-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DX6G55UpqMb1d93y9fi9zI2KD7mZ3VWiYr+4Dq4chhscOVzWd7tnMakqIwP91Rgu fHuQNmLzhgTiKhxRkA2EzQ== 0000950144-00-003774.txt : 20000328 0000950144-00-003774.hdr.sgml : 20000328 ACCESSION NUMBER: 0000950144-00-003774 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARAUSTAR INDUSTRIES INC CENTRAL INDEX KEY: 0000825692 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD MILLS [2631] IRS NUMBER: 581388387 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20646 FILM NUMBER: 579900 BUSINESS ADDRESS: STREET 1: 3100 WASHINGTON STREET CITY: AUSTELL STATE: GA ZIP: 30106 BUSINESS PHONE: 7709483101 MAIL ADDRESS: STREET 1: P O BOX 115 CITY: AUSTELL STATE: GA ZIP: 30168 10-K405 1 CARAUSTAR INDUSTRIES, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K --------------------- (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO__________
COMMISSION FILE NUMBER 0-20646 CARAUSTAR INDUSTRIES, INC. (Exact name of registrant as specified in its charter) NORTH CAROLINA 581388387 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3100 JOE JERKINS BLVD. 30106 AUSTELL, GEORGIA (Zip Code) (Address of principal executive offices)
(770) 948-3101 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.10 PAR VALUE (Title of Class) --------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 1, 2000, computed by reference to the closing sale price on such date, was $408,558,635. As of the same date, 25,735,977 shares of Common Stock, $.10 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's definitive Proxy Statement pertaining to the 2000 Annual Meeting of Shareholders ("the Proxy Statement") and filed pursuant to Regulation 14A is incorporated herein by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INTRODUCTION Caraustar Industries, Inc. operates its business through 34 subsidiaries across the United States and in Mexico and the United Kingdom. As used herein, the "Company" or "Caraustar" includes Caraustar Industries, Inc. and its subsidiaries, except that when used with reference to common shares or other securities described herein and in describing the positions held by management of the Company, the term includes only Caraustar Industries, Inc. PART I ITEM 1. DESCRIPTION OF BUSINESS General. The Company, a major manufacturer of 100 percent recycled paperboard and converted paperboard products, was incorporated in North Carolina in 1980 through the consolidation of six corporations in the recycled paperboard industry previously related by common ownership and administration. The Company operates 99 facilities in the United States, Mexico and the United Kingdom and manufactures its products primarily from recovered fiber, which is derived from recycled paperstock. Additionally, the Company has an equity interest as the non-operating partner in two gypsum wallboard manufacturing plants and two tube plants. The operations of these facilities are managed by the respective operating partners. The Company operates principally in three business segments: paperboard; tubes, cores and composite containers; and carton and custom packaging. Net sales, operating income, identifiable assets, depreciation and amortization and capital expenditures are reported by segment in Note 12 to the consolidated financial statements in Item 8 of this report. Operations and Products Paperboard. The Company's principal manufacturing activity is the production of uncoated and clay-coated recycled paperboard. In this manufacturing process, paperstock is reduced to pulp, cleaned and refined and then processed into various grades of paperboard for internal consumption or sale to four end-use markets: (1) tubes, cores and composite containers; (2) folding cartons; (3) gypsum wallboard facing paper; and (4) miscellaneous other specialty and converted products. The Company currently operates a total of 16 paperboard mills in the following states: Connecticut, Georgia, Illinois, Iowa, Maryland, North Carolina, New Jersey, New York, Ohio, Pennsylvania, South Carolina, Tennessee and Virginia. The Company's Baltimore, Maryland paperboard mill ceased operations in February 2000. Caraustar continually maintains and improves its paperboard mills. During the past five years, the Company spent an average of $34.6 million annually for capital expenditures, which sums were used primarily to expand and upgrade its paperboard production and converting capacity, primarily by acquiring and maintaining state-of-the-art machinery and technology. The Company intends to continue to upgrade its existing facilities with modern, cost-efficient and productive equipment. The Company's strategic plan includes a capital expenditure program that anticipates annual expenditures of approximately $44.3 million in 2000 at its existing facilities. 1 3 In 1999, approximately 34% of the recycled paperboard sold by the Company's paperboard mills was consumed internally by the Company's converting facilities; the other 66% was sold to external customers. Sales of unconverted paperboard to external customers as a percent of total sales by end-use market was as follows:
YEAR ENDED DECEMBER 31, ----------------------- END-USE MARKET 1999 1998 1997 - -------------- ----- ----- ----- Tube, core and composite container.......................... 1.8% 2.2% 2.2% Folding cartons............................................. 12.1% 11.5% 14.3% Gypsum wallboard............................................ 13.8% 13.2% 14.8% Other specialty*............................................ 10.5% 10.3% 11.2%
- --------------- * Includes sales of unconverted paperboard and certain specialty converted products. Three of the Company's paperboard mills operate specialty converting facilities, supplying other specialty converted and laminated products to the bookbinding, game, puzzleboard, printing and furniture industries. The Company also operates two specialty converting facilities that supply die cut and foam laminated products and manufacture jigsaw puzzles, coin folders and other specialty products. Each of the Company's paperboard mills and most of its converting plants have onsite recovered fiber facilities that collect and bale recycled paperstock. The Company operates 11 stand-alone paperstock recycling and brokerage facilities. Sales of paperstock to external customers accounted for 5.2%, 4.5% and 3.9% of total sales in 1999, 1998 and 1997, respectively. Tube, Core and Composite Container. The Company's largest converting operation is the production of tubes and cores. The principal applications of these products are: cloth cores, paper mill cores, yarn carriers, carpet cores and film, foil and metal cores. Paper tubes are designed to provide specific physical strength properties, resistance to moisture and abrasion, and resistance to delamination at extremely high rotational speeds. The Company's 31 tube and core converting plants are primarily operated by the Company's Industrial and Consumer Products Group (two are joint ventures). These plants obtain most of their recycled paperboard from the Company's paperboard mills. Because of the relatively high cost of shipping tubes and cores, tube and core converting facilities generally serve customers within a relatively small geographic area. Accordingly, most of the Company's tube and core converting plants are located in close proximity to concentrations of customers. The Company is seeking to expand its presence in the markets for more sophisticated tubes and cores, which require stronger paper grades, higher skill and new converting technology. These markets include the yarn carrier and plastic film markets, as well as the market for cores used in certain segments of the paper industry. The Company believes these markets offer significant growth potential, as well as potentially higher operating margins. In addition to tube and core converting facilities, the Industrial and Consumer Products Group operates four facilities which produce specialty converted products used in industrial packaging protection applications (edge protectors). The Company's tube, core and related sales to external customers accounted for 21.8%, 26.3% and 27.8% of total sales to external customers in 1999, 1998 and 1997, respectively. The Company's Industrial and Consumer Products Group also produces composite containers used in the adhesive, sealant, food and food service markets, as well as grease cans, tubes, cartridges and other components. The group has two composite container plants located in Saint Paris and Orrville, Ohio and a transportation operation in Ohio. Composite container sales accounted for 4.3%, 4.8% and 5.4% of total sales to external customers in 1999, 1998 and 1997, respectively. The Company manufactures injection-molded and extruded plastic products, including plastic cores for the textile industry, plastic cores for the film, paper and other industries, and other specialized products. These plastic products are, to a large extent, complementary to the Company's tube and core products. The Company has an 80% equity interest in a plant in Union, South Carolina that produces such plastic products. Certain of this plant's customers also purchase the Company's tubes and cores. This plant currently has five 2 4 plastic extrusion lines and 24 injection-molding machines, using the latest available process control technology. The Company produces injection-molded plastic parts at a facility in Georgetown, Kentucky, which are primarily used as components in the manufacture of its composite containers. Plastic cartridges are produced in a facility located in New Smyrna Beach, Florida. Plastic product and related sales to external customers accounted for 2.5%, 3.0% and 2.9% of the Company's total sales in 1999, 1998 and 1997, respectively. Carton and Custom Packaging. The Company produces folding cartons and rigid set-up boxes at 16 carton plants -- four in North Carolina, two in Ohio and one each in Alabama, Colorado, Connecticut, Massachusetts, Maryland, Michigan, Missouri, Pennsylvania, Tennessee, and Utah. Chesapeake Fiber Packaging, acquired in March 1998, also produces specialty-corrugated products. These plants obtain approximately 53% of their paperboard needs from the Company's paperboard mills and the remaining 47% from other manufacturers. The Company's boxes and cartons are used principally as containers for hosiery, hardware, candy, sports related items, cosmetics, dry food, film and various other industrial applications, including textile and apparel applications. The Company operates eight specialty packaging facilities, four in Ohio, two in New Jersey and one each in Massachusetts and North Carolina. These facilities perform contract manufacturing and custom contract packaging for a variety of consumer product companies. Additionally, the Company operates a digital imaging facility in Ohio and a prepress reproduction facility in Connecticut. Carton and custom packaging sales accounted for 28.2%, 24.2% and 17.5% of the Company's total sales to external customers in 1999, 1998 and 1997, respectively. Acquisitions. Since its incorporation, the Company has grown in part as the result of a number of acquisitions, and the Company intends to continue to evaluate and complete acquisitions as part of its strategy to focus on and expand in its primary markets. Acquisitions completed during 1999 include: - - Carolina Component Concepts, Inc., a specialty paperboard converter; - - International Paperboard Company's Sprague boxboard mill, a manufacturer of clay-coated recycled paperboard; - - Halifax Paperboard Company, a manufacturer of uncoated recycled paperboard and a specialty paperboard converter; - - the Folding Carton Division of Tenneco Packaging, Inc., a five-plant folding carton manufacturer; and - - Carolina Converting, Inc., a specialty paperboard converter. In February 2000, the Company acquired MilPak, Inc., a contract packager. Product Distribution. Each of the Company's manufacturing and converting facilities has its own sales staff and maintains direct sales relationships with its customers. The Company also employs divisional and corporate level sales personnel who support and coordinate the sales activities of individual facilities. Divisional and corporate sales personnel also provide sales management, marketing and product development assistance in markets where customers are served by more than one of the Company's facilities. Approximately 140 of the Company's employees are devoted exclusively to sales and customer service activities, although many other employees participate generally in sales efforts. The Company generally does not sell its products through independent sales representatives. The Company's advertising is limited to trade publications. Customers. The Company manufactures most of its converted products pursuant to customers' orders. The Company does, however, maintain minimal inventory levels of certain products. The Company's business is not dependent on any single customer or upon a small number of major customers. The Company does not believe that the loss of any one customer would have a material adverse effect on its financial condition or results of operations. Raw materials. Recovered fiber, derived from recycled paperstock, is the only significant raw material used in the Company's mill operations. The Company purchases approximately 68% of its paperstock requirements from independent sources, such as major retail stores, distribution centers and manufacturing plants. The balance is obtained from a combination of other sources. Some paperstock is collected from small collectors 3 5 and waste collection businesses. This paperstock is sorted and baled by one of the Company's paperstock recycling and processing facilities and then either transferred to the Company's mills for processing or sold to third parties. Paperstock is also obtained from customers of the Company's converting operations and from waste handlers and collectors who deliver loose paperstock to the Company's mill sites for direct use without baling. Another portion of the Company's requirements is obtained from its small baler program, in