Item 1. Business
FiberMark is a leading producer of specialty fiber-based materials (paper, synthetic and composite) with nine production facilities in the United States and Europe. Formed in 1989 as an independent company, FiberMark subsequently went public in 1993. The company develops customer-focused solutions for markets worldwide that value differentiated products and services. Our products, typically sold to customers who manufacture components or finished products for industrial and consumer applications, include:
o filter media for automotive, vacuum, water, and industrial filtration
o backing materials for specialty tapes and labels base materials for
o abrasive, graphic arts, and electrical/electronic applications
o cover materials for office, home and school supplies.
With its versatile manufacturing and technical capabilities and strong service orientation, FiberMark holds leadership positions in its core markets. Using a wide range of fibers and raw materials, including wood pulp and recovered paper, glass, rayon and other synthetic fibers, and cotton denim, the company's manufacturing capabilities comprise papermaking, synthetic web technology (meltblown), saturating, coating, embossing, laminating and other converting processes. Our engineered materials are typically sold in roll or sheet form directly to customers through our internal sales force. In some markets, products are sold through distributors or paper merchants.
Overview
As a specialty fiber-based materials producer, FiberMark serves a broad range of markets that stem from four core product families: filter media, durable specialties (tape and label base materials), technical specialties (base materials for a multitude of markets) and cover materials for office, home and school supplies. The company's three operating segments include: FiberMark Gessner and North American filter products, durable specialties, and technical and office products. The relationship of FiberMark's operating segments to our product families is described in Footnote 21, "Segment Information".
An outline of our core product families follows:
- - -------------------------------------------------------------------------------- Filter Media - - --------------------------------------------------------------------------------
Automotive/Heavy Equipment Liquid (Fuel/Hydraulic/Lube) Air Cabin Air
Home Vacuum (Air) Water (Liquid)
Industrial Industrial Fuels Beverage Processing Hot Oil Processing (Fast Food) Pharmaceutical Processing
- - -------------------------------------------------------------------------------- Tape Base and Label Material - - --------------------------------------------------------------------------------
Tape Substrates/Backing Materials Medical Automotive (Painting) Home Construction (Painting) Electronics
Stripping Tapes Edge Binding and Reinforcing Tapes (Home and Office)
Durable Base Materials Labels - imitation leather and synthetic Protective Coverings
- - -------------------------------------------------------------------------------- Technical Specialties Base Materials - - --------------------------------------------------------------------------------
Electrical/Electronics Insulating Printed Circuit Board Base Fuel Cell Composite
Abrasive Sandpaper Backing
Communications/Graphic Arts Book Cover Base Archival Materials Security Paper Printing Papers
Industrial High Performance Fire Retardant (Automotive/Industrial Filter) Wet Strength (Industrial Process) Friction Materials (Automotive) Absorbent Materials (Medical)
- - -------------------------------------------------------------------------------- Office/School Products Cover Materials - - --------------------------------------------------------------------------------
Heavyweight Cover Materials Binding Filing
Lightweight Cover Materials Filing Presentation
Business Strategy
The company seeks to maximize the return to our shareholders by pursuing the following elements of our strategy:
o Gain market leadership by excelling at serving existing and new markets with high value-added opportunities
o Pursue strategic, accretive acquisitions that build on our core competencies in existing and new markets
o Forge global, mutually beneficial partnerships with our suppliers and customers, providing catalysts for innovation and increasing our knowledge of marketplace needs
o Strengthen product and business development to accelerate our internal growth rates
o Optimize operations to gain an unparalleled competitive advantage in the markets we serve
o Enhance our technical, manufacturing, and service capabilities, aligning them with the product and service needs of our markets
o Add value to customers through continuous improvement of productivity, including consolidation of operations that will generate improvements in quality, service or cost
o Broaden our raw materials base
o Enhance responsiveness to customer requirements
o Create new market opportunities
o Reduce costs
o Reduce exposure to supply / demand volatility
OVERVIEW OF MAJOR MARKETS AND FIBERMARK PRODUCT FAMILIES
Filter Media
Filter media now comprises the largest product family for FiberMark, due to the January 1998 acquisition of Steinbeis Gessner GmbH. FiberMark Gessner's filter business, together with our North American Filter Products business, accounted for 32% of 1998 sales. The following chart summarizes the filter materials produced by the company, the markets they serve, and representative customers.
Competitors
The largest single competitor in the filter business is Ahlstrom Filtration, Inc., a division of A. Ahlstrom Corp.). Additional competitors include Hollingsworth and Vose Co. and Devon Valley Industries, a division of Barlow Paper Ltd. In the vacuum filter media market only, Sorg Paper Co., a division of Wausau Mosinee Paper Corp., is also a significant competitor.
Manufacturing
Filter media is produced at our Feldkirchen / Westerham facility in Germany, and our Richmond, Virginia and Rochester, Michigan facilities. We manufacture base materials, including paper, often with combinations of non-wood pulp sources such as natural and synthetic fibers, synthetic fiber-based materials, and composite paper and non-woven materials. In addition to manufacturing these base materials, we have saturating, creping laminating and other finishing capabilities.
Durable Specialties
Our durable specialties product lines are produced and marketed by our U.S. Durable Specialties Division and the durable specialties business from FiberMark Gessner. Sales for these markets accounted for 25% of FiberMark's 1998 business. The primary product family representing the company's durable specialties are tape substrates. The company is one of the leading producers of specialty tape substrates and a broad range of saturated, coated non-woven and paper materials. The following chart summarizes the key product lines, their corresponding finished products and markets, and representative customers within this market:
Competitors
The company's competitors include a mix of large integrated manufacturers and smaller independent companies, including Kimberly Clark Corp., Northeast Paper Converting Company and Southern Label Company, Inc. In some of its niche markets, the company competes with various small competitors, none of which has a dominant market position. In this market, manufacturers of alternate materials must also be considered competitors.
Manufacturing
The base materials for this market are either manufactured in FiberMark facilities including Bruckmuhl, Germany and Hughesville, NJ, or are purchased from outside suppliers. Our Quakertown facility is a converting facility, relying on supply sources from within and outside of FiberMark. For example, a substantial portion of the substrate used in making the company's edge binding and reinforcing tapes is
Tyvek(R), purchased from DuPont and marketed under the FiberMark trade name SUPER ARCOFLEX(R). Base materials are typically saturated, coated and embossed within FiberMark facilities, and in some cases by our customers.
Technical Specialties
Technical Specialties represent the most diverse product families and markets within the company. Its materials are used in communications, including base or cover materials for electrical/electronics and graphic arts, as well as other technical specialties such as abrasive backing materials. As a group, these products and markets represent 26% of FiberMark's 1998 sales revenue.
Competitors
The company's competitors in this market group include a mix of large integrated manufacturers and smaller independent companies, including Arjo Wiggins Appleton PLC, International Paper Co., Brownville Specialty Paper Products Inc., Crocker Technical Papers, Inc., and Crown Vantage Inc. In some of its niche markets, the company competes with various small competitors, none of which has a dominant market position. In many of these product lines, manufacturers of alternate materials such as polyethylene or vinyl must also be considered competitors.
Manufacturing
The base materials for this group of markets are typically manufactured in the four mills in this Technical and Office Products Segment: Fitchburg, Massachusetts, Warren Glen and Hughesville, New Jersey, and Brattleboro, Vermont. In Germany, the Bruckmuhl facility also manufacturers some technical specialties in the abrasive category. Other FiberMark facilities may, at times, manufacture materials for this market.
Office Products
Office products cover materials are used in communications applications, primarily for supplies used in the office, home or school. Marketed by our Technical and Office Products Division, office products materials comprise 17% of the company's revenue. The major components of this product family/market, the end products/markets and representative customers are noted below:
Competitors
The company's competitors in this market group include a mix of large integrated manufacturers and smaller independent companies, including: International Paper Co., Brownville Specialty Paper Products Inc., Crocker Technical Papers, Inc. and Merrimac Paper Co., Inc. In many of these product lines, manufacturers of alternate materials such as polyethylene or vinyl are also competitors.
Manufacturing
The base materials for this group of markets are largely manufactured in Brattleboro, Vermont, but are also manufactured or processed further by other facilities with the Technical and Office Products Segment, notably Warren Glen and Hughesville, New Jersey.
International Sales
With the combination of the German business acquisition and pre-existing international sales, the company now sells or manufacturers 29% of its business outside North America. The majority of these sales are in Europe. A detailed breakdown of sales revenue and property, plant and equipment by geographic region is found in the final tables of Footnote 21, Segment Information.
Executive Officers
The company 's executive officers are:
Alex Kwader has been the President and Chief Executive Officer of the company since August 1991 and a director since November 1991. Since 1970, Mr. Kwader has been employed by the company and its predecessor, Boise Cascade ("BCC"), a diversified paper products company. He served as Senior Vice President of the company from March 1990 to August 1991 and as Vice President from the company's inception in June 1989 until March 1990. From 1970 until June 1989, Mr. Kwader was employed by BCC, in various managerial positions. Mr. Kwader was General Manager of the Pressboard Products Division from 1986 until June 1989. From 1980 to 1985, he served as General Manager of the Latex Fiber Products Division of BCC. Mr. Kwader holds a B.S. in Mechanical Engineering from the University of Massachusetts and a M.S. from Carnegie Mellon University and attended the Harvard Business School Executive Program.
Bruce Moore has served as Vice President of the company since its inception in June 1989 and as Chief Financial Officer since December 1990. From 1980 to 1989, Mr. Moore was employed by BCC in various management positions, including Controller and General Manager of the Latex Fiber Products Division. Mr. Moore holds a B.A. in Business Administration from Siena College and attended the Stanford University Executive Program.
