Plastics-South, Inc., an extruder located in Pell City, Alabama ("Tri-Lite South"); and Filpac Inc. ("Filpac"), a custom converter of flexible packaging materials located in Terrebonne, Quebec, Canada near Montreal.
Custom extruded profiles, conforming to rigid standards, are sold to original equipment manufacturers ("OEM's") in the lighting fixture, sign and display, transportation equipment, commercial refrigeration, recreational equipment, fencing, health care, office products, marine and electronics industries. Extruded flat sheets are sold to OEM's in the lighting fixture, sign and display, glazing and marine industries, and to vacuum formers, fabricators and distributors. The Company's plastic extrusions are sold through sales engineers and through manufacturers' representatives. Personal contact rather than advertising is relied upon to promote these products.
Filpac sells flexible packaging materials, primarily for the Canadian snack food industry. Filpac purchases a large variety of plastic films, foils and papers that are then printed, laminated, slit and sold in custom-sized rolls for further conversion by
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customers. The primary converting operations are flexographic printing of up to eight colors, backside-patterned adhesive coating and/or adhesive thin film lamination of a variety of packaging films and custom slitting. Rolls are sold directly to food processors, supermarkets, bakeries and others who use these products to package a variety of snack foods such as potato chips, peanuts and candies. These products are sold directly by Filpac to about 100 customers located in Quebec and Ontario, Canada and the United States. Promotion of these products is through personal contact by sales and technical personnel rather than advertising.
About 25% of plastic product sales for 1996 were made to the food packaging industry, 21% to the lighting fixture industry and 9% to the sign and display industry. The remaining sales were spread among a variety of applications discussed above. The largest customer accounted for about 11% of the Company's 1996 net sales.
The plastic products business is highly competitive, and there are plastic extruders and flexible packaging converters with greater resources than the Company. The Company has a number of major competitors in its plastic products market areas but believes that it is a significant supplier of flexible packaging materials in eastern Canada and of plastic profile extrusions in the United States.
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SOURCES OF SUPPLY
The Company's diverse raw material requirements are widely available from many different suppliers. The Company has no long-term contracts with its suppliers; however, the Company believes its sources of supply to be adequate at present sales levels. The Company's energy requirements are relatively low.
RESEARCH AND DEVELOPMENT
Patented tobacco filters have been introduced by the Company periodically since 1958. The Company's writing instrument product line and its bonded fiber lines for other industries were derived from its basic technology in the area of tobacco filters. See BONDED FIBER PRODUCTS above.
The Company conducts its bonded fiber products research, development and engineering program at its Richmond facilities and is constantly engaged in new product and process development. During 1996, the Company spent approximately $2,786,000 on research activities relating to development and engineering of new products or improvements of existing products and processes, all of which was Company sponsored. During 1995 and 1994, about $2,558,000 and $2,377,000, respectively, was spent on such activities, all of which were Company sponsored.
The Company owns 30 U.S. patents in the fiber products area. The Company considers 6 of its patents to be material with respect to its present bonded fibers business and these patents expire between 1999 and 2007. The Company has no knowledge of any
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infringement questions with respect to these patents and believes its patent position to be generally adequate for the conduct of its business.
In addition, the Company conducts product development and engineering activities in the plastics segment. In 1996, approximately $771,000 was spent on these activities in the plastics segment. Approximately $703,000 and $713,000 was spent on these activities in 1995 and 1994, respectively. The Company owns 1 additional United States patent and 6 registered trademarks with respect to this business, none of which the Company considers to be material.
ENVIRONMENTAL MATTERS
The Company does not believe that compliance with federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have any material effect on its financial position, results of operations or competitive position.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Information with respect to the Company's operations in different industry segments and geographic areas is presented on page 16 of the Annual Report in Note 9 of Notes to Consolidated Financial Statements, and is incorporated herein by reference thereto.
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FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Financial information about the Company's foreign and domestic operations is presented on page 16 of the Annual Report in Note 9 of Notes to Consolidated Financial Statements, and is incorporated herein by reference thereto. See also PLASTIC PRODUCTS above.
ITEM 2.
ITEM 2. PROPERTIES
The following is a brief description of the principal properties of the Company, all of which are owned except as stated below.
Location Principal Operations -------- --------------------
Bonded Fibers Facilities ------------------------ Richmond, Virginia Production of tobacco filters, ink reservoirs, writing tips and wicks, and other fiber products.