which the Company leases, sells or furnishes small baling machines to businesses that bale their own paperstock for periodic collection by the Company. The Company closely monitors its recovered fiber costs and intends to further increase its unbaled paperstock purchases as a percentage of its total recovered fiber needs and increase its reliance on purchases from customers and the small baler program. Competition. Although the Company competes with numerous other manufacturers and converters, the Company's competitive position varies greatly by geographic area and within the various product markets of the recycled paperboard industry. In most of its markets, the Company's competitors are capable of supplying products that would meet customer needs. Some of the Company's competitors have greater financial resources than the Company. The Company competes in its markets on the basis of price, quality and service. The Company believes that it is important in all of its markets that suppliers work closely with their customers to develop or adapt products to meet customers' specialized needs. The Company also believes that it competes favorably on the basis of all of the above factors. In the southeastern United States, where the Company historically has marketed its tubes and cores, the Company believes that it and Sonoco Products Company are the major competitors. On a national level, Sonoco is the dominant competitor in the tube and core market. According to industry data, Sonoco had more than 50% of the total United States market in 1999. Several regional companies and numerous small local companies also compete in the tube and core market. The folding carton and set-up box market in the United States is served by several large national and regional companies and numerous small local companies. Nationally, none of the major competitors is dominant, although certain competitors may be dominant in particular geographic areas or market niches. In the markets served by the Company's carton and box plants, the dominant competitor is Rock-Tenn Company. In its sales of miscellaneous specialty and converted products, and in sales of recycled paperboard to other manufacturers for the production of tubes, cores and composite containers, folding cartons and boxes, and miscellaneous converted products (other than gypsum wallboard facing paper), the Company competes with a number of recycled paperboard manufacturers, including Sonoco, Rock-Tenn, Smurfit-Stone Container Corporation and The Newark Group, Inc. The Company believes that none of its competitors is dominant in any of these markets. The gypsum wallboard industry is divided into independent gypsum wallboard manufacturers, which either do not produce their own gypsum wallboard facing paper or cannot fill all of their needs internally, and integrated wallboard manufacturers, which supply all of their own gypsum wallboard facing paper requirements internally. The Company believes that the two largest integrated gypsum wallboard manufacturers, USG Corporation and National Gypsum Company, do not have significant sales of gypsum wallboard facing paper to the independent gypsum wallboard manufacturers. The Company believes it has the largest market share of the supply of gypsum wallboard facing paper to independent wallboard manufacturers in North America. The Company also competes in the gypsum wallboard industry through its joint venture with Temple-Inland Forest Products Corporation, formerly Standard Gypsum Corporation. Standard competes with larger integrated wallboard manufacturers such as USG Corporation and National Gypsum, who have greater financial resources and superior marketing strength due to their greater number of locations and national presence. Standard competes primarily on the basis of product quality, dependability and timeliness of delivery and price. 4 6 Recovered fiber costs were higher on average in 1999 compared to 1998. The company's average same-mill cost for recovered fiber per ton of recycled paperboard produced was approximately $78 during 1999, which was up 11% from $70 per ton in 1998. While no specific information is available about competitors' actual recovered fiber costs, the Company believes that its delivered recovered fiber costs are among the lowest in the recycled paperboard industry. Relative to other competitors, the Company believes that its lower recovered fiber costs are attributable in part to lower shipping costs resulting from the location of the Company's paperboard mills and paperstock facilities near major metropolitan areas that generate substantial supplies of paperstock. Many of the paperboard mills operated by the Company's principal competitors are located away from major metropolitan areas, and the Company believes, based on its knowledge of freight rates, that theses competitors incur higher freight costs associated with their fiber recovery efforts, adding to their total cost of delivered recovered fiber. The Company's relatively low recovered fiber costs are also attributable to its emphasis on certain recovery methods that enable the Company to avoid baling operations. The Company believes that its competitors rely primarily on off-site, company-owned and-operated paperstock baling operations that collect and bale paperstock for shipment and processing at the mill site. The Company also operates such facilities, and its experience is that the baling operation results in $25-$30 per ton higher recovered fiber costs. The Company equips most of its paperboard mills to accept unbaled paperstock for processing directly into its pulpers. In 1999 and 1998, unbaled paperstock represented approximately 10% and 13%, respectively, of the Company's total recovered fiber purchases. The Company also uses other fiber recovery methods -- its small baler program and its recovery of paperstock from customers -- that result in lower recovered fiber costs. Environmental Matters. The Company's operations are subject to various federal, state and local environmental laws and regulations. Among other things, these laws and regulations regulate the discharge of materials into the water, air and land and govern the use and disposal of hazardous substances. These laws are administered by federal, state and local agencies. Except as set forth below, the Company believes that its operations are in substantial compliance with all applicable environmental laws and regulations, except for violations which the Company believes would not have a material adverse effect on the Company's business or financial position. The Company's recycled paperboard mills use substantial amounts of water in the papermaking process. The Company's mills discharge process effluent into local sewer systems pursuant to waste water discharge permits. The Company uses only small amounts of hazardous substances, and the Company believes the concentration of these substances in the Company's wastewater discharge generally is below permitted maximums. From time to time the imposition of stricter limits on the solids, sulfides, BOD (biological oxygen demand) or metals content of a mill's wastewater requires the Company to alter the content of its wastewater. Such reductions can be effected by additional screening of the wastewater, by other changes to the flow of process effluent from the mill or from pretreatment ponds into the sewer system, and by chemical additives. The Company also is subject to regulatory requirements related to the disposal of its solid wastes and the air emissions from its facilities. The Company is not currently aware of any required expenditures relating to wastewater discharge, solid waste disposal or air emissions that it expects to have a material adverse effect on the business or financial condition of the Company, but there can be no assurance that expenditures required in these areas will not have such a material adverse effect. In addition, under certain environmental laws, the Company can be held strictly liable if hazardous substances are found on real property owned or operated by the Company or used by the Company as a disposal site. In recent years, the Company has adopted a policy of assessing real property for environmental risks prior to purchase. The Company is aware of issues regarding hazardous substances at certain facilities, but in each case the Company believes that any possible liabilities will not have a material adverse effect on its business or financial position. Employees. As of December 31, 1999, the Company had approximately 6,020 employees, of whom 4,766 are hourly and 1,254 are salaried. Hourly employees at the Chattanooga, Chicago, Cincinnati, Chesapeake, Buffalo, Reading, Richmond, Roanoke Rapids, Rittman, Sprague and Tama paperboard mills, the Cleveland recovered fiber facility, the Minerva and Perrysburg tube and core plants, the Orrville and St. Paris composite 5 7 container plants, the Ashland, Hunt Valley, Denver, Grand Rapids, Mentor, Salt Lake City, St. Louis, Versailles, and York carton plants and the Clifton contract packaging facility (approximately 2,525 employees) are represented by labor unions. All principal union contracts expire during the period 2000-2004. The Company considers its relations with its employees to be excellent. Executive Officers. The names and ages, positions and period of service of each of the Company's executive officers are set forth below. The term of office for each executive officer expires upon the earlier of the appointment and qualification of a successor or such officer's death, resignation, retirement, removal or disqualification.
PERIOD OF SERVICE AS EXECUTIVE OFFICER AND PRE-EXECUTIVE OFFICER EXPERIENCE (IF AN NAME AND AGE POSITION EXECUTIVE OFFICER FOR LESS THAN 5 YEARS) - ------------ -------- ------------------------------------------ Thomas V. Brown(59).................. President and Chief Executive President since 1/91; CEO since 10/91; Officer; Director Director since 4/91 Edward G. Schmitt(54)................ Vice President, Mill Group Since 4/97; President of the Company's Midwest Mill Division, 1991-97 H. Lee Thrash, III(49)............... Vice President, Planning and Vice President and CFO since 1986; Development; Chief Financial Director since 1987 Officer; Director Jimmy A. Russell(52)................. Vice President, Industrial and Vice President since 4/93; CEO of Star Consumer Products Group Paper Tube, Inc. since 1/93 James L. Walden(54).................. Vice President, Custom Packaging Since 2/93 Group Barry A. Smedstad(53)................ Vice President, Human Resources Since 1/99; 1997-98, Vice President, Human and Public Relations Resources, BoxUSA, a manufacturer of corrugated shipping containers; 1996-97, Director of Human Resources, Northeast Region, Baxter Healthcare Corporation, a diversified healthcare products and technology manufacturer; 1985-96, Director, Labor & Employee Relations, Federal Paper Board Company, Inc., a paper manufacturer. John R. Foster(54)................... Vice President, Sales and Since 9/96; 1995-96, Chief Operating Marketing Officer, Pace International LP, a chemical company; 1991-95, President and General Manager, Eagle-Gypsum, Products, a gypsum wallboard manufacturer.
6 8 ITEM 2. PROPERTIES Facilities. The following table sets forth certain information concerning the Company's facilities. Unless otherwise indicated, such facilities are owned by the Company:
TYPE OF FACILITY AND LOCATION PRODUCTION CAPABILITIES - ----------------------------- ----------------------- PAPERBOARD Paperboard Mills (1) Versailles, CT............................... Clay-coated boxboard and gypsum wallboard facing paper. Austell, GA (Mill #1)........................ Uncoated, folding and set-up boxboard, white lined and colored paperboard, specialty grades, including specialty laminates, game board/puzzle board and bookbinding board. Austell, GA (Mill #2)........................ Tube and core board and other specialty grades. Austell, GA (Sweetwater)..................... Gypsum wallboard facing paper, tube and core board, and folding boxboard. Tama, IA..................................... Clay-coated boxboard and specialty grades. Chicago, IL.................................. Tube and can, folding and set-up boxboard. Baltimore, MD (2)............................ Uncoated folding and set-up boxboard, white lined and colored paperboard and specialty laminates. Charlotte, NC................................ Uncoated, folding and set-up boxboard, white lined and colored paperboard, specialty grades, including specialty laminates, game board/puzzle board and bookbinding board. Roanoke Rapids, NC........................... Uncoated folding and set-up boxboard, white lined and colored paperboard and specialty laminates. Camden, NJ................................... Gypsum wallboard facing paper and folding boxboard. Buffalo, NY.................................. Gypsum wallboard facing paper, tube and core board, and folding carton grades. Cincinnati, OH............................... Tube, can and drum, folding and set-up boxboard and gypsum wallboard facing paper. Rittman, OH.................................. Clay-coated boxboard and gypsum wallboard facing paper. Reading, PA.................................. Folding and set-up carton boxboard, white lined and special colored paperboard. Greenville, SC............................... Uncoated, folding and set-up boxboard, white lined and colored paperboard, specialty grades, including specialty laminates, game board/puzzle board, bookbinding board and tube and core board. Chattanooga, TN.............................. Uncoated folding and set-up boxboard, white lined and colored paperboard, specialty grades, including specialty laminates, game board/puzzle board, bookbinding board and tube, core and can board. Richmond, VA................................. Folding and set-up carton boxboard and tube and core board. Specialty Converting Plants Austell, GA.................................. Laminated paperboard and specialty conversion. Charlotte, NC................................ Laminated paperboard and specialty conversion.