Stephen A. Steidle has served as Vice President and General Sales Manager for the office products business since February 1994. He assumed international sales responsibility for the Company in January 1997. He has held sales management positions with the Company and BCC for more than 15 years and has total of 29 years of service with the Company and BCC. Mr. Steidle receive a B.A. in Psychology from the University of Maine and an M.B.A from the University of Maine.
David C. Bernhard, Vice President and General Manager, Filter Products Division, joined FiberMark, Inc. in 1995, and previously served as General Manager for Endura Products. He initially joined the Company as Technology Development Manager in Brattleboro. He was employed for over 26 years with Scott Paper Company in Mobile, Alabama in the S.D. Warren subsidiary, and Fort Edward, New
York and Chester, Pennsylvania in the Consumer Products business. Mr. Bernhard received his B.S. degree in Pulp and Paper from the College of Forestry at Syracuse University.
David R. Kruft has served as Vice President and General Manager, Durable Specialties since 1996 at the time of the Arcon acquisition, where he held the position of President since 1993. Prior to joining Arcon in 1990, he was employed for over 20 years by Esselte Pendaflex Corporation. His most recent role at Esselte was Senior Vice President and Division Head for the Boorum and Pease office products line with $66 million in sales. Mr. Kruft received his B.S. in Mechanical Engineering from Hofstra University.
David E. Rousse has served as Vice President and General Manager, Office Products, since January 1997, and joined FiberMark in 1996 in the role of Vice President - Marketing and Business Development. He was previously employed by International Paper in a number of marketing and general management positions, primarily in their Strathmore Papers fine printing papers unit, with other assignments in office papers and envelope products. He was selected for a Fellowship in the President's Executive Exchange Program working in the U.S. International Trade Commission in Washington, D.C. He began his career with W.R. Grace & Company in finance, marketing, and sales / sales management roles. Mr. Rousse received his B.S. in Engineering from Dartmouth College, and an M.B.A from the Amos Tuck School of Business at Dartmouth.
Robert F. Yousey has served as Vice President and General Manager, Technical Specialties, since 1996 at the time of the CPG acquisition, where he held the position of Executive Vice President of Operations for all CPG manufacturing sites. He joined James River in 1980 and through various divestitures was employed as General Manager of the Riegel Fitchburg Division of James River, and also as General Manager of the Fitchburg mill. He started his career with Latex Fiber Industries and later Boise Cascade in 1969 and worked for 11 years in significant mill and corporate roles. Mr. Yousey received a B.S. in Chemical Engineering from the University of Texas. Mr. Yousey resigned from the company effective March 31, 1999.
Dr. Walter M. Haegler has served as Vice President and General Manager, FiberMark Gessner Division since the January 1998 acquisition of Steinbeis Gessner. With Steinbeis Gessner GmbH since 1987, he served as Managing Director of Gessner from 1990 until 1997, and as plant manager of the Feldkirchen site from 1987 until 1990. Before joining Gessner, Dr. Haegler was Research and Development and Application Technology Manager for VP Schickedanz during 1981 to 1987. Dr. Haegler received a Ph.D. and Masters Degree from the University of Erlangen in inorganic and analytical chemistry.
Item 2.
Item 2. Properties
The following table depicts all of the company's properties as of December 31, 1998.
(1) German building sizes noted are in cubic meters, as German records are reported and maintained in that unit of measure per governmental regulations.
The corporate headquarters is located at the Brattleboro, VT site. The company owns a production facility in Lowville, NY that it leases to a customer. Most facilities offer web production capabilities, largely paper, but often with the inclusion of synthetic or specialty fibers producing composite materials. Most of our facilities also combine with some level of finishing or converting capabilities (eg. laminating, coating, saturating, embossing). Our facility Quakertown, PA, however, is strictly a converting facility, coating and saturating base material purchased from other FiberMark facilities and outside sources. Additionally, Feldkirchen/Westerham contains a meltblown unit for producing synthetic non-woven materials. International sales offices are maintained in Kowloon, Hong Kong; Tokyo, Japan; and Annecy, France and in Brattleboro, VT.
Item 3.
Item 3. Legal Proceedings
The company is involved in legal proceedings arising in the ordinary course of business. The company does not believe that the outcome of any of these proceedings will have a material adverse effect on the operations or financial condition of the company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter ended December 1998.
Employees
As of December 31, 1998, the company employed a total of 1,322 employees, of which 449 were salaried and 873 were hourly.
In the U.S., all of our hourly employees are members of either The Paper, Allied - Industrial, Chemical and Energy Workers International Union (PACE), formerly the United Paper Workers
International Union (UPIU), or the International Brotherhood of Electrical Workers, with the exception of our Quakertown, PA facility, where hourly employees are non-union. In Germany, FiberMark Gessner employees are represented by the Industriegwerkschaft Bergnau, Chemie, Energie (IG BCE), Mining, Chemicals and Energy Trade Union. A portion of salaried employees (71%) and all of the hourly employees are union eligible, but are not necessarily members. Membership is voluntary and information is not disclosed regarding employee membership by employees or the union. Employees are represented by a local union working committee.
The table below sets out the expiration dates of the company's labor contracts:
Facility Expiration Date - - -------------------------------------------------------------------------------- Fitchburg, MA .................................................. April 30, 2003 Warren Glen, NJ (a) ............................................ May 23, 1999 May 25, 1999 Hughesville, NJ (a) ............................................ May 23, 1999 May 25, 1999 Rochester, MI .................................................. June 26, 1999 Richmond, VA ................................................... April 28, 2000 Brattleboro, VT ................................................ August 31, 2000 Bruckmuhl and Feldkirchen/Westerham, Bavaria, Germany (b) ...... June 30, 2001
(a) Workers at Warren Glen, NJ and Hughesville, NJ are subject to two separate collective bargaining agreements. Negotiations on these contracts and Rochester's are expected to commence during the second quarter of 1999.
(b) Expiration dates relate to the main contract. Portions within these contracts have different expiration dates. Contracts are negotiated with industry representatives and the union, not by the company.
Relations with the union and with some hourly employees in our Fitchburg, MA facility were strained during the recent contract negotiation, with some carry over during implementation of the ratified contract. In general, however, the company believes that it has good relations with its employees and their unions.
Cogeneration Project
In 1993, the company entered into an agreement with Kamine, pursuant to which the company's Beaver Falls facility is the host for a gas-fired, 79-megawatt combined-cycle cogeneration facility developed by Kamine at the company's Beaver Falls mill. Construction of the facility has been completed. The company received an initial cash payment of $4.4 million in 1993 and a series of deferred cash payments from Kamine totaling $7.0 million between May 1995 and May 1997. The present value of these deferred cash payments, in the amount of $6.5 million, was recorded as income in the first quarter 1995. The payment received in May 1997 was the last payment due under this agreement. The company continues to own the land upon which the cogeneration plant is constructed and in such regard has a ground lease contract with Kamine.
In December 1998, Kamine sold the cogeneration plant and assigned the ground lease contract to the new owner. The company received a $1.5 million payment from the new owner relative to the transaction. There are no further payments due under the ground lease contract.
Environmental Regulation and Compliance
The company and its predecessors have made substantial investments in pollution control facilities to comply with existing environmental laws and regulations. The company made expenditures for environmental purposes of $3.3 million in 1998, $2.6 million in 1997, and $1.7 million in 1996. While the company believes that it has made sufficient capital expenditures to maintain compliance with existing environmental laws, any failure by the company to comply with present and future environmental laws could subject it to future liability or require the suspension of operations. In addition, such environmental laws could restrict the company's ability to expand its facilities or could require the company to acquire costly equipment or incur significant expenses to comply with environmental regulations.
The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA") and similar state laws provide for responses to, and liability for, releases of certain hazardous substances from a facility into the environment. These obligations are imposed on the current owner or operator of a facility from which there has been a release, the owner or operator of a facility at the time of the disposal of hazardous substances at the facility, on any person who arranged for the treatment or disposal of hazardous substances at the facility, and any person who accepted hazardous substances for transport to a facility selected by such person. Liability under CERCLA can be strict, joint and several. Pursuant to the environmental laws, there are currently pending investigations at certain of the company's plants relating to the release of hazardous substances, materials and/or wastes. In addition, various predecessors of the company have been named as potentially responsible parties ("PRPs") by the United States Environmental Protection Agency ("EPA") for costs incurred and to be incurred in responding to the investigation and clean-up of various third-party sites. The company has not received any notification or inquiry from EPA or any other agency concerning these sites. Management believes that the company will have no liability in connection with the clean-up of these sites. However, no assurance can be given that such predecessors will perform their responsibilities in connection with such sites and, in the even of such non-performance, the company may incur material liabilities in connection with such sites, and no assurance can be given that the company will not receive PRP notices in connection with these or other sites in the future.
In connection with the acquisition of CPG, the former owners of CPG have agreed to indemnify (subject to certain limitations) the company for certain identified and potential environmental liabilities arising from the historical use of the property acquired in the acquisition of CPG or from CPG's conduct prior to the acquisition of CPG. Management believes that the amount of the escrow established as security for these and other indemnity obligations of the former CPG owners will be sufficient to cover environmental liabilities expected to be incurred in connection with the acquisition of CPG. However, no assurance can be given that the limited indemnity provided by the former owners of CPG will be sufficient to cover all material environmental liabilities associated with the acquisition of CPG.
Based upon its experience to date, the management of the company believes that the future cost of compliance with existing environmental laws, and liability for known environmental claims pursuant to such laws, will not have a material adverse effect on the company's financial condition and results of operation. However, future events, such as new information, changes in existing Environmental Laws or their interpretation, and more vigorous enforcement policies of regulatory authorities, may give rise to additional expenditures or liabilities that could be material to the company's financial condition and results of operations.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The company's Common Stock was first traded on March 11, 1993 on the NASDAQ National Market System ("Nasdaq") under the symbol SPBI. As of the close of business on April 8, 1997, the Common Stock ceased trading on Nasdaq and on April 9, 1997 was listed on the New York Stock Exchange ("NYSE") under the symbol "FMK". The following table show the high and low sale prices per share of the Common Stock as reported on the Nasdaq and on the NYSE Composite Transactions Tape, as the case may be. The high and low sales prices for the first and second quarters of 1997 have been adjusted to give effect to a 3-for-2 stock split in the form of a dividend, which was effective May 13, 1997 for shareholders of record at the close of business on May 6, 1997.