Richmond, Virginia Production of conventional (lease expiring 2004) tobacco filters
Plastic Products Facilities ---------------------------
Athol, Massachusetts Production of custom plastic extruded profiles
Columbia, South Carolina Production of custom plastic extruded profiles and plastic sheet
Des Plaines, Illinois Production of custom plastic extruded profiles
Pell City, Alabama Production of custom plastic extruded profiles
Terrebonne, Quebec, Canada Production of flexible packaging materials
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Yakima, Washington Production of custom plastic extruded profiles
Fallsington, Pennsylvania Production of custom plastic (lease expiring 1998) extruded profiles
Phoenix, Arizona Production of custom plastic extruded profiles and plastic sheet
Corporate Offices -----------------
Richmond, Virginia (lease expiring 1998)
The property owned by the Company in Richmond, Virginia also includes research and development facilities, land and buildings leased by an unrelated corporation, and land available for future expansion.
Management believes that the Company's facilities are generally well maintained and adequate for its business at present and foreseeable sales levels.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained on page 20 of the Annual Report under the captions "Common Stock Information" and "Dividend
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Information" and, with respect to dividends and market prices under the caption "Quarterly Financial and Common Stock Data," is incorporated herein by reference thereto. The Company has about 1,200 shareholders.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information for the five years ended December 31, 1996, contained on pages 18 and 19 the Annual Report under the caption "Historical Financial Review" is incorporated herein by reference thereto.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained on pages 8 and 9 of the Annual Report under the caption "Management's Discussion and Analysis of Financial Statements" is incorporated herein by reference thereto.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements contained on pages 10- 16, and the information with respect to Sales and Earnings under the caption "Quarterly Financial and Common Stock Data" on page 20 of the Annual Report are incorporated herein by reference thereto.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Inapplicable.
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PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE COMPANY
Position with the Company, Principal Occupation for Last 5 Years, Directorships in Director Name Age Public Corporations Since ---- --- -------------------------- --------
JOHN D. BARLOW, JR. 62 Vice President -- Finance of 1982 the Company.
RUDOLPH H. BUNZL 74 Former Chairman of the Board 1954 of the Company (1987-1994), and prior thereto Chairman and Chief Executive Officer.
MANUEL DEESE 55 Retired (since February 1986 1997); formerly Executive Vice President, Major Accounts Business Unit, of Trigon Blue Cross Blue Shield, health care insurer, Richmond, Virginia. Director of Central Fidelity National Bank, Richmond, Virginia.
LEO C. DROZESKI, JR. 57 President (since January 1993 1995) and Chief Operating Officer of the Company (since January 1993), having previously served as Executive Vice President and Chief Operating Officer (since January 1993), and Executive Vice President (since 1992).
BENNETT L. KIGHT 56 Partner, Sutherland, Asbill 1990 & Brennan, L.L.P., law firm, Atlanta, Georgia.
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JOHN L. MORGAN 62 Chairman (since January 1973 1995) and Chief Executive Officer of the Company, having previously served as President and Chief Executive Officer.
STANLEY F. PAULEY 69 Chairman and Chief Executive 1976 Officer of Carpenter Company, manufacturer of comfort cushioning products, Richmond, Virginia.
GILBERT M. ROSENTHAL 71 Retired (since October 1984 1993); formerly Chairman and Chief Executive Officer of Standard Drug Company, retail drug chain, Richmond, Virginia. Director of Jefferson Bankshares Corporation, Charlottesville, Virginia.
WALLACE STETTINIUS 64 Retired (since February 1978 1995); formerly Chairman of Cadmus Communications Corporation, printer and publisher, Richmond, Virginia (since October 1992), having previously served as Chairman and Chief Executive Officer of that corporation. Director of Cadmus Communications Corporation and Chesapeake Corporation, Richmond, Virginia.
BERNARD C. WAMPLER 65 Chairman (since December 1990 1993) and Chief Executive Officer of Pulaski Furniture Corporation, manufacturer of furniture, Pulaski, Virginia, having previously served as President and Chief Executive Officer of that corporation. Director of Pulaski Furniture Corporation.
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HARRY H. WARNER 61 Financial Consultant. 1988 Director of Chesapeake Corporation, Richmond, Virginia; Pulaski Furniture Corporation, Pulaski, Virginia; and Allied Research Corporation, Vienna, Virginia.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on its review of the forms required by Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that have been received by the Company, the Company believes that there has been compliance with all filing requirements applicable to its officers, directors and beneficial owners of greater than 10% of the Common Stock.
EXECUTIVE OFFICERS OF THE COMPANY
The names and ages of all executive officers of the Company, as of March 18, 1997, are set forth below. The term of office of each such officer is until the next annual meeting of the Board of Directors. All of such officers have been employed by the Company for at least the last five years.
Name Age Offices ---- --- ------- John L. Morgan 62 Chairman (since January 1995) and Chief Executive Officer, having previously served as President and Chief Executive Officer.