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TYPE OF FACILITY AND LOCATION PRODUCTION CAPABILITIES - ----------------------------- ----------------------- Fayetteville, NC............................. Speciality conversion Mooresville, NC.............................. Foam Laminated paperboard and specialty conversion. Taylors, SC.................................. Laminated paperboard and specialty conversion. Richmond, VA................................. Laminated paperboard and speciality conversion Recovered Fiber Collection and Processing Plants (3) Canton, GA (leased).......................... Recovered fiber and recovered fiber brokerage sales. Columbus, GA................................. Recovered fiber. Dalton, GA................................... Recovered fiber. Doraville, GA................................ Recovered fiber. Macon, GA (leased)........................... Recovered fiber. Charlotte, NC................................ Recovered fiber. Cleveland, OH................................ Recovered fiber. Rittman, OH.................................. Recovered fiber brokerage sales. Hardeeville, SC.............................. Recovered fiber and recovered fiber brokerage sales. Texarkana, TX (leased)....................... Recovered fiber and recovered fiber brokerage sales. Richmond, VA................................. Recovered fiber TUBE, CORE AND COMPOSITE CONTAINER Tube and Core Plants Linden, AL................................... Spiral-wound tubes. Mobile, AL (leased).......................... Spiral-wound tubes. McGehee, AR (leased)......................... Core recutting/capping. Phoenix, AZ (leased)......................... Spiral-wound tubes. Cantonment, FL............................... Spiral-wound tubes. Palatka, FL.................................. Spiral-wound tubes. Austell, GA.................................. Spiral- and convolute- wound tubes. Cedar Springs, GA............................ Spiral-wound tubes and yarn carriers. Dalton, GA................................... Spiral- and convolute- wound tubes and yarn carriers. West Monroe, LA.............................. Spiral-wound tubes. Mexico City, Mexico (leased)................. Spiral-wound tubes Corinth, MS.................................. Spiral-wound tubes. Kernersville, NC............................. Spiral-wound tubes and yarn carriers. Minerva, OH.................................. Spiral-wound and forming tubes. Perrysburg, OH............................... Spiral-wound tubes. Lancaster, PA (leased)....................... Spiral-wound tubes. Rock Hill, SC................................ Spiral- and convolute- wound tubes and ground and polished tubes. Taylors, SC.................................. Spiral-wound tubes and yarn carriers. Amarillo, TX (leased)........................ Yarn carriers. Arlington, TX................................ Spiral-wound tubes. Silsbee, TX.................................. Spiral-wound tubes. Texarkana, TX................................ Spiral-wound tubes. Leyland, Lancaster, United Kingdom........... Spiral-wound and forming tubes. Salt Lake City, UT (leased).................. Spiral-wound tubes. Altavista, VA (leased)....................... Spiral-wound tubes and yarn carriers. Danville, VA................................. Spiral- and convolute- wound tubes and yarn carriers. Franklin, VA................................. Spiral-wound tubes.
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TYPE OF FACILITY AND LOCATION PRODUCTION CAPABILITIES - ----------------------------- ----------------------- West Point, VA............................... Core recutting. Weyers Cave, VA.............................. Core recutting. Composite Container Plants Orrville, OH................................. Composite cans, tubes and containers. Saint Paris, OH.............................. Composite cans, tubes and containers. Specialty Converting Plants Austell, GA.................................. Edge protectors. Lancaster, PA................................ Edge protectors. Arlington, TX................................ Edge protectors. Mexico City, Mexico.......................... Edge Protectors Plastics Plants New Smyrna Beach, FL (leased)................ Plastic cartridges. Georgetown, KY............................... Injection molded parts for composite containers. Union, SC.................................... Injection molded cones and tubes, extruded plastic cores. Special Services and Other Facilities Saint Paris, OH.............................. Transportation. Kernersville, NC (leased).................... Adhesives. CARTON AND CUSTOM PACKAGING Carton Plants Birmingham, AL (leased)...................... Printed and unprinted folding cartons. Denver, CO................................... Printed and unprinted folding cartons. Versailles, CT............................... Printed and unprinted folding cartons. Thorndike, MA................................ Printed and unprinted folding cartons. Hunt Valley, MD.............................. Printed and unprinted folding cartons and specialty corrugated products. Archdale, NC................................. Printed and unprinted folding cartons. Burlington, NC............................... Set-up cartons and vinyl lids. Charlotte, NC................................ Printed and unprinted folding cartons. Randleman, NC................................ Printed and unprinted folding and set-up cartons. Ashland, OH.................................. Printed and unprinted folding cartons. Mentor, OH................................... Printed and unprinted folding cartons. Grand Rapids, MI............................. Printed and unprinted folding cartons. St. Louis, MO................................ Printed and unprinted folding cartons. York, PA..................................... Printed and unprinted folding cartons. Kingston Springs, TN......................... Printed and unprinted folding cartons. Salt Lake, UT (leased)....................... Printed and unprinted folding cartons. Contract Packaging and Contract Manufacturing Plants Thorndike, MA................................ Contact manufacturing and contract packaging Clifton, NJ.................................. Contract packaging. Pine Brook, NJ............................... Contract packaging, blister packaging, cartoning and labeling. Robersonville, NC............................ Contract manufacturing and contract packaging. Bucyrus, OH.................................. Contract manufacturing and contract packaging. Strasburg, OH (three facilities)............. Contract manufacturing and contract packaging. Special Services Versailles, CT............................... Prepress services Cleveland, OH................................ Digital imaging services
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TYPE OF FACILITY AND LOCATION PRODUCTION CAPABILITIES - ----------------------------- ----------------------- JOINT VENTURES Gypsum Products (50% Interest) Fredericksburg, TX (partially leased)........ Gypsum rock quarry. McQueeney, TX................................ Gypsum wallboard. Cumberland, TN............................... Gypsum (synthetic) wallboard. Tube and Core Plants (50% Interest) Tacoma, WA................................... Spiral-wound tubes and edge protectors. Scarborough, ON, Canada...................... Spiral-and convolute-wound tubes. Paperboard Mill (50% interest) Newport, IN.................................. (Under construction) Gypsum wallboard facing paper, corrugating medium and linerboard
- --------------- (1) All of the Company's paperboard mills produce uncoated recycled paperboard with the exceptions of its Rittman, OH, Tama, IA and Versailles, CT paperboard mills, which produce clay-coated boxboard. (2) The Baltimore, MD mill ceased operations in February, 2000. (3) Paperstock collection and/or processing also occurs at each of the Company's mill sites and all of the carton plants and tube and core plants. ITEM 3. LEGAL PROCEEDINGS From time to time claims are asserted against the Company arising out of its operations in the normal course of business. Management does not believe that the Company is a party to any litigation that will have a material adverse effect on its financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to the Company's security holders during the fourth fiscal quarter ended December 31, 1999. 10 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since October 1, 1992, the Company's common shares, $.10 par value (the "Common Shares") have traded on the National Association of Securities Dealers, Inc. NASDAQ National Market System ("NASDAQ") under the symbol CSAR. As of February 18, 2000, there were approximately 575 shareholders of record and, as of that date, the Company estimates that there were approximately 2,500 beneficial owners holding stock in nominee or "street" name. The table below sets forth high and low stock prices during the years 1999 and 1998.
1998 HIGH LOW DIVIDEND - ---- ------- ------- -------- First Quarter........ 36.00 29.00 $0.16 Second Quarter....... 35.50 27.8125 $0.16 Third Quarter........ 30.625 20.50 $0.16 Fourth Quarter....... 28.5625 20.75 $0.18
1999 HIGH LOW DIVIDEND - ---- ------- ------- -------- First Quarter........ 30.125 22.50 $0.18 Second Quarter....... 27.3125 19.75 $0.18 Third Quarter........ 27.625 21.50 $0.18 Fourth Quarter....... 25.50 21.6875 $0.18
The Company did not pay dividends on its Common Shares from the time of the Company's recapitalization in 1986 until after its initial public offering of Common Shares in October 1992. The Company paid dividends of $0.18 per share during each quarter of 1999. The Company intends to continue paying quarterly dividends at the same rate as the fourth quarter 1999 dividend, although any decision to pay dividends in the future will be made by the Company's Board of Directors after taking into account various factors, including the Company's net income, current and anticipated cash needs and any other factors deemed relevant by the Board of Directors. The Company's credit agreements with its lenders permit the payment of dividends, subject to certain restrictions contained therein. The Company does not believe that such restrictions, however, will materially limit the Company's ability to pay future dividends at the same rate as the 1999 fourth quarter dividend. 11 13 ITEM 6. SELECTED FINANCIAL DATA
COMPOUND GROWTH RATE YEAR ENDED DECEMBER 31, ------------------ ---------------------------------------------------- 5 YEARS 10 YEARS 1999 1998 1997 1996 1995 ------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA, RATIOS AND GROWTH RATES) SUMMARY OF OPERATIONS Sales.................. $936,928 $774,312 $696,093 $629,674 $569,455 Freight................ 46,839 37,454 27,955 26,979 24,827 ---- ---- -------- -------- -------- -------- -------- Net sales.............. 15.6% 12.7% 890,089 736,858 668,138 602,695 544,628 Cost of sales.......... 17.3% 14.0% 683,576 536,925 482,964 422,783 401,570 ---- ---- -------- -------- -------- -------- -------- Gross profit........... 10.8% 9.4% 206,513 199,933 185,174 179,912 143,058 Selling, general and administrative expenses.............. 16.2% 13.7% 125,784 105,052 88,978 81,003 67,361 ---- ---- -------- -------- -------- -------- -------- Operating income....... 4.6% 5.1% 80,729 94,881 96,196 98,909 75,697 Other (expense) income: Interest expense....... (25,456) (16,072) (14,111) (10,698) (6,955) Interest income........ 603 334 312 591 821 Equity in income (loss) of unconsolidated affiliates............ 9,224 4,308 1,665 2,154 -- Other, net............. (459) (433) (674) 4,274 (463) -------- -------- -------- -------- -------- (16,088) (11,863) (12,808) (3,679) (6,597) -------- -------- -------- -------- -------- Income before income taxes................. 2.3% 10.9% 64,641 83,018 83,388 95,230 69,100 Minority interest...... (356) (730) (1,721) (754) 153 Tax provision.......... 1.0% 10.2% 23,216 30,470 30,543 36,574 26,265 ---- ---- -------- -------- -------- -------- -------- Income from continuing operations before discontinued operations, extraordinary items and accounting changes............... 3.0% 10.2% $ 41,069 $ 51,818 $ 51,124 $ 57,902 $ 42,988 ---- ---- -------- -------- -------- -------- -------- Net income............. 3.0% 10.2% $ 41,069 $ 51,818 $ 51,124 $ 57,902 $ 42,988 ---- ---- -------- -------- -------- -------- -------- Diluted weighted average shares outstanding........... 25,199 25,423 25,216 25,377 25,896 PER SHARE DATA Income from continuing operations before discontinued operations, extraordinary items and accounting changes............... 3.4% 6.4% $ 1.63 $ 2.04 $ 2.03 $ 2.28 $ 1.66 Net income............. 3.4% 6.4% 1.63 2.04 2.03 2.28 1.66 Cash dividends declared.............. 0.72 0.66 0.58 0.50 0.435 Market price on December 31........... $ 24.00 $ 28.56 $ 34.25 $ 33.25 $ 20.00 Shares outstanding December 31........... 25,488 24,681 25,331 25,053 25,682 Price/Earnings ratio... 14.72 14.00 16.87 14.58 12.05 TOTAL MARKET VALUE OF COMMON STOCK.......... $611,712 $704,889 $867,587 $833,012 $513,640 BALANCE SHEET DATA Cash and cash equivalents........... $ 18,771 $ 2,610 $ 1,391 $ 11,989 $ 8,785 Property, plant and equipment-net......... 479,856 324,470 291,036 256,834 181,930 Depreciation and amortization.......... 52,741 38,705 33,661 26,314 17,671 Capital expenditures... 35,696 40,716 36,275 32,059 28,041 Total assets........... 878,643 618,797 550,090 476,280 322,076 Current maturities of long-term debt........ 16,615 26,103 9 29 36 Revolving credit loans................. 140,000 147,000 129,000 100,000 10,000 Long-term debt, less current maturities.... 269,739 82,881 83,129 83,261 83,380 Shareholders' equity (deficit)............. 278,459 233,374 213,931 170,570 139,243 Total capital.......... $704,813 $489,358 $426,069 $353,860 $232,659 OTHER KEY FINANCIAL MEASURES Total debt-to-total capital............... 60.5% 52.3% 49.8% 51.8% 40.2% Net debt-to-net capital............... 59.4% 52.1% 49.6% 50.1% 37.8% Effective tax rate..... 36.1% 36.7% 37.4% 38.7% 38.0% Return on shareholders' equity................ 16.0% 23.2% 26.6% 37.4% 35.6% Return on average capital............... 9.6% 13.5% 15.4% 22.0% 22.6% Dividend payout ratio................. 