The company had approximately 1,096 stockholders of record of its Common Stock as of March 23, 1999. The company's transfer agent and registrar has indicated that the company had approximately 2,318 beneficial owners of its Common Stock as of March 23, 1999. The company has never paid any cash dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future.
Item 6.
Item 6. Selected Consolidated Financial Data
The data set forth below should be read in conjunction with the financial statements and notes included elsewhere in this Annual Report on Form 10-K.
FIBERMARK, INC. Selected Consolidated Financial Data (In Thousands, Except Per Share Data)
See accompanying notes to consolidated financial data.
(1) The increase in net sales for the year ended December 31, 1997 reflects the impact of the acquisition of Custom Papers Group and Arcon Coating Mills on October 31, 1996. Net sales related to these acquisitions were $127.9 million in 1997 as compared to $20.2 million in 1996. The increase in net sales for the year ended December 31, 1998 reflects the acquisition of Steinbeis Gessner GmbH in January 1998. Net sales related to this acquisition were $81.2 million in 1998.
(2) Other expenses (income) for the 1998, 1997, 1996, 1995 and 1994 periods include $1,719,000, $1,718,000, $1,719,000, $1,718,000 and $1,146,000, respectively, of amortized income related to a deferred gain on a sale-leaseback transaction. On April 29, 1994, the company sold and leased back certain operating assets at the Brattleboro, Vermont, mill. The sale of these assets resulted in a book gain of $17,187,000. This gain is being amortized over the ten-year life of the lease.
(3) For the year ended December 31, 1995, the company generated net income and recognized an income tax benefit of ($424,000) due primarily to the release of valuation allowances.
(4) Extraordinary items for 1994 include a $248,000 loss related to the early extinguishment of debt, net of an income tax benefit of $99,000. Extraordinary items for 1996 include a $495,000 loss related to the early extinguishment of debt, net of an income tax benefit of $198,000.
(5) On November 19, 1997, the company announced that it planned to close operations at its Owensboro, Kentucky, mill and consolidate its production demands with several of its other mills. Operations continued until a sufficient level of transition inventory was established to ensure continued service to customers during the production transfer period. The Kentucky mill was closed on January 14, 1998. The company booked a $10.0 million charge related to this mill closure in the fourth quarter of 1997.
On November 4, 1998, the company announced that it planned to cease operations at its Beaver Falls, New York, facility and consolidate its production demands with several of its other facilities. Operation continued until a sufficient level of transition inventory was established to ensure continued service to customers during the transition period. The New York facility was closed on January 29, 1999. The company took a $7.8 million pre-tax charge related to the closure of this facility in the fourth quarter of 1998.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
On October 31, 1996, the company acquired all of the outstanding stock of CPG Investors, Inc. ("CPG"). CPG operated five paper mills and manufactures a diverse portfolio of specialty fiber-based products for industrial and technical markets. Annual sales revenue approximated $95.0 million.
On October 31, 1996, the company also acquired all of the outstanding stock of Arcon Holdings ("Arcon"). Arcon operated one converting facility and manufactures colored binding and stripping tapes and edge cover materials sold primarily into the office products, checkbook and book binding markets. Annual sales revenue approximated $28.0 million.
Both of the 1996 acquisitions were financed with proceeds from the issuance of $100.0 million in senior notes. These notes are non-amortizing, have a ten-year term and carry a fixed interest rate of 9.375%. The aggregate purchase price for both CPG and Arcon, including acquisition costs, was approximately $91.5 million. Additionally, the company incurred approximately $4.5 million in financing costs. The balance of the proceeds from the senior note offering was added to the cash reserve of the company.
On November 19, 1997, the company announced that it planned to cease operations at its Owensboro, Kentucky mill and consolidate its production demands with several of its other mills. Operations continued until a sufficient level of transition inventory was established to ensure continued service to customers during the production transfer period. The Kentucky mill was closed on January 14, 1998. The company took a $10.0 million pre-tax charge related to the closure of this facility in the fourth quarter of 1997.
On November 19, 1997, the company also announced its intent to acquire Steinbeis Gessner GmbH for a purchase price of $43.0 million. Steinbeis Gessner, headquartered near Munich, Germany, is a leading producer of specialty fiber-based materials sold into the filter products, technical specialties and durable specialties markets. Sales revenue for 1998 was $81.2 million. Pursuant to this acquisition, the company sold 1,500,000 shares of common stock on December 15, 1997 with a customary 30-day over-allotment option granting the underwriters of the offering the right to purchase up to an additional 225,000 shares. The December 15 sale resulted in gross proceeds of $30.8 million to the company. On January 15, 1998, the over-allotment was partially exercised through the sale of an additional 135,000 shares. The shares were sold for a gross price of $20.50 per share. After expenses, the company realized approximately $31.0 million in total net proceeds. To complete the financing of the Gessner acquisition, the company also closed on a $29.6 million term loan with Bayerische Vereinsbank in Munich, Germany on January 12, 1998. This loan amortizes over seven years with interest rates ranging from 5.8% to 7.0%. The effective date of ownership transfer on the Steinbeis Gessner business was January 1, 1998.
On November 4, 1998, the company announced that it planned to cease operations at its Beaver Falls, New York facility and consolidate its production demands with several of its other facilities. Operation continued until a sufficient level of transition inventory was established to ensure continued service to customers during the transition period. The New York facility was closed on January 29, 1999. The company took a $7.8 million pre-tax charge related to the closure of this facility in the fourth quarter of 1998.
Excluding the impact of facility write downs, the company's income from operations improved from $9.0 million in 1995 (7.7% of sales) to $35.1 million in 1998 (11.4% of sales). This improvement is largely attributable to the added sales volume that resulted from the 1996 and 1998 acquisitions. Additionally, the company is benefiting from improved manufacturing efficiencies due to equipment upgrades at several of its facilities and from cost reduction related to consolidation of facilities and administrative staffs.
The following table sets forth, for the periods indicated, certain operating data as a percentage of net sales.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997:
Net sales increased 30.5% to $307.1 million in 1998 from $235.4 million in 1997.
The acquisition of FiberMark Gessner, effective on January 1, 1998, added $81.2 million in sales revenue for the full year of 1998.
Within the company's operating segments, technical and office products sales decreased by 4.9% to $129.3 million from $136.0 million in 1997. This decline was primarily due to market softness. We also incurred some price reduction related to lower raw material costs and the economic crisis in the Asian markets. Sales revenue in our durable specialties operating segment declined by 4.3% to $55.7 million in 1998 from $58.2 million in 1997. This decline was due to a sharp reduction in demand from Asian customers as well as some softness in our domestic customer base. Sales within our Gessner and North American filter products segment increased by 196.4% to $122.1 million in 1998 from $41.2 million in 1997 due to the January 1, 1998 acquisition of the Gessner business and stable business conditions in the U.S.
Gross profit margin declined to 18.8% in 1998 from 19.6% in 1997. This reduction was due to the impact of lower demand within our U.S. customer base and also to a temporary dip in manufacturing efficiencies as we worked through production transfer trials related to the consolidation of two facilities within our technical and office products operating segment.
General and administrative expenses increased 39.3% to $22.7 million (7.4% of sales) in 1998 from $16.3 million (6.9% of sales in 1997). This increase was due to the impact of the Gessner acquisition.
Income from operations increased 41.1% to $27.8 million (9.1% of sales) in 1998 from $19.7 million (8.4% of sales) in 1997. This improvement was due to the Gessner acquisition and a reduced level of facility closure expense.
In 1998, we recorded other income of $1.3 million compared with other expense of $.4 million in 1997. This change was due to a $1.5 million payment received from a cogeneration developer who leases property from the company. The company anticipates no further income from this lease.
Net interest expense increased to $10.5 million in 1998 compared with $9.2 million in 1997. This increase was due to the debt incurred to fund the Gessner acquisition.
Income taxes were $7.1 million or 38.1% of taxable income in 1998 compared with $4.0 million or 39.3% of taxable income in 1997.
Net income for 1998 was $11.5 million or $1.43 per share compared with $6.2 million or $.95 per share in 1997. Excluding the tax adjusted impact of facility closure expenses which existed for both years and the non-recurring cogeneration income in 1998, net income for 1998 would have been $15.4 million, or $1.91 per share, compared with $12.3 million, or $1.90 per share, in 1997. Per share earnings are stated on a fully diluted basis.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996:
Net sales increased 88.6% to $235.4 million in 1997 from $124.8 million in 1996.
The company acquired Custom Papers Group and Arcon Coating Mills on October 31, 1996. These acquisitions contributed $127.9 million in sales revenue for the full year of 1997 compared with $20.2 million for the final two months of 1996.
Within the company's operating segments, sales for technical and office products increased by 58.1% to $136.0 million in 1997 from $86.0 million in 1996. This increase was primarily due to the 1996 acquisitions. Moderate growth in demand for our pressboard, and new business in lightweight filing and cover materials also contributed to revenue growth in this segment. Sales in our durable specialties segment increased by 80.8% to $58.2 million in 1997 from $32.2 million in 1996. This increase was primarily due to the impact of the 1996 acquisitions. In addition, sales with a key customer grew due to their expansion into new geographic markets and new distribution channels in part fueled by a new product developed with them in 1995. Net sales in North American filter products increased by 524.2% to $41.2 million from $6.6 million in 1996 due to the impact of the 1996 acquisitions.