Leo C. Drozeski, Jr. 57 President (since January 1995) and Chief Operating Officer (since January 1993), having previously served as Executive Vice President and Chief
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Operating Officer (since January 1993) and Executive Vice President (since 1992).
John D. Barlow, Jr. 62 Vice President - Finance.
Randall L. Hagan 51 Vice President - Bonded Fiber Products and President of American Filtrona Company, a division of the Company.
Anthony M. Vincent 50 Vice President (since April 1994) and prior thereto Vice President - Industrial Filtration Products and President of Dollinger Corporation, a former subsidiary of the Company.
James E. McCune 57 Vice President - Plastic Products (since January 1997) having previously served as General Manager - Extrusion Operations (since April 1993).
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table lists all compensation paid by the Company to the Chief Executive Officer and the four other most highly compensated executive officers of the Company for services rendered in fiscal years 1996, 1995 and 1994.
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SUMMARY COMPENSATION TABLE
(1) The amounts in this column represent the value of shares of Common Stock received at the completion of the 1994-1996 Performance Cycle of the Company's Performance Plan based on per-share prices of $41.00 and $42.50. No new Performance Shares were issued in 1996 pursuant to the Performance Plan.
(2) Includes contributions to the 401(k) Savings and Profit Sharing Plan ($11,625, $10,125 and $9,375) and ESOP ($1,125, $1,125 and $1,125) for 1996, 1995 and 1994, respectively.
(3) Includes contributions to the 401(k) Savings and Profit Sharing Plan ($11,625, $10,125 and $9,375) and ESOP ($1,125, $1,125 and $1,125) for 1996, 1995 and 1994, respectively.
(4) Includes contributions to the 401(k) Savings and Profit Sharing Plan ($13,125, $12,375 and $10,875) and ESOP ($1,125, $1,125 and $1,125) for 1996, 1995 and 1994, respectively.
(5) Includes contributions to the 401(k) Savings and Profit Sharing Plan ($11,625, $10,125 and $9,375) and ESOP ($1,125, $1,125 and $1,125) for 1996, 1995 and 1994, respectively.
(6) Includes contributions to the 401(k) Savings and Profit Sharing Plan ($10,193, $9,990 and $5,862) and ESOP ($1,009, $1,110 and $1,125) for 1996, 1995 and 1994, respectively.
(7) In addition, Anthony M. Vincent received a one-time payment of $134,375 in 1994 related to the sale of Dollinger Company.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information on options or Stock Appreciation Rights ("SAR") grants made during the 1996 fiscal year by the Company to the Chief Executive Officer and the four other most highly compensated executive officers of the Company.
(1) Value of unexercised options based on the December 31, 1996, closing price of $42.50 per share.
RETIREMENT BENEFITS
The following table illustrates annual retirement benefits payable under the American Filtrona Corporation Retirement Plan (the "Retirement Plan") and the supplemental benefit plan, as amended in 1993 (the "Supplemental Plan"), to participants based on Final Average
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Earnings and years of credited service, assuming normal retirement at age 65.
PENSION PLAN TABLE
ANNUAL RETIREMENT BENEFITS PAYABLE FOR CREDITED SERVICE OF ---------------------------------------------------------- FINAL AVERAGE EARNINGS 5 YEARS 10 YEARS 15 YEARS 20 OR MORE YEARS - ---------------------- ------- -------- -------- ---------------- $100,000.............. $ 6,250 $ 12,500 $ 18,750 $ 25,000 150,000.............. 9,375 18,750 28,125 37,500 200,000.............. 12,500 25,000 37,500 50,000 250,000.............. 15,625 31,250 46,875 62,500 300,000.............. 18,750 37,500 56,250 75,000 350,000.............. 21,875 43,750 65,625 87,500 400,000.............. 25,000 50,000 75,000 100,000 450,000.............. 28,125 56,250 84,375 112,500 500,000.............. 31,250 62,500 93,750 125,000 550,000.............. 34,375 68,750 103,125 137,500 600,000.............. 37,500 75,000 112,500 150,000
Under the Retirement Plan, "Final Average Earnings" is the highest annual average compensation during any five consecutive calendar years within the ten-year period prior to the date the participant's benefits are determined. Annual retirement benefits at age 65 for all participants equal 25% of Final Average Earnings. The benefits under the Retirement Plan may be reduced depending upon the number of years of service with the Company or one of its subsidiaries or divisions.
To the extent that benefits determined under the Retirement Plan's benefit formula are reduced because of compensation limitations imposed by the Internal Revenue Code, they will be paid under the Supplemental Plan.