44.2% 32.4% 28.6% 21.9% 26.2% Economic profit(B)..... $ 25,886 $ 31,442 $ 30,419 $ 43,663 $ 29,104 YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA, RATIOS AND GROWTH RATES) SUMMARY OF OPERATIONS Sales.................. $455,808 $365,410 $325,620 $288,773 $286,410 $ 287,076 Freight................ 24,583 22,963 19,674 17,646 17,011 18,858 -------- -------- -------- -------- -------- --------- Net sales.............. 431,225 342,447 305,946 271,127 269,399 268,218 Cost of sales.......... 307,652 244,578 213,405 187,952 184,292 184,012 -------- -------- -------- -------- -------- --------- Gross profit........... 123,573 97,869 92,541 83,175 85,107 84,206 Selling, general and administrative expenses.............. 59,247 49,355 42,402 36,655 37,555 34,982 -------- -------- -------- -------- -------- --------- Operating income....... 64,326 48,514 50,139 46,520 47,552 49,224 Other (expense) income: Interest expense....... (6,870) (6,822) (12,315) (17,754) (22,343) (26,721) Interest income........ 353 612 243 246 412 491 Equity in income (loss) of unconsolidated affiliates............ -- -- -- -- -- -- Other, net............. (249) 167 (151) (297) (409) (19) -------- -------- -------- -------- -------- --------- (6,766) (6,043) (12,223) (17,805) (22,340) (26,249) -------- -------- -------- -------- -------- --------- Income before income taxes................. 57,560 42,471 37,916 28,715 25,212 22,975 Minority interest...... 13 15 -- -- 235 1,369 Tax provision.......... 22,095 15,165 14,839 11,095 9,468 8,774 -------- -------- -------- -------- -------- --------- Income from continuing operations before discontinued operations, extraordinary items and accounting changes............... $ 35,478 $ 27,321 $ 23,077 $ 17,620 $ 15,979 $ 15,570 -------- -------- -------- -------- -------- --------- Net income............. $ 35,478 $ 32,471 $ 22,899 $ 17,620 $ 15,979 $ 15,570 -------- -------- -------- -------- -------- --------- Diluted weighted average shares outstanding........... 25,639 25,387 19,791 17,720 17,701 17,690 PER SHARE DATA Income from continuing operations before discontinued operations, extraordinary items and accounting changes............... $ 1.38 $ 1.08 $ 1.17 $ 0.99 $ 0.90 $ 0.88 Net income............. 1.38 1.28 1.16 0.99 0.90 0.88 Cash dividends declared.............. 0.375 0.33 0.08 -- -- -- Market price on December 31........... $ 22.25 $ 16.75 $ 18.75 N/A N/A N/A Shares outstanding December 31........... 25,280 24,968 24,639 17,649 17,649 17,619 Price/Earnings ratio... 16.12 13.09 16.45 N/A N/A N/A TOTAL MARKET VALUE OF COMMON STOCK.......... $562,480 $418,214 $461,981 N/A N/A N/A BALANCE SHEET DATA Cash and cash equivalents........... $ 12,465 $ 14,371 $ 23,667 $ 4,547 $ 1,900 $ 13,364 Property, plant and equipment-net......... 150,391 127,773 103,004 86,005 87,445 90,180 Depreciation and amortization.......... 14,542 12,493 10,661 10,515 13,077 11,756 Capital expenditures... 29,331 21,251 16,880 10,647 10,634 12,486 Total assets........... 266,863 221,366 187,513 144,519 141,216 153,671 Current maturities of long-term debt........ 72 64 71 36,292 36,216 39,514 Revolving credit loans................. -- -- -- -- -- -- Long-term debt, less current maturities.... 83,446 83,515 83,388 126,021 145,459 173,170 Shareholders' equity (deficit)............. 102,274 74,424 47,558 (68,732) (86,352) (102,578) Total capital.......... $185,792 $158,003 $131,017 $ 93,581 $ 95,323 $ 110,106 OTHER KEY FINANCIAL MEASURES Total debt-to-total capital............... 45.0% 52.9% 63.7% (A) (A) (A) Net debt-to-net capital............... 41.0% 48.2% 55.7% (A) (A) (A) Effective tax rate..... 38.4% 35.7% 39.1% 38.6% 37.6% 38.2% Return on shareholders' equity................ 40.2% 44.8% (A) (A) (A) (A) Return on average capital............... 23.1% 21.9% 27.2% 30.2% 29.1% 29.7% Dividend payout ratio................. 27.2% 25.8% 7.0% 0.0% 0.0% 0.0% Economic profit(B)..... $ 30,649 $ 19,512 (A) (A) (A) (A)
- --------------- (A) Not meaningful due to Company's leveraged recapitalization in 1986. (B) Economic profit represents adjusted net operating profit after cash taxes less a calculated capital charge for beginning-of-year capital employed. 12 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The Company is a major manufacturer of recycled paperboard and converted paperboard products, operating principally in three business segments. The paperboard segment consists of facilities that manufacture recycled uncoated and clay-coated paperboard and facilities that collect and broker recycled paper and other paper rolls. The tube, core and composite container segment is principally made up of facilities that produce spiral and convolute-wound tubes, cores and cans. The carton and custom packaging segment consists of facilities that produce printed and unprinted folding and set-up cartons and facilities that provide contract manufacturing and contract packaging services. The Company is vertically integrated to the extent that a large portion of its paperboard production is consumed internally by its converting segments (approximately 34 percent in 1999). As part of its strategy to optimize capacity utilization, the Company regularly purchases paperboard from other manufacturers in an effort to minimize the potential impact of demand declines on the Company's own mill system. Additionally, each of the Company's mills can produce recycled paperboard for more than one end-use product market, which allows it to shift production between mills in response to customer or market demands. The Company is also the only major manufacturer to serve all four recycled boxboard end-use markets: tube and core, folding carton, gypsum wallboard facing paper and other specialty. Recovered fiber, which is derived from recycled paper stock, is the Company's only significant raw material. Historically, the cost of recovered fiber has fluctuated significantly due to market and industry conditions. For example, the Company's average recovered fiber cost per ton of paperboard produced increased from $43 per ton in 1993 to $144 per ton in 1995, an increase of 235 percent, before dropping to $66 per ton in 1996. Recovered fiber cost per ton averaged $70 during 1998 and $78 during 1999. Although the Company raises its selling prices in response to increases in raw material costs, it often is unable to maintain its operating margins in the face of dramatic cost increases, and it experiences short-term margin shrinkage during all periods of price increases due to customary time lags in the implementation of price increases. There can be no assurance that the Company will be able to recoup any future increases in the cost of recovered fiber by raising the prices of its products. There also can be no assurance that, even if the Company is able to recoup such cost increases, its operating margins and results of operations will not be materially and adversely affected by time delays in the implementation of price increases. RESULTS OF OPERATIONS 1999 -- 1998 The following tables set forth certain operating data regarding the Company's volume and gross paper margins for the periods indicated. The volume information shown below includes shipments of unconverted paperboard and converted paperboard products. Tonnage volumes from the Company's business segments are combined and presented along end-use market lines. Additionally, certain financial information is reported by segment in note 12 to the consolidated financial statements.
YEARS ENDED DECEMBER 31, ------------------- % 1999 1998 CHANGE CHANGE -------- -------- ------ ------ Production source of paperboard tons sold (in thousands): From paperboard mill production.......................... 1,064.9 919.8 145.1 15.8% Outside purchases........................................ 90.6 84.7 5.9 7.0% -------- -------- ------ ----- Total paperboard tonnage......................... 1,155.5 1,004.5 151.0 15.0% ======== ======== ====== =====
13 15
YEARS ENDED DECEMBER 31, ------------------- % 1999 1998 CHANGE CHANGE -------- -------- ------ ------ Tons sold by market (in thousands): Tube, core and can volume Paperboard (internal)................................. 203.2 199.4 3.8 1.9% Outside purchases..................................... 18.9 23.4 (4.5) -19.2% -------- -------- ------ ----- Tube, core and can converted products.................... 222.1 222.8 (0.7) -0.3% Unconverted paperboard................................... 41.6 40.8 0.8 2.0% -------- -------- ------ ----- Tube, core and can volume........................ 263.7 263.6 0.1 0.0% Folding carton volume Paperboard (internal)................................. 65.2 52.0 13.2 25.4% Outside purchases..................................... 58.3 38.4 19.9 51.8% -------- -------- ------ ----- Folding cartons.......................................... 123.5 90.4 33.1 36.6% Unconverted paperboard................................... 286.4 202.6 83.8 41.4% -------- -------- ------ ----- Folding carton volume............................ 409.9 293.0 116.9 39.9% Gypsum facing paper volume Unconverted paperboard................................ 265.8 239.1 26.7 11.2% Outside purchases (for resale)........................ 4.5 16.1 (11.6) -72.0% -------- -------- ------ ----- Gypsum facing volume............................. 270.3 255.2 15.1 5.9% Other specialty volume Paperboard (internal)................................. 91.6 75.5 16.1 21.3% Outside purchases..................................... 8.9 6.8 2.1 30.9% -------- -------- ------ ----- Other specialty converted products....................... 100.5 82.3 18.2 22.1% Unconverted paperboard................................... 111.1 110.4 0.7 0.6% -------- -------- ------ ----- Other specialty volume........................... 211.6 192.7 18.9 9.8% -------- -------- ------ ----- Total paperboard tonnage......................... 1,155.5 1,004.5 151.0 15.0% ======== ======== ====== ===== Gross paper margins ($/ton): Paperboard mill: Average same-mill net selling price................... $ 414 $ 412 $ 2 0.5% Average same-mill recovered fiber cost................ 78 70 8 11.4% -------- -------- ------ ----- Paperboard mill gross paper margin............... $ 336 $ 342 $ (6) -1.8% ======== ======== ====== ===== Tube and core: Average net selling price............................. $ 730 $ 735 $ (5) -0.7% Average paperboard cost............................... 390 407 (17) -4.2% -------- -------- ------ ----- Tube and core gross paper margin.................... $ 340 $ 328 $ 12 3.7% ======== ======== ====== =====
Consolidated net sales for the year ended December 31, 1999 increased 20.8 percent to $890.1 million from $736.9 million in 1998. Acquisitions accounted for $144.2 million of sales during 1999. These acquisitions included Carolina Component Concepts, Inc., International Paper Company's Sprague boxboard mill, Halifax Paperboard Co., Inc., Tenneco Packaging, Inc.'s folding carton division and Carolina Converting, Inc., all completed in 1999, and Chesapeake Paperboard Company and its wholly owned subsidiary, Chesapeake Fiber Packaging Corporation, Etowah Recycling, Inc., Tenneco Packaging, Inc.'s 20 percent interest in the CPI partnership and Boxall, Inc., completed in 1998. Excluding acquisitions, net sales increased 1.2 percent. This increase was due to higher sales from the tube, core and composite containers and carton and custom packaging segments. Total paperboard tonnage for 1999 increased 15.0 percent to 1,155,500 tons from 1,004,500 tons. Excluding acquisitions, total paperboard tonnage declined 1.2 percent to 992.3 thousand tons. Lower shipments of converted paperboard products and lower shipments of unconverted paperboard to external 14 16 customers in the folding carton and other specialty end-use markets were partially offset by higher shipments of unconverted paperboard to the gypsum facing paper market. Excluding acquisitions, outside purchases decreased 26.3 percent to 62.4 thousand tons. Tons sold from paperboard mill production increased 15.8 percent for 1999 to 1,064,900 tons compared with 919.8 thousand tons last year and increased 0.5 percent excluding acquisitions. Total tonnage converted increased 12.8 percent for 1999 to 446.1 thousand tons versus 395.5 thousand tons in 1998 but declined 1.7 percent from last year excluding acquisitions. Excluding acquisitions, volumes in the folding carton and other specialty end-use markets decreased 7.2 and 3.0 percent, respectively. Gross margin for 1999 decreased to 23.2 percent of net sales from 27.1 percent in 1998. This margin decrease was due primarily to the acquisition of operations with lower margins, as a percent of sales, than the Company's other operations combined with lower margins in the paperboard segment, partially offset by higher margins in the tube, core and composite containers segment. Operating income for 1999 was $80.7 million, a decrease of $14.2 million, or 14.9 percent from 1998. Operating income at comparable facilities declined $7.5 million, or 7.9 percent. This decline was due primarily to lower margins in the paperboard segment, partially offset by improved results in the tube, core and composite containers and carton and custom packaging segments. Selling, general and administrative expenses increased by $20.7 million in 1999 versus 1998 due primarily to acquisitions and increased information technology costs. Interest expense increased 58.4 percent to $25.5 million for 1999 from $16.1 million in 1998 due to higher average borrowings under the revolving credit facility and the June 1, 1999 public debt securities offering. Equity income from unconsolidated affiliates was $9.2 million, up 114.1 percent from 1998 due to improved results for the Company's gypsum wallboard joint venture with Temple-Inland. Net income decreased 20.7 percent to $41.1 million from $51.8 million in 1998. Diluted net income per common share decreased 20.1 percent to $1.63 for 1999 from $2.04 in 1998. RESULTS OF OPERATIONS 1998 -- 1997 The following tables set forth certain operating data regarding the Company's volume and gross paper margins for the periods indicated. The volume information shown below includes shipments of unconverted paperboard and converted paperboard products. Tonnage volumes from the Company's business segments are combined and presented along end-use market lines.