Gross profit margin increased to 19.6% in 1997 from 18.3% in 1996. This improvement related to lower fiber prices which reduced cost in all of the company's operating segments, productivity gains within the technical and office products segment, and early benefits from consolidation of operations within our durable specialties segment.
General and administrative expenses increased to $16.3 million (6.9% of sales) in 1997 from $9.9 million (7.9% of sales) in 1996. This increase was due to the impact of the 1996 acquisitions.
In 1997, the company booked a $10.0 million charge related to the closure of its Owensboro, Kentucky mill. Operations at this mill permanently closed on January 14, 1998.
Income from operations increased to $19.7 million (8.4% of sales) in 1997 from $12.9 million (10.4% of sales) in 1996. This improvement was due to the higher sales volume brought about by the 1996 acquisitions, lower fiber prices, and improved manufacturing efficiencies. These improvements were offset by the $10.0 million charge related to the closure of the Owensboro, Kentucky mill.
In 1997, the company recorded other expense of $.4 million as compared with other income of $1.1 million in 1996. This change was due to higher levels of amortization expense related to the 1996 acquisitions.
Net interest expense increased to $9.2 million in 1997 compared with $1.8 million in 1996. This increase was due to the debt incurred to fund the 1996 acquisitions.
Income taxes were $4.0 million or 39.3% of taxable income in 1997 compared with $4.7 million or 38.5% of taxable income in 1996.
Net income before extraordinary items for 1997 was $6.2 million or $.95 per share. Excluding the tax adjusted impact of the Owensboro closure, net income would have been $12.3 million, or $1.90 per share, compared with $7.2 million, or $1.14 per share, in 1996. Per share earnings are stated on a fully diluted basis.
Liquidity and Capital Resources
As of December 31, 1998, the company had outstanding $100.0 million of senior notes. The notes have a ten-year term, are non-amortizing and carry a fixed interest rate of 9.375%. Additionally, the company had available to it a $20.0 million revolving credit facility as of December 31, 1998. As of such date, no advances were outstanding under such credit facility. Effective January 1, 1998 the company acquired Steinbeis Gessner GmbH. A portion of the purchase price was funded through term loans. As of December 31, 1998, Gessner had a secured term loan of $32.4 million with Bayerische Bank. This loan amortizes over seven years with interest rates ranging from 5.8% to 7.0%. As of this same date, Gessner had an unsecured term loan of $4.8 million with the previous owner. The loan amortizes over three years and has a fixed interest rate of 5%. As of December 31, 1998, Gessner also has a $9.0 million line of credit and a $9.0 million capital spending facility with Bayerische Vereinsbank. As of such date no advances were outstanding under these facilities.
The company's historical requirements for capital have been primarily for servicing debt, capital expenditures, working capital and acquisitions. Cash flows from operating activities were $18.6 million in 1998, $7.9 million in 1997 and $17.1 million in 1996. Additions to property, plant and equipment were $13.9 million in 1998, $13.5 million in 1997 and $8.5 million in 1996. In addition, the company expects to fund certain expenditures related to technology transfer projects between Gessner and the company, which the company believes will provide quality improvements, cost reductions, product performance enhancements and the ability to produce a broader range of products. The company currently anticipates that the implementation of these projects can be accomplished over a two to three year period, at a cost of $20 to $25 million. The company believes that cash reserves on hand, cash flow from operations, plus amounts available under credit facilities, will be sufficient to fund its capital requirements, debt service and working capital requirements for the foreseeable future.
The company intends to pursue strategic acquisitions that will enhance its range of products, complement the company's core markets, provide distribution or sales and marketing efficiencies or provide opportunities for technology gains or other operating efficiencies. Any such acquisition could require the company to secure independent debt or equity financing to complete such transaction.
Disclosures of Certain Financial Market Risks
The company believes it has minimal exposure to financial market risks. All debt is at a fixed rate. Most of the company's sales transactions have been conducted in the currency where the shipment originated, limiting our exposure to changes in currency exchange rates. The company does not use derivative financial instruments.
Inflation
The company attempts to minimize the effect of inflation on earnings by controlling operating expenses. During the past several years, the rate of general inflation has been relatively low and has not had a significant impact on the company's results of operations. The company purchases raw materials that are subject to cyclical changes in costs that may not reflect the rate of general inflation.
Seasonality
The company's business is mildly seasonal, with the third quarter of each year typically having the lowest level of net sales and operating income. This seasonality is the result of a lower level of purchasing activity in the third quarter, since many of our U.S. customers shut down their manufacturing operations during portions of July and many European manufacturers shut down during portions of August.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1: Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The SOP is effective for financial statements issued for fiscal years beginning after December 15, 1998. The company has yet to analyze in detail the potential impact on its financial statements upon adoption of this pronouncement.
Year 2000
Readiness
The company expects to complete Year 2000 compliance by the third quarter of 1999. A significant portion of our systems is already compliant due to implementation of new integrated information systems. In terms of hardware, management believes the company's inventory of equipment is also compliant.
The company has communicated with its principal customers and suppliers regarding Year 2000 compliance. Although we have been given assurances by our customers and suppliers that they will be compliant, no assurances can be given that they will be ready, or that the company would not suffer any material adverse effects to its business, operations or financial condition should they fail to be compliant.
Costs
The costs of achieving Year 2000 compliance are not expected to have a material impact on the company's business, operations, or financial condition, as system upgrades were planned for strategic reasons. Anticipated costs are almost exclusively the cost of installing the company's integrated information systems. FiberMark Gessner had completed a substantial portion of its system upgrades prior to the 1998 purchase.
Risks
The company has assessed the risks of Year 2000 problems, and concluded that in the unlikely event that a small portion of its software might not be in place by the year 2000, it would need to rely on manual systems.
The company has contacted both our key suppliers and customers to ascertain their Year 2000 readiness, and have received assurances that they will be ready. However, the company cannot control supplier or customer Year 2000 readiness, or even completely assess the risk the company might face should they fail to be ready. However, our assessments suggest that in the case of customers, potential problems might include greater difficulties in managing inventories and forecasting demand, and in placing or receiving orders that could impact FiberMark. In the case of suppliers, risks seem to relate more to billing and ordering rather than more significant items that might impact productivity and profitability.
Contingency Plans
The company is analyzing its contingency planning needs, but at this stage has chosen not to develop a comprehensive plan, as it is confident that Year 2000 compliance timetables will be met.
Forward-looking Statements
Statements in this report that are not historical are forward-looking statements subject to risk and uncertainties that could cause actual results to differ materially. Such risk and uncertainties include fluctuations in economies worldwide, fluctuations in our customers' demand and inventory levels (including the loss of certain major customers), the price and availability of raw materials and of competitive materials, which may preclude passing increases on or maintaining prices with customers; changes in environmental and other governmental regulations, changes in terms from lenders, ability to retain key management and to reach agreement on labor issues, failure to identify or carry out suitable strategic acquisitions.
PART III
Item 10.
Item 10. Directors and Executive Officers
See the section entitled "Executive Officers" in Part I, Item 1 hereof for information regarding the company's executive officers.
The information required by this item with respect to the company's directors is presented under the caption entitled "Election of Directors" of the company's Definitive Proxy Statement, which will be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the company's Annual Meeting of Shareholders to be held on May 19, 1999 (the "Proxy Statement"), and is incorporated herein by reference.
The information required by this item concerning compliance with Section 16(a) of the Exchange Act is presented under the caption entitled "Compliance with Section 16(a) of the Securities Exchange Act of 1934" of the Proxy Statement, and is incorporated herein by this reference.
Item 11.
Item 11. Executive Compensation and Other Information
The information required by this item is incorporated herein by reference to the information presented under the caption entitled "Executive Compensation and Other Information" of the Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference to the information presented under the caption entitled "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions
None existed.
Part IV
Item 14.
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Index to Consolidated Financial Statements
The consolidated financial statements required by this term are submitted beginning on page 24 of this Form 10-K.
Page ----
Report of Independent Accountants ................................. 24
Consolidated Statements of Income for the years ended December 31, 1998, 1997, and 1996 ............................... 25
Consolidated Balance Sheets of December 31, 1998 and 1997 ......... 26
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996 ............................... 27
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997, and 1996 ............................... 28
Notes to Consolidated Financial Statements ........................ 29
(a)(2) Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts Reserves ........... 54
Independent Auditor's Report ...................................... 55
(a)(3) Index to Exhibits, beginning on ................................... 56
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the fourth quarter of the fiscal year ended December 31, 1998.
(c) Exhibits
The exhibits required by this item are listed under Item 14(a)(3).. 60
Independent Auditors' Report
Board of Directors & Stockholders FiberMark, Inc.
We have audited the accompanying consolidated balance sheets of FiberMark, Inc. as of December 31, 1998 and 1997 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of FiberMark, Inc. as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
Burlington, Vermont February 5, 1999
Vt. Reg. No. 92-0000241
FIBERMARK, INC Consolidated Statements of Income Years Ended December 31, 1998, 1997 and 1996
(In Thousands, Except Per Share Amounts)
See accompanying notes to consolidated financial statements.
FIBERMARK, INC. Consolidated Balance Sheets December 31, 1998 and 1997 (In Thousands)
See accompanying notes to consolidated financial statements.
FIBERMARK, INC. Consolidated Statements of Cash Flows Years Ended December 31, 1998, 1997 and 1996
(In Thousands)
See accompanying notes to consolidated financial statements.
FIBERMARK, INC. Consolidated Statements of Stockholders' Equity Years Ended December 31, 1998, 1997 and 1996
(In Thousands, Except Share Amounts)
See accompanying notes to consolidated financial statements.
FIBERMARK, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997
(1) Description of Business
FiberMark produces specialty fiber-based materials in three operating segments: FiberMark Gessner and North American Filter Products, Technical and Office Products, and Durable Specialties. FiberMark is headquartered in Brattleboro, Vermont and operates seven facilities located in the eastern and midwestern regions of the United States and two facilities in Bavaria, Germany.