Benefit amounts are stated as payments in the form of a life annuity with a guarantee of 120 monthly payments and are in addition to Social Security benefits. Other actuarially equivalent forms of benefit may be selected.
At December 31, 1996, Messrs. Morgan, Drozeski, Hagan, Barlow and Vincent had 27, 24, 18, 16 and 17 years of credited service for
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purposes of calculating retirement benefits, respectively, and $436,000, $295,000, $177,000, $174,000 and $134,500 Rates of Earnings, respectively.
The Supplemental Plan provides certain key management personnel with additional supplemental retirement benefits. The Executive Compensation Committee selects participants and determines the amount payable to each participant under the Supplemental Plan. Benefits are paid at retirement and may be payable at death or disability. A participant's benefit may be reduced depending on the number of years of service with the Company or any of its subsidiaries. Benefit amounts under the Supplemental Plan are stated as annual payments in the form of a life annuity with a guarantee of 120 monthly payments. Benefits are paid in the form of benefit selected by the participant under the Retirement Plan. At December 31, 1996, Messrs. Morgan and Barlow were entitled to annual benefits under the Supplemental Plan of $12,000 and $5,000, respectively, at normal retirement age.
CHANGE-IN-CONTROL ARRANGEMENTS
On November 7, 1996, eighteen employees of the Company received Stay Bonus and Severance Benefit Letters. Each such employee will receive a stay bonus equal to 50% of his or her salary as of the Control Change Date (as defined below) if (i) he or she continues to work for the Company or one of its affiliates until the second anniversary of the Control Change Date, (ii) his or her employment with the Company or one of its affiliates is terminated without Cause (as defined below) before the second anniversary of the Control Change Date or (iii) he or she resigns from employment with the Company and its
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affiliates with Good Reason (as defined below) before the second anniversary of the Control Change Date.
Each such employee will receive a severance benefit equal to 100% of his or her base pay as in effect on the date he or she terminates employment or the Control Change Date, whichever amount is larger, if (i) his or her employment with the Company and its affiliates is terminated without Cause before the third anniversary of the Control Change Date or (ii) he or she resigns from the Company and its affiliates with Good Reason before the third anniversary of the Control Change Date.
On November 7, 1996, thirty-one employees of the Company received Severance Benefit Letters (together with the Stay Bonus and Severance Benefit letters, collectively, the "Benefit Letters"). Each such employee will receive a severance benefit equal to 100% of his or her base pay as in effect on the date he or she terminates employment or the Control Change Date, whichever amount is larger, if (i) his or her employment with the Company and its affiliates is terminated without Cause before the second anniversary of the Control Change Date or (ii) he or she resigns from the Company and its affiliates with Good Reason before the second anniversary of the Control Change Date.
Cause means such employee's willful and continuing neglect of his or her duties to the Company or the conviction of such employee of a felony (including the theft, larceny or embezzlement of the Company's tangible or intangible property). Change in Control means, among other things, the consummation of the merger contemplated by the Merger Agreement. Control Change Date means the date that a Change in Control
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occurs. Good Reason means the occurrence of one or more of the following: (i) such employee does not receive salary increases or bonuses comparable to the salary increases or bonuses that such employee received in prior years, (ii) such employee's salary or bonus is reduced, (iii) such employee's status, title, office, working conditions or management responsibilities are significantly diminished, (iv) such employee's place of employment is changed by more than 35 miles without such employee's consent, (v) the Company's President or Board of Directors directs that such employee perform an act or refrain from acting if such act or omission would be illegal, unethical or a violation of the Company's policy or standards or (vi) the failure of any successor employer to enter into an agreement, satisfactory to such employee, to assume and agree to provide the benefits described in the American Filtrona Corporation Severance Pay Plan and/or the American Filtrona Corporation Severance Benefit Plan, as appropriate.
In 1996, the Company also approved certain severance arrangements for Mr. Morgan (the "Morgan Severance Arrangements"). Upon consummation of the merger contemplated by the Merger Agreement, Mr. Morgan will resign from all of his positions with the Company and its subsidiaries in exchange for a severance benefit of $800,000 and continued participation in the Company's health plan until December 31, 1999, subject to certain conditions. The Company has agreed to reimburse Mr. Morgan to the extent that he is subject to any excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended and in an amount sufficient to pay the excise, income and employment taxes on such reimbursement.
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REMUNERATION OF DIRECTORS
During the year ended December 31, 1996, each of the directors except Messrs. Barlow, Drozeski and Morgan was paid $750 for attendance at each Board meeting, $500 for attendance at each meeting of a Committee of the Board of which he was a member and $6,000 per year as a retainer. Such directors' fees may, at the director's election, be deferred until retirement. Interest will accrue thereon semi-annually at an interest rate equal to the 26-week U.S. Treasury Bill rate in effect on January 1 and July 1 of each year. Each chairman of a Committee of the Board received $2,000 per year as an additional retainer.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
One member of the Executive Compensation Committee, Mr. Bunzl, was the Chairman of the Board of the Company until December 31, 1994, and was formerly the Chief Executive Officer of the Company.