YEARS ENDED DECEMBER 31, ------------------- % 1998 1997 CHANGE CHANGE -------- -------- ------ ------ Production source of paperboard tons sold (in thousands): From paperboard mill production.......................... 919.8 928.6 (8.8) -0.9% Outside purchases........................................ 84.7 78.2 6.5 8.3% -------- -------- ------ ----- Total paperboard tonnage......................... 1,004.5 1,006.8 (2.3) -0.2% ======== ======== ====== ===== Tons sold by market (in thousands): Tube, core and can volume Paperboard (internal)................................. 199.4 200.2 (0.8) -0.4% Outside purchases..................................... 23.4 23.4 0.0 0.0% -------- -------- ------ ----- Tube, core and can converted products.................... 222.8 223.6 (0.8) -0.4% Unconverted paperboard................................... 40.8 38.6 2.2 5.7% -------- -------- ------ ----- Tube, core and can volume........................ 263.6 262.2 1.4 0.5%
15 17
YEARS ENDED DECEMBER 31, ------------------- % 1998 1997 CHANGE CHANGE -------- -------- ------ ------ Folding carton volume Paperboard (internal)................................. 52.0 31.2 20.8 66.7% Outside purchases..................................... 38.4 30.0 8.4 28.0% -------- -------- ------ ----- Folding cartons.......................................... 90.4 61.2 29.2 47.7% Unconverted paperboard................................... 202.6 226.2 (23.6) -10.4% -------- -------- ------ ----- Folding carton volume............................ 293.0 287.4 5.6 1.9% Gypsum facing paper volume Unconverted paperboard................................ 239.1 245.5 (6.4) -2.6% Outside purchases (for resale)........................ 16.1 15.8 0.3 1.9% -------- -------- ------ ----- Gypsum facing volume............................. 255.2 261.3 (6.1) -2.3% Other specialty volume Paperboard (internal)................................. 75.5 64.5 11.0 17.1% Outside purchases..................................... 6.8 9.0 (2.2) -24.4% -------- -------- ------ ----- Other specialty converted products....................... 82.3 73.5 8.8 12.0% Unconverted paperboard................................... 110.4 122.4 (12.0) -9.8% -------- -------- ------ ----- Other specialty volume........................... 192.7 195.9 (3.2) -1.6% -------- -------- ------ ----- Total paperboard tonnage......................... 1,004.5 1,006.8 (2.3) -0.2% ======== ======== ====== ===== Gross paper margins ($/ton): Paperboard mill: Average same-mill net selling price................... $ 413 $ 410 $ 3 0.7% Average same-mill recovered fiber cost................ 71 82 (11) -13.4% -------- -------- ------ ----- Paperboard mill gross paper margin.................. $ 342 $ 328 $ 14 4.3% ======== ======== ====== ===== Tube and core: Average net selling price............................. $ 735 $ 722 $ 13 1.8% Average paperboard cost............................... 407 404 3 0.7% -------- -------- ------ ----- Tube and core gross paper margin................. $ 328 $ 318 $ 10 3.1% ======== ======== ====== =====
Consolidated net sales for the year ended December 31, 1998 increased 10.3 percent to $736.9 million from $668.1 million in 1997. Acquisitions accounted for $91.1 million of sales during 1998. These acquisitions included Chesapeake Paperboard Company and its wholly owned subsidiary, Chesapeake Fiber Packaging Corporation, Etowah Recycling,Inc., Tenneco Packaging, Inc.'s 20 percent interest in the CPI partnership, and Boxall, Inc., all completed in 1998, and The New General Packaging Service, Oak Tree Packaging Corporation, and Baxter Tube Company, completed in 1997. Excluding acquisitions, net sales declined 3.3 percent. This decline was due primarily to lower sales volume in the paperboard and tube and core segments, partially offset by higher sales from the carton and custom packaging segment. Total paperboard tonnage for 1998 decreased 0.2 percent to 1,005,000 tons compared with 1997. Excluding acquisitions, total paperboard tonnage declined 4.0 percent to 967 thousand tons. This decline was the result of lower shipments of unconverted paperboard to external customers, primarily to customers in the folding carton and other specialty end-use markets. Excluding acquisitions, outside purchases (purchases of various grades of paperboard for internal conversion and gypsum facing paper for resale) decreased 13.8 percent to 67.4 thousand tons. Tons sold from paperboard mill production decreased 0.9 percent for 1998 versus 1997 and declined 3.2 percent excluding the Chesapeake Paperboard acquisition. Total tonnage converted increased 10.4 percent in 1998 versus 1997 and was unchanged excluding acquisitions. Excluding acquisitions, volumes by end-use market were as follows: tube, core and can volume decreased 1.2 percent; folding carton volume decreased 5.5 percent; and other specialty volume decreased 7.6 percent. Gross margin for 1998 decreased to 27.1 percent of net sales from 27.7 percent in 1997. This margin decrease was due primarily to the acquisition of operations with lower margins, as a percent of sales, than the 16 18 Company's other operations combined with lower margins in the carton and custom packaging segment. These lower margins were partially offset by improved same-mill margins in the paperboard segment. Operating income decreased $1.3 million, or 1.4 percent,to $94.9 million from $96.2 million last year. Operating income at comparable facilities declined $4.2 million,or 4.3 percent. This decline was due primarily to weaker volume, partially offset by improved gross paper margins combined with the Company's overall cost cutting initiatives. Selling, general and administrative expenses increased by $16.1 million in 1998 versus 1997 due primarily to acquisitions and increased information systems costs. Interest expense increased to $16.1 million for 1998 from $14.1 million in 1997 due to higher average borrowings under the revolving credit facility. Equity income from unconsolidated affiliates was $4.3 million, up 158.7 percent from 1997 due to improved results for the Company's gypsum wallboard joint venture with Temple-Inland. Net income increased 1.4 percent from $51.1 million in 1997 to $51.8 million. Diluted net income per common share increased 0.5 percent to $2.04 for 1998 from $2.03 in 1997. LIQUIDITY AND CAPITAL RESOURCES On December 31, 1999, the Company had loans of $140.0 million outstanding under its revolving credit facility versus $147.0 million on December 31, 1998. Loans under the revolving credit facility bear interest, payable monthly, at the Eurodollar rate plus a margin based upon the Company's investment grade rating,as defined in the revolving credit agreement. For the years ended December 31, 1999 and 1998 the weighted average borrowings outstanding under the revolving credit facility during such periods bore interest at 5.44 percent, and 5.80 percent, respectively. At December 31, 1999 and 1998, long-term debt consisted of the following (in thousands):
1999 1998 -------- -------- 7.375 percent 10-year notes (net of unamortized discount)... $198,691 $ -- 7.74 percent senior notes................................... 82,750 82,750 Other notes payable......................................... 4,913 26,234 -------- -------- 286,354 108,984 Less current maturities..................................... 16,615 26,103 -------- -------- $269,739 $ 82,881 ======== ========
In 1998, the Company registered with the Securities and Exchange Commission a total of $300 million in public debt securities for issuance in one or more series and with such specific terms as to be determined from time to time. On June 1, 1999, the Company issued $200 million in aggregate principal amount of its 7.375 percent notes due June 1, 2009. The notes were issued at a discount to yield an effective interest rate of 7.473 percent and pay interest semi-annually. The notes are unsecured obligations of the Company. Proceeds, net of the issuance discount and after deducting underwriting and other costs, were $196.7 million and were largely used to repay revolving credit loans. The Company has a $400 million, five-year bank revolving credit facility which may be increased up to $500 million and its maturity extended by up to three additional years beyond the second quarter of 2002, subject to certain conditions and approvals. The Company can use the facility to fund ongoing working capital needs and for general corporate purposes, including acquisitions. Interest under the facility is computed using the Company's choice of: (a) the Eurodollar rate plus a margin; or (b) the higher of the Federal Funds Rate plus a margin or the bank's prime lending rate. The Company can also choose the basis for determining the margin above the Eurodollar rate as either: (a) its consolidated leverage ratio; or (b) its investment grade rating. The credit agreement contains certain restrictive covenants regarding, among other matters, the incurrence of additional indebtedness and the maintenance of certain leverage and interest coverage ratios, as defined in the agreement. 17 19 Cash generated from operations was $90.8 million for the year ended December 31, 1999 compared with $94.7 million last year. The decrease in 1999 compared to the same period last year was due primarily to lower net income and unfavorable changes in working capital. Capital expenditures, excluding acquisitions, were $35.7 million in 1999 versus $40.7 million for the same period last year. Aggregate capital expenditures of approximately $44.3 million are anticipated for 2000. In March 1999, the Company acquired 67 percent of the outstanding stock of Carolina Component Concepts, Inc. in exchange for 225,000 shares of the Company's common stock, valued at approximately $6.0 million. As a result of this transaction, the Company now owns 100 percent of CCC's common stock. CCC operates a specialty converting facility, located in Mooresville, North Carolina. In April 1999, the Company acquired the assets of International Paper Company's Sprague boxboard mill for approximately $103.2 million in cash plus $4.7 million of assumed debt. In addition, as part of the acquisition, the Company expects to settle approximately $23.9 million in liabilities. Sprague, located in Versailles, Connecticut, produces clay-coated recycled boxboard used primarily in the manufacture of folding cartons. Also in April 1999, the Company acquired the assets and assumed certain liabilities of Halifax Paper Board Company, Inc. in exchange for 34,256 shares of the Company's common stock valued at $802 thousand and repayment of approximately $5.6 million of Halifax's debt. Halifax operates a paperboard mill in Roanoke Rapids, North Carolina that produces specialty paperboard and a specialty paperboard converting plant whose operations have recently been relocated to Greenville, South Carolina. In June 1999, the Company acquired the assets and assumed certain liabilities of Tenneco Packaging, Inc.'s folding carton division for approximately $72.7 million in cash. The division consists of five folding carton plants located in Mentor, Ohio; Grand Rapids, Michigan; St. Louis, Missouri; Denver, Colorado; Salt Lake City, Utah and five sales and technical support centers. In September 1999, the Company acquired all of the outstanding stock of Carolina Converting, Inc. in exchange for 480,309 shares of the Company's common stock, subject to a post-closing working capital adjustment, valued at approximately $11.2 million and repayment of $2.0 million of CCI's debt. CCI operates a specialty converting and packaging facility located in Fayetteville, North Carolina. Cash dividends of $18.0 million were paid in 1999 versus $16.2 million in the same period last year. The Company's Senior Notes agreement and its revolving credit agreement contain no specific limitations on the payment of dividends. The Company did not purchase any shares of its common stock during 1999 pursuant to its common stock purchase plan. The Company has cumulatively purchased 3,169,000 shares since January 1996. The Company's board of directors has authorized purchases of up to 831,000 additional shares, and the Company intends to continue such purchases, subject to market conditions and availability, but there can be no assurance as to the completion, timing or prices of such future purchases. The Company anticipates that it will be able to meet its funding needs for the possible acquisition of additional facilities, working capital, capital expenditures and additional stock purchases through internally generated cash and borrowings under its revolving credit facility and the issuance of debt securities in the public markets. YEAR 2000 The Company uses software and related information technologies and other equipment throughout its business that could be affected by the failure to correctly interpret and process dates after 1999. Accordingly, the Company attempted to identify and assess its areas of risk related to the year 2000 issue. As called for in its overall plan to prepare for the year 2000, the Company conducted a comprehensive inventory and evaluation of its information technology ("IT") systems to determine their year 2000 compliance. The primary financial computer systems were upgraded in December of 1997 and are year 2000 compliant, as are the Company's computerized financial software systems. Certain systems at individual operating Company 18 20 sites, primarily involving order entry, shipping and inventory control, have undergone remediation and replacement as needed. Non-IT electronic equipment, including equipment engaged in manufacturing and other processes, was tested and modified or replaced as needed. The remediation and replacement efforts were complete as of the end of 1999. The Company also made efforts to identify third parties that might be unable to become year 2000 compliant and to make contingency plans. The total cost associated with required modifications and replacement of the Company's systems in response to the year 2000 issue was approximately $4.2 million. This amount does not include costs to replace or upgrade systems that were previously planned and not accelerated due to the year 2000 issue. The Company's year 2000 efforts were funded primarily from the existing IT budget and had been ongoing since 1997. The total costs of these efforts represent approximately 20% of the total IT budget for the three-year period ending 1997-1999. The Company did not experience any disruptions to its business as the result of the change to calendar year 2000 and has not been made aware of any problems to date as the result of such change, but there can be no assurance that the Company will not experience any year 2000 related issues in the future. FORWARD-LOOKING INFORMATION This annual report on Form 10-K, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," may contain various "forward-looking statements," within the meaning of Section 21E of the Securities Exchange Act of 1934,that are based on management's belief and assumptions, as well as information currently available to management. When used in this document, the words "anticipate," "estimate," "expect," and similar expressions may identify forward-looking statements. Although the Company believes that the expectations reflected in any such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Any such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company's actual financial results, performance or condition may vary materially from those anticipated, estimated or expected. Among the key factors that may have a direct bearing on the Company's actual financial results, performance or condition are fluctuations in raw material prices and the economy in general, the degree and nature of competition, demand for the Company's products, changes in government regulations, the Company's ability to complete acquisitions and integrate the operations of acquired businesses, and other matters discussed in this report and the Company's other filings with the Securities and Exchange Commission. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At December 31, 1999, the Company had outstanding borrowings of approximately $200,000,000 related to an issuance of public debt securities registered with the Securities and Exchange Commission in June of 1999. The 7.375 percent notes were issued at a discount to yield an effective interest rate of 7.473 percent. The notes pay interest semiannually, and are unsecured obligations of the Company. The Company has a $400,000,000 five year bank revolving credit facility, with interest computed using the Company's choice of (a) the Eurodollar rate plus a margin or (b) the higher of the federal funds rate plus a margin or the bank's prime lending rate. As of December 31, 1999, borrowings of $140,000,000 were outstanding under the bank revolving credit facility at a weighted average interest rate of 6.45 percent. In addition, the Company had senior notes dated October 8, 1992, which are payable to an insurance company in five equal installments of $16,550,000 beginning October 8, 2000. Interest on the notes accrues at 7.74 percent and is payable semiannually. As of December 31, 1999, $260,000,000 of committed credit was available under the bank revolving facility. The Company's senior management establishes parameters of the Company's financial risk, which has been approved by the board of directors. The Company does not utilize derivatives for speculative purposes. The Company also does not hedge interest rate exposure through the use of swaps and options and does not hedge foreign exchange exposure through the use of forward contracts. 19 21 The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates and should be read in conjunction with the referenced notes in the Company's consolidated financial statements. For debt obligations, the table presents principal cash flows and related interest rates by expected maturity dates. The table below presents principal amounts and related weighted average interest rates by year or expected maturity for the Company's debt obligations as of December 31, 1999. For obligations with variable interest rates, the table sets forth payout amounts based on current rates and does not attempt to project future interest rates.
EXPECTED MATURITY DATE -- DECEMBER 31, 1999 ------------------------------------------------------------------------ 2000 2001 2002 2003 2004 THEREAFTER TOTAL ------- ------- -------- ------- ------- ---------- -------- (IN THOUSANDS) 7.74% Senior Notes (Note 6) Fixed Rate........................... $16,550 $16,550 $ 16,550 $16,550 $16,550 $ -- $ 82,750 Average interest rate................ 7.74% 7.74% 7.74% 7.74% 7.74% 7.74% 7.375% 10-year Notes (Note 6).......... $200,000 $200,000 Average interest rate................ 7.47% 7.47% Revolving Credit Facility (Note 5) Variable Rate........................ $140,000 $140,000 Average interest rate................ 6.45% 6.45%
20 22 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA CARAUSTAR INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------- 1999 1998 --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 18,771 $ 2,610 Receivables, net of allowances for doubtful accounts, returns, and discounts of $2,418 and $1,069 in 1999 and 1998, respectively..................................... 108,819 76,394 Inventories............................................... 89,770 67,544 Refundable income taxes................................... 1,985 1,365 Other current assets...................................... 7,777 6,790 --------- --------- Total current assets.............................. 227,122 154,703 --------- --------- PROPERTY, PLANT AND EQUIPMENT: Land...................................................... 12,312 6,530 Buildings and improvements................................ 125,126 97,942 Machinery and equipment................................... 580,892 415,653 Furniture and fixtures.................................... 8,984 7,837 --------- --------- 727,314 527,962 Less accumulated depreciation............................. (247,458) (203,492) --------- --------- Property, plant and equipment, net................ 479,856 324,470 --------- --------- GOODWILL, net of accumulated amortization of $11,712 and $7,994 in 1999 and 1998, respectively..................... 140,763 120,127 --------- --------- OTHER ASSETS................................................ 30,902 19,497 --------- --------- $ 878,643 $ 618,797 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of debt................................ $ 16,615 $ 26,103 Accounts payable.......................................... 62,454 47,040 Accrued liabilities....................................... 43,755 25,631 Dividends payable......................................... 4,572 4,476 --------- --------- Total current liabilities......................... 127,396 103,250 --------- --------- REVOLVING CREDIT LOANS...................................... 140,000 147,000 --------- --------- LONG-TERM DEBT, less current maturities..................... 269,739 82,881 --------- --------- DEFERRED INCOME TAXES....................................... 49,153 43,437 --------- --------- DEFERRED COMPENSATION....................................... 3,164 3,889 --------- --------- OTHER LIABILITIES........................................... 9,786 4,375 --------- --------- MINORITY INTEREST........................................... 946 591 --------- --------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, $.10 par value; 5,000,000 shares authorized, no shares issued in 1999 and 1998.......... -- -- Common stock, $.10 par value; 60,000,000 shares authorized, 25,488,280 and 24,681,358 shares issued and outstanding in 1999 and 1998, respectively............. 2,549 2,468 Additional paid-in capital................................ 149,509 130,240 Retained earnings......................................... 126,935 103,991 Accumulated other comprehensive income.................... (534) (3,325) --------- --------- 278,459 233,374 --------- --------- $ 878,643 $ 618,797 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets. 21 23 CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) SALES....................................................... $936,928 $774,312 $696,093 FREIGHT..................................................... 46,839 37,454 27,955 -------- -------- -------- Net sales......................................... 890,089 736,858 668,138 COST OF SALES............................................... 683,576 536,925 482,964 -------- -------- -------- Gross profit...................................... 206,513 199,933 185,174 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 125,784 105,052 88,978 -------- -------- -------- Operating income.................................. 80,729 94,881 96,196 -------- -------- -------- OTHER (EXPENSE) INCOME: Interest expense.......................................... (25,456) (16,072) (14,111) Interest income........................................... 603 334 312 Equity in income of unconsolidated affiliates............. 9,224 4,308 1,665 Other, net................................................ (459) (433) (674) -------- -------- -------- (16,088) (11,863) (12,808) -------- -------- -------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST............ 64,641 83,018 83,388 MINORITY INTEREST........................................... (356) (730) (1,721) PROVISION FOR INCOME TAXES.................................. 23,216 30,470 30,543 -------- -------- -------- NET INCOME.................................................. $ 41,069 $ 51,818 $ 51,124 ======== ======== ======== BASIC INCOME PER COMMON SHARE............................... $ 1.64 $ 2.05 $ 2.05 ======== ======== ======== BASIC WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING......... 25,078 25,244 24,939 ======== ======== ======== DILUTED INCOME PER COMMON SHARE............................. $ 1.63 $ 2.04 $ 2.03 ======== ======== ======== DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING....... 25,199 25,423 25,216 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 22 24 CARAUSTAR INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ACCUMULATED COMMON STOCK ADDITIONAL OTHER ------------------- PAID-IN RETAINED COMPREHENSIVE SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL ---------- ------ ---------- -------- ------------- -------- BALANCE, December 31, 1996................. 25,053,460 $2,505 $140,144 $ 32,209 $(4,288) $170,570 Net income............................... -- -- -- 51,124 -- 51,124 Issuance of common stock for acquisitions........................... 985,041 99 27,078 -- -- 27,177 Issuance of common stock under nonqualified stock option plans........ 301,410 30 4,181 -- -- 4,211 Issuance of common stock under 1993 stock purchase plan.......................... 94,923 10 2,309 -- -- 2,319 Issuance of common stock under director equity plan............................ 1,836 -- 62 -- -- 62 Purchase and retirement of common stock.................................. (1,106,000) (111) (29,332) -- -- (29,443) Pension liability adjustment............. -- -- -- -- 2,364 2,364 Foreign currency translation adjustment............................. -- -- -- -- 57 57 Dividends declared of $.58 per share..... -- -- -- (14,510) -- (14,510) ---------- ------ -------- -------- ------- -------- BALANCE, December 31, 1997................. 25,330,670 2,533 144,442 68,823 (1,867) 213,931 Net income............................... -- -- -- 51,818 -- 51,818 Issuance of common stock for acquisitions........................... 369,073 37 10,094 -- -- 10,131 Issuance of common stock under 1993 stock purchase plan.......................... 21,636 2 914 -- -- 916 Issuance of common stock under 1998 stock purchase plan.......................... 1,202 -- 34 -- -- 34 Issuance of common stock under director equity plan............................ 2,077 -- 65 -- -- 65 Purchase and retirement of common stock.................................. (1,043,300) (104) (25,309) -- -- (25,413) Pension liability adjustment............. -- -- -- -- (1,478) (1,478) Foreign currency translation adjustment............................. -- -- -- -- 20 20 Dividends declared of $.66 per share..... -- -- -- (16,650) -- (16,650) ---------- ------ -------- -------- ------- -------- BALANCE, December 31, 1998................. 24,681,358 2,468 130,240 103,991 (3,325) 233,374 Net income............................... -- -- -- 41,069 -- 41,069 Issuance of common stock for acquisitions........................... 739,565 74 17,889 -- -- 17,963 Issuance of common stock under nonqualified stock option plan......... 19,000 2 252 -- -- 254 Issuance of common stock under 1993 stock purchase plan.......................... 21,828 3 679 -- -- 682 Issuance of common stock under 1998 stock purchase plan.......................... 20,371 2 302 -- -- 304 Issuance of common stock under director equity plan............................ 2,930 -- 77 -- -- 77 Pension liability adjustment............. -- -- -- -- 2,877 2,877 Foreign currency translation adjustment............................. -- -- -- -- (86) (86) Dividends declared of $.72 per share..... 3,228 -- 70 (18,125) -- (18,055) ---------- ------ -------- -------- ------- -------- BALANCE, December 31, 1999................. 25,488,280 $2,549 $149,509 $126,935 $ (534) $278,459 ========== ====== ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated statements. 23 25 CARAUSTAR INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1999 1998 1997 ---------- --------- --------- (IN THOUSANDS) OPERATING ACTIVITIES: Net income................................................ $ 41,069 $ 51,818 $ 51,124 --------- -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 52,741 38,705 33,661 Equity in income of unconsolidated affiliates.......... (9,224) (4,308) (1,665) Change in deferred income taxes........................ 9,072 8,076 1,109 Provision for deferred compensation.................... 