(2) Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include FiberMark, Inc. and its wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using the moving weighted average cost method for raw materials and the first-in, first-out (FIFO) method for work in process (WIP) and finished goods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation for financial reporting purposes is provided using the straight-line method based upon the useful lives of the assets. Buildings and improvements and machinery and equipment are depreciated over periods not exceeding forty (40) and twenty (20) years, respectively. When assets are sold or retired, the cost and accumulated depreciation are removed from the accounts and any gain or loss is included in income. Improvements are capitalized and included in property, plant and equipment while expenditures for maintenance and repairs are charged to expense. Leasehold improvements are amortized over the shorter of the life of the improvement or the lease term.
OTHER INTANGIBLE ASSETS AND GOODWILL
Intangible assets include primarily organization, debt issue, goodwill, and intangible assets related to pension plans (see note 14). Organization costs of $57,000 and $233,000, net of accumulated amortization of $485,000 and $309,000 as of December 31, 1998 and 1997, respectively, arose in conjunction with the acquisition of the Endura Products Division and are amortized on a straight-line basis over seven years. During the fourth quarter of 1997, organization costs amounting to $185,000, net of accumulated amortization of $177,000 were written off in conjunction with the closing of the Owensboro, Kentucky facility (see note 12). Debt issue costs of $4,177,000 and $4,517,000, net of accumulated amortization of $933,000 and $483,000 as of December 31, 1998 and 1997, respectively, are related to the issuance of the Series B Senior Notes and are amortized using the interest method over the life of those notes. Steinbeis Gessner GmbH was acquired effective January 1, 1998. Debt issue cost associated with Gessner was $413,000 net of accumulated amortization of $75,000 as of December 31, 1998. Other intangible assets acquired amounted to $526,000 net of accumulated amortization of $82,000 as of December 31, 1998.
Goodwill of $49,692,000 and $45,179,000, net of accumulated amortization of $3,609,000 and $1,805,000 as of December 31, 1998 and 1997, respectively, includes goodwill of $6,397,000 net of accumulated amortization of $220,000 associated with the Gessner acquisition. Goodwill represents the cost in excess of the fair value of the net assets of acquired companies and is amortized on a straight-line basis over thirty years. During the fourth quarter of 1997, goodwill of $186,000 net of accumulated amortization of $24,000 was written off in conjunction with the closing of the Owensboro, Kentucky facility (see note 12).
Amortization of intangibles, including goodwill, was $2,567,000, $2,542,000 and $812,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The company periodically evaluates the recoverability of intangibles resulting from business acquisitions and measures the amount of impairment, if any, by assessing current and future levels of income and cash flows as well as other factors, such as business trends and prospects and market and economic conditions.
DEFERRED GAIN
The deferred gain incurred in connection with the sale-leaseback transaction is being amortized on a straight-line basis over the life of the lease (see note 7).
RESEARCH AND DEVELOPMENT
The company expenses research and development costs as incurred. The costs amounted to $2.4 million, $1.4 million, and $1.2 million for the years ended December 31, 1998, 1997, and 1996, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency of all operations outside the U.S. is the respective local currency. The assets and liabilities of these operations are translated at the exchange rates in effect at the balance sheet date and income and expense accounts at average exchange rates during the year. Resulting translation adjustments are recorded directly to a separate component of other comprehensive income.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the company's stock at the date of the grant over the amount an employee must pay to acquire the stock.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS 128 requirements. Weighted average number of common and common equivalent shares outstanding and earnings per common and common equivalent share have also been restated to give effect to a 3-for-2 stock split effective May 13, 1997. The following table sets forth the computation of basic and diluted earnings per share:
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of the Statement did not have a material impact on the company's financial position, results of operations, or liquidity in 1996. During the fourth quarter of 1998 the company decided to close their Beaver Falls, New York facility. In the fourth quarter of 1997, the company also decided to close its Owensboro, Kentucky facility. The costs of closing these facilities, including the costs associated with disposing of the assets, are reflected as a component of income from operations (see note 12).
COMPREHENSIVE INCOME
In 1998, the company adopted SFAS No. 130, Reporting Comprehensive Income. This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income, minimum pension liability adjustments, and foreign currency translation adjustments and is presented in the Consolidated Statement of Stockholders' Equity. The adoption of SFAS 130 had no impact on total shareholders' equity. Prior year financial statements have been reclassified to conform to the SFAS 130 requirements.
SEGMENT DISCLOSURES
In 1998, the company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS 131 establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas, and major customers.
PENSION AND POST-RETIREMENT DISCLOSURES
In 1998, the company adopted SFAS No. 132, Employers' Disclosures about Pensions and Other Post-retirement Benefits. This statement revises employers' disclosures about pension and other post-retirement benefit plans. It does not change the measurement or recognition of those plans.
COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies, including environmental remediation costs, arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Recoveries from third parties which are probable of realization are separately recorded, and are not offset against the related environmental liability, in accordance with Financial Accounting Standards Board Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts.
Environmental Matters
In October 1996, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 96-1, Environmental Remediation Liabilities. SOP 96-1 was adopted by the company on January 1, 1997 and requires, among other things, environmental remediation liabilities to be accrued when the criteria of SFAS No. 5, Accounting for Contingencies, have been met. The guidance provided by the SOP is consistent with the company's current method of accounting for environmental remediation costs and, therefore, adoption of this new Statement does not have a material impact on the company's financial position, results of operations, or liquidity.
Pursuant to environmental laws and regulations, there are currently pending investigations at certain of the company's plants relating to the release of hazardous substances, materials and/or wastes. In addition, various predecessors of the company have been named as potentially responsible parties ("PRPs") by the United States Environmental Protection Agency ("EPA") for costs incurred and to be incurred in responding to the investigation and clean-up of various third-party sites. The company has not received any notification or inquiry from EPA or any other agency concerning these sites. Management believes that the company will have no liability in connection with the clean-up of these sites. However, no assurance can be given that such predecessors will perform their responsibilities in connection with such sites and, in the event of such nonperformance, the company may incur material liabilities in connection with such sites, and no assurance can be given that the company will not receive PRP notices in connection with these or other sites in the future.
Other Matters
The company is involved in various legal proceedings in the ordinary course of business. Management believes that the outcome of these proceedings will not have a material adverse effect on the company's financial condition, results of operations or cash flows.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year's presentation.
(3) Cogeneration Project
In 1993, the company entered into agreements with Kamine/Besicorp Beaver Falls L.P. ("Kamine") pursuant to which the company's Latex Fiber Products Division would host a gas-fired, 79-megawatt combined-cycle cogeneration facility developed by Kamine in Beaver Falls, New York. Construction of the facility has been completed. The company received $4.4 million in cash in 1993. The company had a firm contract with Kamine to receive a series of cash payments totaling $7.0 million between May 1995 and May 1997. The present value of these cash payments, in the amount of $6.5 million, was recorded as income in the first quarter of 1995. Cash payments of $2 million each were received in May 1997 and 1996 and $3 million was received in 1995. The $1.5 million received in 1998 represents a payment received from a cogeneration developer who leases property from the company.
(4) Inventories
Inventories consist of the following at December 31, 1998 and 1997 (in thousands):
(5) Property, Plant and Equipment
Property, plant and equipment consists of the following at December 31, 1998 and 1997 (in thousands):
Depreciation expense was $6,386,000, $4,852,000 and $2,839,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
(6) Debt
The company's long-term debt is summarized as follows at December 31, 1998 and 1997 (in thousands):
The Series B senior notes are redeemable at the company's option in whole or in part, on or after October 15, 2001 at redemption prices ranging from 100% to 104.688% of face value. Up to 35% of the notes are redeemable at the company's option on or prior to October 15, 1999 using the net proceeds of a public equity offering at a redemption price equal to 109.375% of the principal amount plus accrued and unpaid interest thereon subject to certain other conditions as described in the agreement.
In conjunction with the issuance of the Series B senior notes, (see note 11), the company repaid the senior term debt from CIT then outstanding. As a result, the company expensed $297,000 of deferred financing costs, net of income tax expense of $198,000. The loss has been reflected in the consolidated statements of income as an extraordinary item.
Approximately, $10,474,000, $9,430,000 and $1,797,000 of interest was paid during the years ended December 31, 1998, 1997 and 1996, respectively.
The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 1998 are as follows (in thousands):
The company has $20,000,000 in available funds through a revolving credit line with the CIT Group, Inc., at December 31, 1998, 1997 and 1996. The interest rate on the line as of December 31, 1998 is prime plus .5% or LIBOR plus 2%. The revolving credit line is subject to a commitment fee payable at the rate of 1/2 of 1% per annum on the daily average unused portion of this line. This fee is payable on a quarterly basis. In addition, the company is required to pay an annual Collateral Management Fee of $35,000 in connection with periodic examinations, analyzing and evaluating the collateral.
In connection with the acquisition of Steinbeis Gessner GmbH (see note 11), two credit facilities were established by Gessner with Bayerische Vereinsbank AG.
Gessner has $8,995,000 in available funds through a line of credit with Bayerische Vereinsbank AG at December 31, 1998. The interest rate on the line as of December 31, 1998 is LIBOR plus 1.75%. The credit line is subject to a commitment fee payable semi-annually at the rate of 1/4 of 1% per annum on the undisbursed amount.
In addition, Gessner established a loan agreement with Bayerische Vereinsbank AG for the purposes of financing capital expenditures. Under this agreement, Gessner has $8,995,000 in available funds at December 31, 1998. The interest rate as of December 31, 1998 is LIBOR plus 1.75%. The available funds mature as follows: $2,999,000 matures on June 30, 1999, $2,999,000 matures on December 31, 1999 and the remainder on December 31, 2000. The agreement is subject to a commitment fee at the rate of 1/4 of 1% per annum on the undisbursed amount at maturity.