REPORT OF EXECUTIVE COMPENSATION COMMITTEE
The Company's executive compensation program, as administered by the Executive Compensation Committee (the "Committee"), encompasses several components: base salary, cash bonus and long-term, stock-based incentive awards.
The Committee determines base salaries based on a review of salaries paid to executives of companies of comparable size and type and on the inflation rate. The Committee attempts to set base salaries slightly below the middle of the range of salaries paid by such companies. The companies considered do not include all of the
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companies reflected in the Performance Graph on page 31. The Committee also takes into account level of responsibility, time in position and past performance in setting base salary. The Committee approved a base salary for Mr. Morgan for 1996 that reflected an increase of 4% above his 1995 base salary in response to inflation and to bring his salary more in line with the Committee's general sense of competitive salaries.
In determining the cash bonuses for the Company's executives, the Committee reviews the Company's financial results as well as each individual's contribution to the Company's performance, especially his level of responsibility and leadership efforts. The procedure is essentially discretionary and subjective. When establishing Mr. Morgan's cash bonus, the Committee considers his total cash compensation (base salary and bonus) on a year to year basis. In determining Mr. Morgan's 1996 cash bonus, the Committee also reviewed the Company's performance for the year, as well as Mr. Morgan's individual efforts in enhancing that performance and his consistently strong performance as Chief Executive Officer. Mr. Morgan's cash bonus of $200,000 was 33% above his 1995 cash bonus. However, his total cash compensation increased only 14%, which was less than the Company's 23% increase in earnings per share from continuing operations.
In 1996, the Company made stock-based incentive awards pursuant to the 1995 Stock Incentive Plan (the "Incentive Plan") to its executives who have contributed, and are expected to contribute, to the long-term financial performance of the Company. The Incentive Plan provides for the grant of (i) incentive stock options to purchase
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shares of Common Stock at no less than the fair market value of the Common Stock on the date of grant and (ii) non-qualified stock options to purchase shares of Common Stock at no less than 85% of the fair market value of the Common Stock on the date of grant. The Company has granted both incentive stock options and non-qualified stock options pursuant to the Incentive Plan, all with exercise prices of 100% of the fair market value of the Common Stock on the dates of such grants. The Incentive Plan also provides for the issuance of performance shares (the "Performance Shares") entitling an executive to receive one share of Common Stock for each Performance Share that vests after a pre-determined performance cycle (i) upon continued employment with the Company, (ii) upon satisfaction of certain pre-established performance goals, including achievement of corporate earnings per share and return on equity goals, and (iii) at the discretion of the Committee, based on individual performance. Achievement of these goals inures to the benefit of the shareholders, as well as the executives. On February 7, 1996, the executives listed on page 22 were awarded 33,500 options. Mr. Morgan received 15,000 of such options because of his critical long-term role in the Company's development. No Performance Shares were awarded in 1996.
In adopting the Benefit Letters described previously under "Change-in Control Arrangements", the Committee considered the importance of protecting the Company from efforts by competitors to lure such employees, and to reduce other distractions, to which such employees may be exposed during the transition period with respect to the ownership of the Company.
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In approving the Morgan Severance Arrangements described previously under "Change-in Control Arrangements", the Committee initially attempted to provide him with compensation comparable to what he would have received if he were permitted by an acquiror of the Company to continue in his present position and at his current compensation level through his normal retirement date. The arrangements finally approved reflect the apportionment between WBT Holdings LLC and Bunzl plc of the costs of providing such treatment.
Because none of the Company's executive officers has received annual compensation in excess of $1 million, the Company has not taken any position with respect to the cap on tax deductibility of compensation in excess of that amount established under the Omnibus Budget Reconciliation Act of 1993.