292 519 279 Minority interest...................................... 356 730 1,721 Changes in operating assets and liabilities, net of acquisitions: Receivables.......................................... (11,665) 1,531 (4,820) Inventories.......................................... 2,831 740 (5,245) Other current assets................................. 2,303 (1,111) (2,046) Accounts payable and accrued liabilities............. 3,696 (2,866) (11,057) Income taxes......................................... (669) 833 7,783 --------- -------- -------- Total adjustments................................. 49,733 42,849 19,720 --------- -------- -------- Net cash provided by operating activities......... 90,802 94,667 70,844 --------- -------- -------- INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (35,696) (40,716) (36,275) Acquisition of businesses, net of cash acquired........... (177,881) (14,488) (22,032) Cash acquired in stock acquisition........................ 499 81 1,083 Other..................................................... 504 262 2,073 --------- -------- -------- Net cash used in investing activities............. (212,574) (54,861) (55,151) --------- -------- -------- FINANCING ACTIVITIES: Distributions to CPI partner.............................. -- (3,100) -- Proceeds from note issuance............................... 196,733 -- -- Proceeds from revolving credit loans...................... 158,000 80,000 85,000 Repayments of revolving credit loans...................... (165,000) (62,000) (56,000) Repayments of long and short-term debt.................... (33,750) (11,918) (14,101) Dividends paid............................................ (17,995) (16,227) (13,959) Proceeds from issuances of stock.......................... 761 755 2,986 Purchases of stock........................................ -- (25,275) (29,443) Other..................................................... (816) (822) (774) --------- -------- -------- Net cash provided by (used in) financing activities...................................... 137,933 (38,587) (26,291) --------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 16,161 1,219 (10,598) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 2,610 1,391 11,989 --------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 18,771 $ 2,610 $ 1,391 ========= ======== ======== SUPPLEMENTAL DISCLOSURES: Cash payments for interest................................ $ 25,480 $ 15,048 $ 14,186 ========= ======== ======== Cash payments for income taxes............................ $ 16,849 $ 23,844 $ 22,655 ========= ======== ======== Stock issued for acquisitions............................. $ 17,963 $ 10,131 $ 27,177 ========= ======== ======== Note payable issued for acquisition....................... $ -- $ 26,000 $ -- ========= ======== ========
The accompanying notes are an integral part of these consolidated statements. 24 26 CARAUSTAR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998, AND 1997 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Caraustar Industries, Inc. (the "Parent Company") and subsidiaries (collectively, the "Company") are engaged in manufacturing, converting, and marketing paperboard and related products. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Parent Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. CASH AND CASH EQUIVALENTS The Company considers cash on deposit and investments with an original maturity of three months or less to be cash equivalents. INVENTORIES Inventories are carried at the lower of cost or market. Cost includes materials, labor, and overhead. Market, with respect to all inventories, is replacement cost. Substantially all inventories (approximately 96 percent and 90 percent at December 31, 1999 and 1998, respectively) are valued using the first-in, first-out method. Reserves related to inventories valued using the last-in, first-out method are not significant. Inventories at December 31, 1999 and 1998 were as follows (in thousands):
1999 1998 ------- ------- Raw materials and supplies.................................. $40,753 $32,570 Finished goods and work in process.......................... 49,017 34,974 ------- ------- $89,770 $67,544 ======= =======
PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost. When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income. Expenditures for repairs and maintenance not considered to substantially lengthen the asset lives are charged to expense as incurred. For financial reporting purposes, depreciation is computed using both straight-line and accelerated methods over the following estimated useful lives of the assets: Buildings and improvements.................................. 10-45 years Machinery and equipment..................................... 3-20 years Furniture and fixtures...................................... 5-10 years
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 those estimates. 25 27 CARAUSTAR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REVENUE RECOGNITION The Company recognizes revenue at the time of shipment of products. SELF-INSURANCE The Company is self-insured for the majority of its workers' compensation costs and group health insurance costs, subject to specific retention levels. Consulting actuaries and administrators assist the Company in determining its liability for self-insured claims and such liabilities are not discounted. FOREIGN CURRENCY TRANSLATION The financial statements of the Company's non-U.S. subsidiaries are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation. "Net assets of the non-U.S. subsidiaries are translated at current rates of exchange. Income and expense items are translated at the average exchange rate for the year. The resulting translation adjustments are recorded in shareholders' equity. Certain other translation adjustments and transaction gains and losses continue to be reported in net income and were not material in any year. GOODWILL Goodwill is amortized using the straight-line method over periods ranging up to 40 years. The Company periodically evaluates goodwill for impairment. In completing this evaluation, the Company estimates the future undiscounted cash flows of the businesses to which goodwill relates in order to ensure that the carrying amount of goodwill has not been impaired. INCOME PER SHARE The Company computes basic and diluted earnings per share in accordance with SFAS No. 128, "Earnings Per Share." Basic income per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The dilutive effect of stock options outstanding during 1999, 1998, and 1997 added 121,000, 179,000, and 277,000, respectively, to the weighted average shares outstanding for purposes of calculating diluted income per share. COMPREHENSIVE INCOME Total comprehensive income, consisting of net income plus other nonowner changes in equity for the years ended December 31, 1999, 1998, and 1997, was $43,860,000, $50,360,000, and $53,545,000, respectively. Components of accumulated other comprehensive income (loss) at December 31,1999 and 1998 consist of pension liability adjustments of $0 and $(2,877,000), respectively, and foreign currency translation adjustments of $(534,000) and $(448,000), respectively. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives"), and for hedging activities. It also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Investments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133."This statement defers the 26 28 CARAUSTAR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. Management does not expect SFAS No. 133 to have a significant impact on the Company's financial statements. 2. SHAREHOLDERS' EQUITY PREFERRED STOCK The Company has authorized 5,000,000 shares of $.10 par value preferred stock. The preferred stock is issuable from time to time in one or more series and with such designations and preferences for each series as shall be stated in the resolutions providing for the designation and issue of each such series adopted by the board of directors of the Company. The board of directors is authorized by the Company's articles of incorporation to determine the voting, dividend, redemption, and liquidation preferences pertaining to each such series. No shares of preferred stock have been issued by the Company. COMMON STOCK PURCHASE PLAN During 1998 and 1997, the Company purchased and retired 1,043,000 and 1,106,000 shares, respectively, of its common stock pursuant to a plan authorized and approved by its board of directors allowing purchases of up to 4,000,000 common shares. These purchases were made in a series of open market transactions and privately negotiated purchases at an aggregate cost of $25,413,000 and $29,443,000 in 1998 and 1997, respectively, and at prices ranging from $21.25 to $33.00 per share in 1998 and $22.25 to $31.94 per share in 1997. 3. ACQUISITIONS Each of the following acquisitions was accounted for under the purchase method of accounting, applying the provisions of Accounting Principles Board ("APB") Opinion No. 16, and as a result, the Company recorded the assets and liabilities of the acquired companies at their estimated fair values with the excess of the purchase price over these amounts being recorded as goodwill. Actual allocations of goodwill and other identifiable assets will be based on further studies and may change during the allocation period, generally one year following the date of acquisition. The financial statements for the years ended December 31, 1999, 1998, and 1997 reflect the operations of the acquired businesses for the periods after their respective dates of acquisition. In March 1999, the Company acquired 67 percent of the outstanding stock of Carolina Component Concepts Inc. ("CCC") in exchange for 225,000 shares of the Company's common stock, valued at approximately $6,000,000. As a result of this transaction, the Company now owns 100 percent of CCC's common stock. CCC operates a specialty converting facility located in Mooresville, North Carolina. Goodwill of approximately $5,400,000 was recorded in connection with the acquisition and is being amortized over 40 years. In April 1999, the Company acquired the operating assets of International Paper Company's Sprague boxboard mill for approximately $103,200,000 in cash plus $4,700,000 of assumed debt. In addition, as part of the acquisition, the Company expects to settle approximately $23,900,000 in liabilities, including liabilities related to future losses on contractual sales commitments. Sprague, located in Versailles, Connecticut, produces clay-coated recycled boxboard used primarily in the manufacture of folding cartons. Goodwill of approximately $7,900,000 was recorded in connection with the acquisition and is being amortized over 40 years. Also in April 1999, the Company acquired the assets and assumed certain liabilities of Halifax Paper Board Company, Inc. ("Halifax") in exchange for 34,256 shares of the Company's common stock valued at $802,000 and repayment of $5,560,000 of Halifax's debt. Halifax operates a paperboard mill in Roanoke Rapids, North Carolina, that produces specialty paperboard and a specialty paperboard converting plant whose 27 29 CARAUSTAR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) operations have recently been relocated to Greenville, South Carolina. No goodwill was recorded in connection with this acquisition. In June 1999, the Company acquired the assets and assumed certain liabilities of Tenneco Packaging Inc.'s folding carton division for approximately $72,700,000 in cash. The division consists of five folding carton plants located in Mentor, Ohio; Grand Rapids, Michigan; St. Louis, Missouri; Denver, Colorado; Salt Lake City, Utah, and five sales and technical support centers. Goodwill of approximately $900,000 was recorded in conjunction with the acquisition and is being amortized over 40 years. In September 1999, the Company acquired all of the outstanding stock of Carolina Converting Inc. ("CCI") in exchange for 480,309 shares of the Company's common stock, subject to a postclosing working capital adjustment, valued at approximately $11,200,000 and repayment of $2,000,000 of CCI's debt. CCI operates a specialty converting and packaging facility located in Fayetteville, North Carolina. Goodwill of approximately $9,640,000 was recorded in conjunction with the acquisition and is being amortized over 40 years. In March 1998, the Company acquired all of the outstanding common stock of Chesapeake Paperboard Company ("Chesapeake") and its wholly owned subsidiary, Chesapeake Fiber Packaging Corporation, for approximately $21,000,000, including approximately $8,150,000 of Chesapeake's debt, which was repaid by the Company. Chesapeake Paperboard Company, located in Baltimore, Maryland, produces recycled paperboard used primarily in the folding carton and other specialty markets. Chesapeake Fiber Packaging Corporation, located in Hunt Valley, Maryland, manufactures folding cartons and specialty corrugated products. No goodwill was recorded in connection with the acquisition. In May 1998, the Company acquired all of the outstanding stock of Etowah Recycling, Inc. ("Etowah") in exchange for approximately 140,000 shares of the Company's common stock, valued at approximately $4,700,000. Simultaneously, the Company repaid Etowah's debt of approximately $2,100,000. Etowah operates two recovered fiber facilities located in Canton, Georgia, and Hardeeville, South Carolina. Goodwill of approximately $3,300,000 was recorded in connection with the acquisition and is being amortized over 40 years. In June 1998, the Company acquired Tenneco Packaging, Inc.'s ("TPI") 20 percent interest in the CPI partnership for $27,400,000. The CPI partnership had operated as a joint venture of the Company and TPI since July 1996. As a result of this transaction, the Company now owns 100 percent of CPI's operations, which include clay-coated recycled paperboard mills located in Rittman, Ohio, and Tama, Iowa, and recovered fiber recycling and brokerage operations located in Rittman and Cleveland, Ohio. The purchase price consisted of $1,400,000 in cash paid at closing and a note payable to TPI for the remaining $26,000,000 paid in June 1999. Goodwill of approximately $9,700,000 was recorded in connection with the acquisition and is being amortized over 40 years. In October 1998, the Company acquired all of the outstanding stock of Boxall, Inc. ("Boxall") in exchange for approximately 230,000 shares of the Company's common stock valued at approximately $5,500,000. Simultaneously,the Company repaid Boxall's debt of approximately $1,500,000. Boxall operates a folding carton manufacturing facility in Birmingham, Alabama. Goodwill of approximately $4,900,000 was recorded in connection with the acquisition and is being amortized over 40 years. 28 30 CARAUSTAR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following unaudited pro forma financial information assumes that the above acquisitions occurred on January 1, 1998. These results have been prepared for comparative purposes only and do not purport to be indicative of what would have resulted had the acquisitions occurred on January 1, 1998 or the results which may occur in the future (in thousands, except per share data):