(7) Leases
DEFERRED GAIN AND SALE-LEASEBACK
In April 1994, FiberMark entered into a sale-leaseback agreement with the CIT Group, Inc. ("CIT"). FiberMark sold CIT $7,813,000 in fixed assets for a purchase price of $25,000,000. As a result FiberMark recorded a deferred gain of $17,187,000 which is amortized on a straight-line over the life of the ten year lease. In 1998, 1997 and 1996 the company amortized $1,719,000, $1,718,000 and $1,719,000, respectively, of the deferred gain into income. At December 31, 1998 and 1997, the deferred gain amounted to $9,166,000 and $10,885,000 net of accumulated amortization of $8,021,000 and $6,302,000, respectively.
In connection with the sale-leaseback transaction, CIT leased back the fixed assets to FiberMark utilizing a ten-year operating lease. The lease requires quarterly payments of $843,000 for the first five years and quarterly payments of $690,000 for the remaining five years of the lease.
In December 1995, FiberMark amended the sale-leaseback agreement whereby FiberMark sold a newly constructed wet end machine ("Kobayashi") for $10 million. No gain or loss was recorded on the transaction. FiberMark received $5.0 million of the purchase price from CIT in December 1995, the remaining $5.0 million was placed in escrow and paid during 1996 when all specifications were met. CIT leased back the Kobayashi machine to FiberMark using the remaining 8.5 years of the operating lease discussed above. The amended lease required additional payments including a first quarter payment of $113,000 and quarterly payments of $339,901 for the next 33 quarters.
Rental expense associated with these leases is recognized on a straight-line basis and amounted to $4,426,000, $4,426,000 and $4,426,000 for the years ending December 31, 1998, 1997 and 1996, respectively. Accumulated deferred rent expense included in prepaid expense amounted to $1,380,000 and $1,073,000 as of December 31, 1998 and 1997, respectively.
Total future minimum lease payments under the sale-leaseback agreement are set forth as follows (in thousands):
Payments to be made in the years ending December 31: - - ----------------------------------------------------
OTHER LEASES
The company assumed obligations under operating leases for certain machinery, equipment and facilities with the acquisition of Steinbeis Gessner GmbH in January 1998, and with facilities purchased from CPG in October 1996.
Rental expense was $869,000, $1,043,000 and $420,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
As of December 31, 1998, obligations to make future minimum lease payments under these leases were as follows (in thousands):
Payments to be made in the years ending December 31: - - ----------------------------------------------------
(8) Preferred Stock
At December 31, 1998, 1997 and 1996, the company has 2,000,000 shares of preferred stock authorized with none issued. The company, without stockholder approval, can issue preferred stock with voting, conversion, and other rights.
(9) Income Taxes
Income before provision for income taxes, classified by source of income was as follows:
The components of the provision for income taxes before extraordinary item for the years ended December 31, 1998, 1997 and 1996 are as follows (in thousands):
9) Income Taxes, continued
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1998 and 1997 are presented below (in thousands):
SFAS No. 109 requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized through future taxable earnings.
(9) Income Taxes, continued
A reconciliation of income taxes from continuing operations at the United States statutory rate to the effective rate for the years ended December 31, 1998, 1997 and 1996 are as follows:
Income taxes paid during 1998, 1997 and 1996 were $5,399,000, $5,696,000 and $3,698,000, respectively.
(10) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures About the Fair Value of Financial Instruments, requires disclosure of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of the following disclosure the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced sale or liquidation. The fair value of long-term debt is based upon the quoted market price and amounts to $139,181,000 (carrying value of $137,181,000 at December 31, 1998, and $103,313,000 (carrying value $100,000,000) at December 31, 1997. Management has determined that the carrying values of its other financial assets and liabilities approximate fair value at December 31, 1998.
(11) Acquisitions
1998 ACQUISITION
Effective January 1, 1998 the company purchased all of the outstanding shares of Steinbeis Gessner GmbH (Gessner) for $40.0 million and DM8.08 ($4.4) million in cash. Gessner manufactures crepe masking and specialty tape materials, wet and dry abrasives papers, filter media for automotive air, oil and fuel and filter media for automotive cabins and vacuum cleaner bags. The acquisition was financed with a portion of the proceeds of the sale of 1,500,000 shares of the company's common stock for $28.7 million along with borrowings under a DM54.0 ($29.6) million bank facility provided by Bayerische Vereinsbank AG and an unsecured note issued by Gessner and guaranteed by the company to the seller in the amount of DM8.0 ($4.4) million. The acquisition was accounted for using the purchase method. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based upon their respective fair values. This resulted in approximately $6.4 million of cost in excess of net assets acquired, or goodwill which is being amortized on a straight line basis over thirty years. The 1998 consolidated results include Gessner's results of operation for the entire year.
The following summarized unaudited pro forma results of operations for the year ended December 31, 1997, assumes the Gessner acquisition occurred as of the beginning of the period (dollars in thousands, except per share amounts):
The unaudited pro forma results are not necessarily indicative of actual results of operations that would have occurred had the acquisitions been consummated as of the above dates, nor are they necessarily indicative of future operating results.
1996 ACQUISITIONS
The company purchased all of the outstanding stock of Arcon Holdings ("Arcon") as of October 31, 1996. Concurrently with the transfer of the purchase price to the stockholders of Arcon, the stockholders agreed to repay all amounts owed under Arcon's revolver and term loans and repurchase and cancel warrants then outstanding.
The company also purchased all of the issued and outstanding common stock of CPG Investors Inc. ("CPG") on October 31, 1996. Concurrently with the transfer of the purchase price to the stockholders of CPG, the stockholders agreed to repay all amounts owed under CPG's revolving and term loans.
The aggregate purchase price of CPG and Arcon was approximately $91,500,000 which includes costs of the acquisitions. The acquisitions were financed through the issuance of senior notes in the amount of $100,000,000 and were accounted for using the purchase method. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based upon their respective fair values. This treatment resulted in approximately $46,668,000 of cost in excess of net assets acquired. Such excess, or goodwill, is being amortized on a straight-line basis over thirty years. The 1996 consolidated results include Arcon and CPG's results of operations from the date of the acquisitions through the end of the year.
The following summarized unaudited pro forma results of operations for the year ended December 31, 1996, assumes the Arcon and CPG acquisitions occurred as of the beginning of the period (dollars in thousands, except per share amounts):
The unaudited pro forma results are not necessarily indicative of actual results of operations that would have occurred had the acquisitions been consummated as of the above dates, nor are they necessarily indicative of future operating results.
(12) Facility Closure
The company ceased operations at its Beaver Falls, New York facility on January 29, 1999. Part of the historical demand from this facility has been taken in-house by an integrated customer. The balance of the production demand will be absorbed by other mills within the company. As of December 31, 1998 the company recorded a facility closure charge of $7,794,000 to recognize severance and benefits for the employees to be terminated ($1,427,000) to reflect contract cancellation costs ($250,000) and to reflect the write off of property, plant and equipment ($6,117,000). The company expects to terminate 92 administrative and plant employees. Results of operations of the facility amounted to a $.1 million income for the year ended December 31, 1998.
On January 14, 1998, the company closed the Owensboro, Kentucky facility. Production at this facility was moved into certain of the company's other operations. As of December 31, 1997 the company recorded a facility closure charge of $10,000,000 to recognize severance and benefits for the employees to be terminated ($450,000) to reflect contract cancellation costs ($325,000), to reflect the write down to estimated fair market value of the plant and equipment not expected to be transferred to other facilities ($8,129,000), to write off goodwill ($186,000) and organization costs ($185,000) and to write off or accrue for other miscellaneous costs ($725,000). The company terminated 39 administrative and plant employees. The actual termination benefits paid were $492,000. Results of operations of the facility amounted to a $.3 million loss for the year ended December 31, 1997.
In 1998 the company adjusted $520,000 of previously accrued expenses related to its Owensboro, Kentucky mill to facility closure expense.
(13) Related Party Transactions
The company paid a management fee of $250,000 for the years ended December 31, 1997 and 1996 to an equity owner, MDC Management company ("MDC"). The company had a management agreement with MDC which called for an annual fee of $250,000 through 1997. In 1996 the company also paid MDC $250,000 in conjunction with the CPG and Arcon acquisitions.
(14) Retirement and Deferred Compensation Plans
QUALIFIED PLANS
The company has a defined contribution plan (salaried and hourly) and a defined benefit (hourly) retirement plan for FiberMark.
Defined Contribution Plan
The defined contribution plan is a 401(k) ERISA and IRS-qualified plan covering substantially all employees that permits employee salary deferrals up to 16% of salary with the company matching 50% of the first 6%. Defined contribution expense for the company was $1,017,000, $1,102,000 and $487,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Defined Benefit Plan for Hourly Employees
Effective August 13, 1997 the CPG defined benefit pension plan was merged into the FiberMark, Inc. pension plan and the assets and liabilities of both plans were combined. The defined benefit plan is an ERISA and IRS-qualified plan. Plan assets are invested principally in equity securities, government and corporate debt securities and other fixed income obligations. The company annually contributes at least the minimum amount as required by ERISA.
The following table sets forth the accumulated pension obligation (PBO) included liabilities on the company's consolidated balance sheet (in thousands):
The funded status at December 31 is (in thousands):
Net periodic pension expense included the following components (in thousands):
The following table reconciles plan assets (in thousands):
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation at December 31, 1998 and 1997 was 6.5% and 7.25%, respectively. The expected long-term rate of return on plan assets was 9% in 1998 and 1997.
As is required by SFAS No. 87, Employers' Accounting for Pensions, for plans where the accumulated benefit obligation exceeds the fair value of plan assets, the company has recognized in the accompanying consolidated balance sheets the minimum liability of the unfunded accumulated benefit obligation as a long-term liability with an offsetting intangible asset and equity adjustment, net of tax impact.