Executive Compensation Committee Rudolph H. Bunzl Manuel Deese Stanley F. Pauley Harry H. Warner (Chairman)
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PERFORMANCE GRAPH
Comparison of Five Year Cumulative Total Return Among American Filtrona, S&P 500, and Nasdaq Non-Financial Stocks
[GRAPH]
S&P NASDAQ 500 NON-FINANCIAL AFC INDEX STOCKS ----------- ------------ ------------- 100.00 100.00 100.00 1992 118.86 107.70 109.39 1993 120.09 118.47 126.30 1994 130.32 120.05 121.44 1995 171.97 165.08 169.24 1996 218.58 203.46 205.62
Assumes $100 invested on January 1, 1992 with dividends reinvested.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP
Pursuant to the rules and regulations of the Exchange Act, Rudolph H. Bunzl and Wallace Stettinius may be deemed to be members of a "group" (as that term is used in Section 13(d)(3) of the Exchange Act) with respect to all securities of the Company owned by each of them and Bennett L. Kight and Frances B. Bunzl may also be deemed to be such a "group." Each of the foregoing persons expressly disavows the existence of any such group by virtue of the relationships described
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below and, to the extent any such groups may be deemed to exist, expressly disclaims membership in any such group and beneficial ownership of all shares deemed to be beneficially owned as a result thereof. The following table lists any person (including any "group" as that term is used in Section 13(d)(3) of the Exchange Act) who, to the knowledge of the Company, was the beneficial owner, as of January 31, 1997, of more than five percent of the outstanding shares of Common Stock. The number of shares shown for each of the foregoing persons under column (3) below excludes shares that may be deemed to be beneficially owned under the rules and regulations of the Exchange Act as a result of a group being deemed to exist.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below sets forth the beneficial ownership of Common Stock by all persons who beneficially owned 5% or more of the Common Stock as of January 31, 1997. Unless otherwise indicated, all persons have sole voting and investment power over all shares beneficially owned.
(2) Name and (3) Amount and (4) (1) Title Address of Nature of Beneficial Percent of Stock Beneficial Owners Ownerships of Class --------- ----------------- -------------------- -------- Common Stock Rudolph H. Bunzl 5540 Falmouth Street, 327,613 shares (a) 8.6 Suite 305 Richmond, Virginia
Frances B. Bunzl 3649 Peachtree Rd., 1,059,720 shares (b) 27.8 Apt. 105 Atlanta, Georgia 30319
Bennett L. Kight c/o Sutherland, Asbill, 1,059,720 shares (b) 27.8 & Brennan 999 Peachtree Street, N.E. Atlanta, Georgia 30309
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Wallace Stettinius 515,540 shares (c) 13.5 P.O. Box 27367 Richmond, Virginia
William A. Forrest, Jr. 513,540 shares (d) 13.5 P.O. Box 27367 Richmond, Virginia
Quest Advisory Corp. 325,300 shares (e) 8.5 Charles M. Royce 1414 Avenue of the Americas New York, New York
David L. Babson & 221,900 shares (f) 5.8 Company, Inc. One Memorial Drive Cambridge, Massachusetts 02142
(a) Includes 247,189 shares held in a revocable trust of which Rudolph H. Bunzl is the sole trustee, sole beneficiary and has sole voting and investment power, and 80,424 shares as to which Rudolph H. Bunzl has shared voting and investment power. Of the shares in the latter category, 80,000 are held in certain trusts for the benefit of Rudolph H. Bunzl's wife and others, of which Rudolph H. Bunzl's wife is a trust committee member and the remainder are held by Rudolph H. Bunzl's wife. Rudolph H. Bunzl disclaims beneficial ownership of 80,424 of such shares.
(b) Bennett L. Kight and Frances B. Bunzl are co-trustees of a marital trust for the benefit of Mrs. Bunzl. Bennett L. Kight and Frances B. Bunzl share voting and investment power with respect to 429,298 of such shares that are owned by the trust. Bennett L. Kight disclaims beneficial ownership of all of such trust shares. In addition, Bennett L. Kight and Frances B. Bunzl have shared voting and investment power with respect to 593,622 such shares, which are held in certain trusts for the benefit of the children of Walter H. Bunzl, of which Bennett L. Kight and Frances B. Bunzl are co-trustees or members of the trust committee or which one of the trusts has the present right to acquire prior to the merger contemplated by the Merger Agreement from the children of Frances B. Bunzl. Bennett L. Kight and Frances B. Bunzl disclaim beneficial ownership of the shares held in all such trusts. Bennett L. Kight, Frances B. Bunzl and Mrs. Bunzl's children also share voting and investment power with respect to 36,800 shares owned by a charitable foundation of which each is a director. Bennett L. Kight and Frances B. Bunzl disclaim beneficial ownership of the shares in such charitable foundation.
(c) Includes 2,000 shares as to which Wallace Stettinius has sole voting and investment power and 513,540 shares as to which Wallace Stettinius has shared voting and investment power. All of the shares in the latter category are held in certain trusts for the benefit of the children of Rudolph H. Bunzl of which Wallace Stettinius and William A. Forrest, Jr. are co-trustees. Wallace Stettinius disclaims beneficial ownership of all shares held in such trusts.