The closure of the facility in Owensboro, Kentucky resulted in a curtailment of the plan. However, since the plan benefit is not salary related, there is no curtailment gain or loss as a result of the facility closure.
NON-QUALIFIED PLANS
In addition to the benefits provided under the qualified pension plans, retirement and deferred compensation benefits associated with wages in excess of the IRS allowable wages are provided to certain employees under non-qualified plans.
During 1997, the company established a trust pursuant to two executive deferral plans for the benefit of a select group of management, highly compensated employees and/or directors who contribute materially to the continued growth, development and business success of the company. The plans established under the trust agreement are set forth as follows:
Supplemental Executive Retirement Plan (SERP)
The plan is a defined benefit plan and shall be unfunded for tax purposes and for purposes of Title I of ERISA. Pension benefits are based upon final average compensation and years of service. Benefits earned are subject to cliff vesting after fifteen (15) years or more of service.
The following table sets forth the accumulated pension obligation (PBO) included in accrued liabilities on the company's consolidated balance sheet (in thousands):
The funded status at December 31 is (in thousands)
Net periodic pension expense included the following components (in thousands):
The following table reconciles plan assets (in thousands):
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation at December 31, 1998 and 1997 was 6.5% and 7%, respectively.
As required by SFAS No. 87, Employers' Accounting for Pensions, for plans where the accumulated benefit obligation exceeds the fair value of plan assets, the company has recognized in the accompanying consolidated balance sheet the minimum liability of the unfunded accumulated benefit obligation as a long-term liability with an offsetting intangible asset.
Deferred Compensation Plan
The company has a deferred compensation plan that permits eligible participants to defer a specified portion of their compensation. The deferred compensation, together with certain company contributions, earn a guaranteed rate of return. As of December 31, 1998 and 1997 the company has accrued $2,809,000 and $1,494,000, respectively for its obligation under the plan. The company's expense which includes company contributions and interest expense amounted to $17,000 and $152,000 for the years ended December 31, 1998 and 1997, respectively.
To assist in the funding of the plan, the company purchased corporate-owned life insurance contracts. Proceeds from the insurance policies are payable to the company upon the death of the participant. The cash surrender value of the policies, included in other long-term assets, was $2,817,000 and $1,342,000 as of December 31, 1998 and 1997, respectively.
(15) Post-retirement Benefits Other Than Pensions
The company provides certain health care and life insurance benefits to specific groups of former CPG employees when they retire. The salaried group of employees generally become eligible for retiree medical benefits after reaching age 62 and with 15 years of service or after reaching age 65. The medical plan for salaried employees provides for an allowance, which must be used towards the purchase of a Medicare supplemental insurance policy, based on a retiree's length of service. The allowance may be adjusted to reflect annual changes in the Consumer Price Index ("CPI"); however, once the initial allowance has doubled, there will be no further increases. Salaried employees hired after January 1, 1993 are not eligible to participate in this retiree medical plan. Upon satisfying certain eligibility requirements, approximately 45% of the hourly employees are eligible upon retirement to receive a medical benefit, which is an allowance to be used toward the purchase of a Medicare supplemental insurance policy and cannot exceed a specified annual amount. The post-retirement benefit obligations related to employees who retired prior to the acquisition were not assumed by the company and remain the responsibility of prior owners.
Included in accrued liabilities on the company's consolidated balance sheet (in thousands):
The funded status at December 31 is (in thousands):
Net periodic post-retirement benefits cost included the following components (in thousands):
The assumed health care cost trend rate used in measuring future benefit costs was 7.5%, gradually declining to 6% by 2001 and remaining at that level thereafter. A 1% increase in this annual trend rate would increase the accumulated post-retirement benefit obligation at December 31, 1998 by $1,546,000 And the aggregate of service and interest cost components of net periodic post-retirement benefit expense for the year ended December 31, 1997 by $118,000. The assumed discount rate used in determining the accumulated post-retirement benefit obligation was 6.5% and 7.5% as of December 31, 1998 and 1997 respectively.
(16) Accrued Liabilities Consist of (in thousands):
(17) Supplemental Cash Flow Information
Non-cash investing and financing activities:
During 1998 the company recorded an intangible asset related to the hourly defined benefit pension plan amounting to $166,000 and a long-term liability of $1,636,000. The offset resulted in a minimum pension liability adjustment of $910,000, net of tax benefit.
During 1998 the company recorded an intangible asset related to the SERP in the amount of $2,622,000 and recorded a long-term liability for the same amount.
During 1997 the company recorded an intangible asset related to the hourly defined benefit pension plan amounting to $180,000 and a long-term liability of $946,000. The offset resulted in a minimum pension liability adjustment of $471,000, net of tax benefit.
During 1997 the company recorded an intangible asset related to the SERP in the amount of $2,487,000 and recorded a long-term liability for the same amount.
(18) Significant Business Concentrations
(a) In our office products and technical specialties segment (b) Excluding Canada
(19) Stock Option and Bonus Plans
The company has three stock option plans which provide for grants of non-qualified or incentive stock options. The 1992 Amended and Restated Stock Option Plan ("1992 Plan") is fully granted at 301,422 shares of common stock to management of the company. Options granted under the 1992 Plan typically vest at a rate of 20% per year and are exercisable for a period of ten years from the grant date.
The 1994 Stock Option Plan ("1994 Plan") is fully granted at 300,000 shares of common stock to selected officers and employees of the company. Options granted under the Plan vest at a rate of 20% per year commencing on the one year anniversary of the grant date and 1.66% at the end of each month thereafter. The options are exercisable for a period of ten years from the grant date.
The 1994 Director Stock Option Plan ("Directors' Plan") authorizes the grant of up to 225,000 shares
(19) Stock Option and Bonus Plans, continued
of common stock to directors who are not otherwise full-time employees of the company. The Plan was amended in 1996 to increase the authorized shares from 75,000 to 225,000 shares and to allow for an accelerated vesting schedule not to exceed five years. Options will vest and become exercisable based upon target levels set for the fair market value of the common stock or in the event of a merger or asset sale. The options are exercisable for a period of eight years from the date of grant.
During 1997 the company authorized the grant of up to 600,000 incentive stock options under a new plan, the 1997 Stock Option Plan ("1997 Plan") to selected officers and employees of the company. Options granted under the 1997 Plan vest at a rate of 20% per year and are exercisable for a period of ten years from the grant date.
During 1998 the company authorized the grant of up to 200,000 stock options under a new plan, the 1998 Stock Option Plan ("1998 Plan") to non-employee Directors. The 1998 Plan contains two types of option grants: (1) a base grant of an option for 7,500 shares at the grant date fair market value option price which vests at a rate of 20% for each year of board service and (2) a performance grant of an option for 15,000 shares at a grant date fair market value option price which has accelerated vesting if the stock of the company reaches certain price levels for 20 consecutive trading days and ultimately vests after eight years of service on the Board of Directors.
The following table sets forth the stock option transactions for the three years ended December 31, 1998:
(19) Stock Option and Bonus Plans, continued
The following table summarizes information about stock options outstanding at December 31, 1998:
The company has adopted the disclosure-only provisions of Statement of Financial Standards No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for stock options granted under the plans during 1998, 1997 and 1996 as the options were all granted at exercise prices which equaled the market value at the date of the grant. Compensation for the options granted prior to December 31, 1992 at $3.33 per share was measured as of the grant date based upon a fair market value of $5.33 per share as determined by the Board of Directors and is being recognized as expense over the vesting period. Had compensation cost for the company's stock option plans been determined based on the fair value at the grant date for awards during 1998, 1997 and 1996 consistent with the provisions of SFAS No. 123, the company's net income would have been reduced to the pro forma amounts indicated below:
Pro forma net income reflects only options granted after 1994. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting periods and compensation cost for options granted prior to January 1, 1995 is not considered.
(19) Stock Option and Bonus Plans, continued
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996: risk-free interest rate of 6%; dividend yield of $0; expected volatility of 45%; and expected lives of ten (10) years.
Effective January 1, 1994, the Compensation Committee adopted the Executive Bonus Plan, which provides for bonus payments of a percentage of base salary based upon achievement by the company of certain levels of earnings per share. The Executive Bonus Plan utilizes a sliding scale so that the percentage of base salary paid as bonus compensation increases as the earnings per share of the company increase. The Executive Bonus Plan is designed to directly align the interests of the executive officers and the stockholders. Although the Executive Bonus Plan is subject to annual review by the Committee, the Committee expects it to remain in place for a five-year term. Expense recorded under the plan amounted to $660,000, $1,001,000 and $398,000 in 1998, 1997 and 1996, respectively.
(20) Unaudited Quarterly Summary Information
The following is a summary of unaudited quarterly summary information for the years ended December 31, 1998, 1997 and 1996 (in thousands except per share data).
(1) In the fourth quarter of 1998, the company announced its decision to close the facility located in Beaver Falls, New York. Income from operations reflects a $7,794,000 charge as a result of this event.
(2) In the fourth quarter of 1997, the company announced its decision to close the facility located in Owensboro, Kentucky. Income from operations reflects a $10,000,000 charge as a result of this event.
Equivalent shares of common stock have not been included in the 1997 fourth quarter diluted earnings per share calculation as their effect would be anti-dilutive.
(3) In the fourth quarter of 1996, the company acquired Arcon Holdings Corporation and CPG Investors Inc.
(21) Segment Information
On December 31, 1998, the company adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131). SFAS 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services and geographic areas.
The company's reportable operating segments include: technical and office products, durable specialties and FiberMark Gessner and North American filter products. Each operating segment consists of facilities with common management, with significant marketing and manufacturing overlap.
The technical and office products segment manufactures a wide range of specialty fiber-based materials used in communications, including base or cover materials for electrical/electronics, graphic arts and office products, as well as other technical specialties. This represents the combination of our office products and technical specialties markets.
Durable specialties produces specialty tape substrates, using a broad range of saturated, coated paper and non-woven materials. This represents our U.S. durable specialties division.
FiberMark Gessner and North American filter products manufactures filter media used in automotive, vacuum, water and industrial filtration, including paper, synthetic non-woven materials and composite materials. FiberMark Gessner also manufactures technical specialties (abrasives) and durable specialties (tape backing materials). This segment encompasses FiberMark Gessner GmbH, as well as our North American filter products business.
The following table details sales and selected financial data by operating segment (in thousands). Inter-segment sales are accounted for as if the sales were to third parties.
(21) Segment Information (Continued)
(In Thousands)
(21) Segment Information (Continued)
Information concerning principal geographic areas is as follows (in thousands):
(a) Revenues are attributed to countries based on product shipment destination.
FIBERMARK, INC. Schedule II - Valuation and Qualifying Accounts and Reserves (In Thousands)
(1) The increase in the reserve reflects the impact of the acquisition of Steinbeis Gessner GmbH.
Independent Auditors Report
The Board of Directors and Stockholders FiberMark, Inc.:
Under date of February 5, 1999, we reported on the consolidated balance sheets of FiberMark, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, as contained in the annual report on Form 10-K for the year 1998. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, 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.
KPMG LLP
Burlington, Vermont February 5, 1999
Item 14 (a) (3) Exhibits
Number Description - - ------ -----------
2.1(10) Share Purchase Agreement dated as of November 26, 1997, among Steinbeis Holding GmbH ("Steinbeis"), Zetaphoenicis Beteiligungs GmbH and Thetaphoenicis Beteiligungs GmbH. 3.1(1) Restated Certificate of Incorporation of the Company as amended through March 25, 1997. 3.2(10) Certificate of Ownership and Merger of FiberMark, Inc. with and into Specialty Paperboard, Inc. filed with the Secretary of State of Delaware on March 26, 1997. 3.3(1) Restated By-laws. 4.1(1) Reference is made to Exhibits 3.1, 3.2 and 3.3. 4.2(1) Specimen stock certificate. 4.3(9) Indenture dated as of October 15, 1996 (the "Indenture") among the Company, CPG Co., Specialty Paperboard/Endura, Inc. ("Endura") and the Wilmington Trust Company ("Wilmington"). 4.4(9) Specimen Certificate of 9 3/8% Series B Senior Note due 2006 (included in Exhibit 4.3 hereof). 4.5(9) Form of Guarantee of Senior Notes issued pursuant to the Indenture (included in Exhibit 4.3 hereof). 10.1(5) Lease Agreement dated April 29, 1994, between CIT Group/Equipment Financing Inc. ("CIT/Financing") and the Company. 10.2(5) Grant of Security Interest in Patents, Trademarks and Leases dated April 29, 1994, between the Company and CIT/Financing. 10.3(5) Bill of Sale dated April 29, 1994, to CIT/Financing. 10.4(1)(3) Form of Indemnity Agreement entered into between the Company and its directors and executive officers. 10.5(1)(3) The Company's 1992 Amended and Restated Stock Option Plan and related form of Option Agreement. 10.6(1) Paper Procurement Agreement, between the Company and Acco-U.S.A. 10.7(1) Energy Service Agreement (Latex mill), dated as of November 19, 1992, between Kamine and the Company. 10.8(2) Amendment No. 1 to the Energy Service Agreement (Latex mill), dated as of May 7, 1993, between Kamine and the Company. 10.9(1) Energy Service Agreement (Lewis mill), dated as of November 19, 1992, between Kamine and the Company. 10.10(2) Amendment No. 1 to the Energy Service Agreement (Lewis mill), dated as of May 7, 1993, between Kamine and the Company. 10.11(1) Restated Ground Lease, dated as of November 19, 1992, between Kamine and the Company. 10.12(1) Beaver Falls Cogeneration Buyout Agreement, dated as of November 20, 1992, between Kamine, Kamine Beaver Falls Cogen. Co., Inc. and the Company. 10.13(2) Consent and Agreement (Energy Services Agreement), dated as of May 7, 1993, by the Company. 10.14(2) First Amendment of Restated Ground Lease, dated as of May 7, 1993, between Kamine and the Company. 10.15(2) Memorandum of Lease, dated as of May 7, 1993, between Kamine and the Company. 10.16(7)(3) The Company's 1994 Stock Option Plan and related forms of Option Agreements.
10.17(7)(3) The Company's 1994 Directors Stock Option Plan and related form of Option Agreement. 10.18(9)(3) Amendment to the Company's 1994 Directors Stock Option Plan. 10.19(4)(3) The Company's Executive Bonus Plan. 10.20(9) Deed of Lease between James River Paper Company, Inc. and CPG-Virginia Inc. dated as of October 31, 1993. 10.21(9) Amended and Restated Agreement of Lease, between Arnold Barsky doing business as A&C Realty and Arcon Mills Inc., dated June 1, 1988. 10.22(9) Lease Agreement dated November 15, 1995, between IFA Incorporated and Custom Papers Group Inc. ("Custom Papers Group"). 10.23(9) Master Lease Agreement dated January 1, 1994, between Meridian Leasing Corp. and Custom Papers Group. 10.24(9) Master Equipment Lease Agreement dated February 3, 1995, between Siemens Credit Corp. and CPG Holdings Inc. 10.25(6) Endura Sale Agreement, by and among W.R. Grace & Co. Conn., W.R. Grace (Hong Kong) Limited, Grace Japan Kabushiki Kaisha (collectively, the "Sellers"), the Company, Specialty Paperboard (Hong Kong Limited) and Specialty Paperboard Japan Kabushiki Kaisha (collectively the "Buyers"), dated May 10, 1994. 10.26 (11) Loan Agreement dated as of November 24, 1997, between Steinbeis and Gessner. 10.27(11) Expansion Land Option and Preemption Right Agreement dated as of November 13, 1997, between Steinbeis and Gessner. 10.28(12) Third Amended and Restated Financing Agreement & Guaranty 10.29(12) Second Amended and Restated Security Agreement dated December 31, 1997, between FiberMark Office Products, LLC and CIT Group/Equipment Financing, Inc. 10.30(12) Second Amended and Restated Security Agreement dated December 31, 1997, between FiberMark, Inc. FiberMark Durable Specialties, Inc., and FiberMark Filter and Technical Products 10.31(12) Loan Agreement dated as of January 7, 1988, between Zetaphoenieis Beteiligungs GmbH and Bayerische Vereinsbank AG ("Bayerische"). 10.32(12) Working Credit Facility dated as of January 13, 1998 between Gessner and Bayerische. 10.33(12) Capex Loan Agreement dated as of January 13, 1998, between Gessner and Bayerische. 10.34 1998 Amended and Restated Non-Employee Directors Stock Option Plan 21 List of FiberMark subsidiaries 23.1 Consent of KPMG LLP. 27 Financial Data Schedule
(1) Incorporated by reference to exhibits filed with the company's Registration Statement on Form S-1 (No. 33-47954), as amended, which became effective March 10, 1993.
(2) Incorporated by reference to exhibits filed with the company's report on Form 10-Q for the quarter ended June 30, 1993, filed August 13, 1993.
(3) Indicates management contracts or compensatory arrangements filed pursuant to Item 601(b)(10) of Regulation S-K.
(4) Incorporated by reference to exhibits filed with the company's report on Form 10-K for the year ended December 31, 1993 (No. 0-20231).
(5) Incorporated by reference to exhibits filed with the company's report on Form 10-Q for the quarter ended March 31, 1994, filed May 14, 1994.
(6) Incorporated by reference to exhibits filed with the company's report on Form 8-K, filed July 14, 1994.
(7) Incorporated by reference to exhibits filed with the company's Registration Statement on Form S-8 filed, July 18, 1994.
(8) Incorporated by reference to exhibits filed with the company's report on Form 10-K for the year ended December 31, 1994 (No. 0-20231).
(9) Incorporated by reference to exhibits filed with the company's report on Form 10-K for the year ended December 31, 1996, filed April 1, 1997.
(10) Previously filed.
(11) Incorporated by reference to exhibits filed with the company's Registration Statement on Form S-3, filed December 15, 1997.
(12) Incorporated by reference to exhibits filed with the company's report on Form 10-K for the year ended December 31, 1997, filed March 31, 1998.
FIBERMARK, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Brattleboro, County of Windham, State of Vermont, on the 31st day of March, 1999.
FiberMark, Inc.
By /s/ ALEX KWADER --------------------- Alex Kwader President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Alex Kwader and Bruce Moore, or any of them, his or her attorney-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report, and to file the same, with exhibits thereto and other documents in connections therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. This Form 10-K may be executed in multiple counterparts, each of which shall be an original, but which shall together constitute but one agreement.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/S/ ALEX KWADER President and March 31, 1999 - - ------------------------ Chief Executive Officer Alex Kwader
/S/ K. PETER NORRIE Chairman of the Board March 31, 1999 - - ------------------------ K. Peter Norrie
/S/ BRIAN C. KERESTER Director March 31, 1999 - - ------------------------ Brian C. Kerester
/S/ MARION A. KEYES, IV Director March 31, 1999 - - ------------------------ Marion A. Keyes, IV
/S/ GEORGE E. MCCOWN Director March 31, 1999 - - ------------------------ George E. McCown
/S/ JON H. MILLER Director March 31, 1999 - - ------------------------ Jon H. Miller
/S/ ELMAR B. SCHULTE Director March 31, 1999 - - ------------------------ Elmar B. Schulte
/S/ EDWARD P. SWAIN, JR. Director March 31, 1999 - - ------------------------ Edward P. Swain, Jr.
/S/ FRED P. THOMPSON, Director March 31, 1999 JR. - - ------------------------ Fred P. Thompson, Jr.
/S/ BRUCE MOORE Vice President March 31, 1999 - - ------------------------ Chief Financial Officer Bruce Moore