(d) All of such shares are held in certain trusts for the benefit of the children of Rudolph H. Bunzl of which William A. Forrest, Jr., and Wallace Stettinius are co-trustees. William A. Forrest, Jr. disclaims beneficial ownership of all such shares.
(e) The information contained herein with respect to Quest Advisory Corp. and Charles M. Royce, is based solely on a Schedule 13G filed by such entities with the Securities and Exchange Commission, a copy of which was received by the Company on February 10, 1997. Such filing further stated that the acquisition of such shares
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was in the ordinary course of business and not in connection with or as a participant in any transaction having the purpose or effect of changing or influencing the control of the Company.
(f) The information contained herein with respect to David L. Babson & Company, Inc. is based solely on a Schedule 13G filed by such entity with the Securities and Exchange Commission, a copy of which was received by the Company on February 18, 1997. Such filing further stated that the acquisition of such shares was in the ordinary course of business and not in connection with or as a participant in any transaction having the purpose or effect of changing or influencing the control of the Company.
The Board of Directors knows of no other person (including any "group") who is the beneficial owner of more than five percent of the Company's Common Stock.
SECURITY OWNERSHIP OF CERTAIN MANAGEMENT OF THE COMPANY
The following table provides information, as of January 31, 1997, as to shares of Common Stock owned by each director, the Chief Executive Officer and the four other most highly compensated officers of the Company and by all directors and officers of the Company as a group:
AMOUNT AND NATURE PERCENT OF NAME OF PERSON OR NUMBER OF OF BENEFICIAL CLASS IF PERSONS IN GROUP OWNERSHIP (A)(B) MORE THAN 1% - -------------------------- -------------------------- ------------
John D. Barlow, Jr. 39,398 shares (c) 1.0 Rudolph H. Bunzl 327,613 shares 8.6 Manuel Deese 400 shares Leo C. Drozeski, Jr. 51,298 shares (c) 1.3 Bennett L. Kight 1,059,720 shares 27.8 John L. Morgan 121,149 shares (c) 3.2 Stanley F. Pauley 1,100 shares Gilbert M. Rosenthal 1,000 shares Wallace Stettinius 515,540 shares 13.5 Bernard C. Wampler 500 shares Harry H. Warner 1,500 shares Randall L. Hagan 38,543 shares (c) 1.0 Anthony M. Vincent 17,892 shares (c) All Officers and Directors as a 2,188,614 shares (d) 57.3 Group (17) - 34 -
(a) Includes 1,653,934 shares held by spouses, children and in certain trust relationships, which may be deemed to be beneficially owned by the directors and officers under the rules and regulations of the Securities and Exchange Commission, but as to which the directors and officers disclaim beneficial ownership.
(b) Except in situations described in Note (a) above where beneficial ownership is disclaimed, and except as set forth in the preceding table and the notes thereto, the beneficial owner of each share shown in the table has sole voting and investment power.
(c) Includes 10,100, 14,000, 38,100, 12,500, and 10,500 shares that may be acquired by Messrs. Barlow, Drozeski, Morgan, Hagan, and Vincent, respectively, on or before March 31, 1997, under the Company's stock option plans.
(d) Includes the shares described in Note (c) above and 11,000 shares that may be acquired by other officers on or before March 31, 1997, under the Company's stock option plans.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Inapplicable.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) The response to this portion of Item 14 is submitted as a separate section of this report.
(a)(3) Exhibits
The following documents are filed as exhibits to this Form 10-K pursuant to Item 601 of Regulation S-K:
2 Agreement of Merger among WBT Holdings LLC, WB Parent Corp., WB Acquisition Corp. and the registrant dated as of February 19, 1997 (filed herewith).
3.1 Restated Articles of Incorporation of the registrant (filed as Exhibit 3.1 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference thereto)
3.2 By-laws of the registrant (filed as Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and incorporated herein by reference thereto)
10.1(a) Incentive Stock Option Plan (filed as Exhibit 10.1(a) to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference thereto)*
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10.1(b) Amendment to Incentive Stock Option Plan (filed as Exhibit 10.1(b) to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference thereto)*
10.2 1988 Performance Shares Plan (filed as Exhibit 10.2 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference thereto)*
10.3 1988 Stock Option Plan (filed as Exhibit 10.3 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference thereto)*
10.4 American Filtrona Corporation Supplemental Benefit Plan (filed as Exhibit 10.4 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and incorporated herein by reference thereto)*
10.5 1995 Stock Incentive Plan (filed as Exhibit A to the registrant's Proxy Statement, dated March 10, 1995, for the 1995 annual shareholder meeting and incorporated herein by reference thereto)*
10.6 Agreement of Merger among WBT Holdings LLC, WB Parent Corp., WB Acquisition Corp. and the registrant dated as of February 19, 1997 (filed herewith).
10.7 Form of Stay Bonus and Severance Benefit letter dated November 7, 1996 (filed herewith)*
10.8 Form of Severance Benefit letter dated November 7, 1996 (filed herewith)*
10.9 American Filtrona Severance Benefit Plan (filed herewith)*
10.10 American Filtrona Corporation Severence Pay Plan (filed herewith)*
13 The registrant's Annual Report to Shareholders for the year ended December 31, 1996 (filed herewith) (Note 1)
21 List of subsidiaries of the registrant (filed herewith)
23 Consent of Independent Accountants (filed herewith)
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(b) the Company filed Current Reports on Form 8-K on November 12, 1996, and December 18, 1996.
Note 1. With the exception of the information incorporated in this Form 10-K by reference thereto, the Annual Report shall not be deemed "filed" as part of this Form 10-K.
* The marked items are compensatory plans or arrangements required to be filed as an exhibit to this form pursuant to Item 14(c) of this Form 10-K.
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FORM 10-K--ITEM 14(a)(1) AND (2) AND ITEM 14(d)
AMERICAN FILTRONA CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of American Filtrona Corporation and subsidiaries, included in the Annual Report of the registrant to its shareholders for the year ended December 31, 1996, are incorporated by reference in Item 8:
Consolidated Balance Sheet - December 31, 1996 and 1995
Consolidated Statement of Income - Years ended December 31, 1996, 1995 and 1994
Consolidated Statement of Shareholders' Equity - Years ended December 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows - Years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
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COOPERS Coopers & Lybrand L.L.P. & LYBRAND a professional services firm
Report of Independent Accountants
To the Shareholders and Board of Directors American Filtrona Corporation:
We have audited the accompanying consolidated balance sheets of American Filtrona Corporation and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 1996, which financial statements are included on pages 10 through 16 of the 1996 Annual Report to Shareholders of American Filtrona Corporation and incorporated by reference herein. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Filtrona Corporation and Subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Richmond, Virginia January 22, 1997 (February 19, 1997 as to Note 2)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN FILTRONA CORPORATION ----------------------------- (Registrant)
Dated: March 28, 1997 By: /s/ John L. Morgan --------------------------- John L. Morgan, Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 28, 1997.
Signature Title --------- -----
/s/ RUDOLPH H. BUNZL Director - ------------------------------ Rudolph H. Bunzl
/s/ JOHN D. BARLOW, JR. Vice President - Finance - ------------------------------ and Director (Principal John D. Barlow, Jr. Financial and Accounting Officer)
/s/ JOHN L. MORGAN Chairman and Director - ------------------------------ (Principal Executive John L. Morgan Officer)
/s/ LEO C. DROZESKI, JR. President and Director - ------------------------------ (Principal Operating Leo C. Drozeski, Jr. Officer)
Director - ------------------------------ Manuel Deese
/s/ BENNETT L. KIGHT Director - ------------------------------ Bennett L. Kight
/s/ STANLEY F. PAULEY Director - ------------------------------ Stanley F. Pauley
/s/ GILBERT M. ROSENTHAL Director - ------------------------------ Gilbert M. Rosenthal
/s/ WALLACE STETTINIUS Director - ------------------------------ Wallace Stettinius
/s/ BERNARD C. WAMPLER Director - ------------------------------ Bernard C. Wampler
/s/ HARRY S. WARNER Director - ------------------------------ Harry S. Warner
EXHIBIT INDEX -------------
Number and Name of Exhibit Page Number - -------------------------- -----------
3.1 Restated Articles of Incorporated by reference - Incorporation see page 36
3.2 By-laws Incorporated by reference - see page 36
10.1(a) Incentive Stock Option Incorporated by reference - Plan see page 36
10.1(b) Amendment to Incentive Incorporated by reference - Stock Option Plan see page 37
10.2 1988 Performance Incorporated by reference - Shares Plan see page 37
10.3 1988 Stock Option Incorporated by reference - Plan see page 37
10.4 Supplemental Benefit Plan Incorporated by reference - see page 37
10.5 1995 Stock Incentive Plan Incorporated by reference - see page 37
10.6 Agreement of Merger Pages 43 through 103
10.7 Form of Stay Bonus and Severance Benefit letter Pages 104 through 106
10.8 Form of Severance Benefit letter Pages 107 through 109
10.9 Severance Benefit Plan Pages 110 through 127
10.10 Severance Pay Plan Pages 128 through 144
13 Annual Report Pages 145 through 156
21 List of Subsidiaries Page 157
23 Consent of Independent Accountants Page 158