1999 1998 -------- -------- Net sales................................................... $961,979 $982,014 Net income.................................................. 38,328 46,910 Diluted income per common share............................. 1.50 1.78
4. EQUITY INTEREST IN UNCONSOLIDATED AFFILIATE On April 1, 1996, the Company transferred substantially all of the operating assets and liabilities of its wholly owned subsidiary, Standard Gypsum Corporation, a producer of gypsum wallboard, to a newly formed limited liability company, Standard Gypsum LLC ("Standard"). Simultaneous with the formation of Standard, the Company sold a 50 percent interest in Standard to Temple-Inland Forest Products Corporation ("Temple"), an unrelated third party, for $10,800,000 in cash. Standard is operated as a joint venture managed by Temple. The Company accounts for its interest in Standard under the equity method of accounting. The Company's equity interest in the earnings of Standard for the years ended December 31, 1999, 1998, and 1997, was $9,218,000, $4,343,000 and $1,703,000, respectively. During April 1998, Standard entered into a loan agreement with a financial institution for credit facilities in an amount not to exceed $61,000,000. Proceeds of the new credit facility were used to fund the construction of a green field gypsum wallboard plant in Cumberland City, Tennessee which began operation in the fourth quarter of 1999. Borrowings under the credit facility were $19,000,000 at December 31, 1998. During 1999, Standard received financing from two industrial revenue bond issuances by Stewart County, Tennessee, totaling $56,200,000. The proceeds of the bond issuances were used to pay off the borrowings under the credit facility and fund the remaining construction of the plant. The Company received distributions based on its equity interest in Standard of $1,000,000 and $1,500,000 in 1999 and 1998, respectively. No distributions were received in 1997. Summarized financial information for Standard at December 31, 1999 and 1998 and for the years ended December 31, 1999, 1998 and 1997, respectively, is as follows (in thousands):
1999 1998 ------- ------- Current assets.............................................. $25,960 $11,213 Noncurrent assets........................................... 76,920 36,921 Current liabilities......................................... 7,270 5,926 Noncurrent liabilities...................................... 56,274 19,000
1999 1998 1997 ------- ------- ------- Net sales................................................. $55,875 $38,711 $32,312 Gross profit.............................................. 25,307 12,315 6,729 Income from continuing operations......................... 18,128 8,638 3,400 Net income................................................ 18,128 8,638 3,400
5. REVOLVING CREDIT FACILITY The Company has a $400,000,000 five-year bank revolving credit facility which may be increased up to $500,000,000 and its maturity extended by up to three additional years beyond the second quarter of 2002, subject to certain conditions and approvals. Interest under the facility is computed using the Company's choice of (a) the Eurodollar rate plus a margin or (b) the higher of the federal funds rate plus a margin or the bank's prime lending rate. As of December 31, 1999 and 1998, borrowings of $140,000,000 and $147,000,000, 29 31 CARAUSTAR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) respectively, were outstanding under the revolving credit facility at weighted average interest rates of 6.45 percent and 5.57 percent, respectively. 6. LONG-TERM DEBT At December 31, 1999 and 1998, long-term debt consisted of the following (in thousands):
1999 1998 -------- -------- 7.375 percent ten-year notes................................ $198,691 $ -- 7.74 percent senior notes................................... 82,750 82,750 Other notes payable......................................... 4,913 26,234 -------- -------- 286,354 108,984 Less current maturities..................................... 16,615 26,103 -------- -------- $269,739 $ 82,881 ======== ========
The senior notes dated October 8, 1992 (the "Notes") are payable to an insurance company in five equal annual installments of $16,550,000 beginning October 8, 2000. Interest on the Notes accrues at 7.74 percent and is payable semiannually. The Notes also provide for optional prepayments, in whole or in part, with a penalty, as defined, during specified periods. The Notes and revolving credit facility (Note 5) contain certain restrictive covenants on the part of the Company, including (but not limited to) sales of assets, incurrence of additional indebtedness, capital expenditures, maintenance of certain leverage, interest coverage ratios (as defined), investments, and minimum working capital requirements. In 1998, the Company registered with the Securities and Exchange Commission a total of $300,000,000 in public debt securities for issuance in one or more series and with such specific terms as to be determined from time to time. On June 1, 1999, the Company issued $200,000,000 in aggregate principal amount of its 7.375 percent notes due June 1, 2009. The 7.375 percent notes were issued at a discount to yield an effective interest rate of 7.473 percent and pay interest semiannually. The 7.375 percent notes are unsecured obligations of the Company. Proceeds, net of the issuance discount and after deducting underwriting and other costs, were $196,733,000 and were largely used to repay revolving credit loans. Aggregate maturities of long-term debt at December 31, 1999 are as follows (in thousands): 2000........................................................ $ 16,615 2001........................................................ 16,604 2002........................................................ 16,595 2003........................................................ 16,598 2004........................................................ 16,550 Thereafter.................................................. 203,392 -------- $286,354 ========
30 32 CARAUSTAR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES LEASES The Company leases certain buildings, machinery, and transportation equipment under operating lease agreements expiring at various dates through 2022. Certain rental payments for transportation equipment are based on a fixed rate plus an additional amount for mileage. Rental expense on operating leases for the years ended December 31, 1999, 1998, and 1997 is as follows (in thousands):
1999 1998 1997 ------- ------ ------ Minimum rentals............................................. $11,698 $9,209 $6,905 Contingent rentals.......................................... 377 326 371 ------- ------ ------ $12,075 $9,535 $7,276 ======= ====== ======
The following is a schedule of future minimum rental payments required under leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1999 (in thousands): 2000........................................................ $11,895 2001........................................................ 8,863 2002........................................................ 6,680 2003........................................................ 4,072 2004........................................................ 2,442 Thereafter.................................................. 11,725 ------- $45,677 =======
LITIGATION The Company is involved in certain litigation arising in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. 8. STOCK OPTION AND DEFERRED COMPENSATION PLANS DIRECTOR EQUITY PLAN During 1996, the Company's board of directors approved a director equity plan. Under the plan, directors who are not employees or former employees of the Company ("Eligible Directors") are paid a portion of their fees in the Company's common stock. Additionally, each Eligible Director is granted an option to purchase 1,000 shares of the Company's common stock at an option price equal to the fair market value at the date of grant. These options are immediately exercisable and expire ten years following the grant. A maximum of 100,000 shares of common stock may be granted under this plan. During 1999, 1998, and 1997, 2,930, 2,077, and 1,836 shares, respectively, of common stock and options to purchase 6,000 shares of common stock were issued under this plan in each year. INCENTIVE STOCK OPTION AND BONUS PLANS The Company has a nonqualified stock option plan (the "Plan") adopted in 1987 for certain officers of the Company. Under the Plan, options to purchase a maximum of 1,980,000 shares could be granted through 1990. The stock option committee, appointed by the board of directors, determined the price, vesting period, exercise dates, and expiration dates for options granted to officers. Options outstanding under the Plan expired at various dates through 1997. 31 33 CARAUSTAR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During 1992, the Company's board of directors approved a qualified incentive stock option and bonus plan (the "1993 Plan") which became effective January 1, 1993 and terminated December 31, 1997. Under the provisions of the 1993 Plan, selected members of management received one share of common stock ("bonus share") for each two shares purchased at market value. In addition, the 1993 Plan provided for the issuance of options at prices not less than market value at the date of grant. The options and bonus shares awarded under the 1993 Plan are subject to four-year and five-year respective vesting periods. The Company's board of directors authorized 1,400,000 common shares for grant under the 1993 Plan. During 1997, the Company issued 189,215 qualified incentive stock options under the 1993 Plan. During 1997, the Company issued 31,816 bonus shares with an aggregate market value of $934,000. Compensation expense of approximately $336,000, $457,000, and $451,000 related to bonus shares was recorded in 1999, 1998, and 1997, respectively. During 1998, the Company's board of directors approved a qualified incentive stock option and bonus plan (the "1998 Plan") which became effective March 10, 1998. Under the provisions of the 1998 Plan, selected members of management may receive the right to acquire one share of restricted stock contingent upon the direct purchase of two shares of unrestricted common stock at market value. In addition, the 1998 Plan provides for the issuance of both traditional and performance stock options at market price and 120 percent of market price, respectively. Restricted stock and options awarded under the 1998 Plan are subject to five-year vesting periods. The Company's board of directors authorized 1,600,000 common shares for grant under the 1998 Plan. During 1999 and 1998, the Company issued 363,728 and 235,404 options, respectively, under the 1998 Plan. During 1999 and 1998, the Company issued 9,374 and 1,202 shares, respectively, of restricted stock. The Company recorded approximately $20,000 of compensation expense related to the issuance of restricted stock during 1999. A summary of stock option activity for the years ended December 31, 1999, 1998, and 1997 is as follows:
WEIGHTED AVERAGE EXERCISE SHARES PRICE --------- -------- Outstanding at December 31, 1996............................ 904,041 $12.06 Granted................................................... 195,215 30.13 Forfeited................................................. (13,805) 21.84 Exercised................................................. (364,813) 7.10 --------- Outstanding at December 31, 1997............................ 720,638 19.27 Granted................................................... 241,404 35.60 Forfeited................................................. (6,215) 24.89 Exercised................................................. (34,204) 17.53 --------- Outstanding at December 31, 1998............................ 921,623 23.57 Granted................................................... 369,728 27.18 Forfeited................................................. (22,450) 31.20 Exercised................................................. (45,756) 11.98 --------- Outstanding at December 31, 1999............................ 1,223,145 24.95 ========= Options exercisable at: December 31, 1999......................................... 566,867 19.55 December 31, 1998......................................... 464,844 16.20 December 31, 1997......................................... 361,242 13.61
32 34 CARAUSTAR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summary information about the Company's stock options outstanding at December 31, 1999 is as follows:
OUTSTANDING AT WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE RANGE OF EXERCISE PRICE 1999 LIFE PRICE 1999 PRICE - ----------------------- -------------- ---------------- ---------------- -------------- ---------------- (IN YEARS) $ 4.00 - $15.00....... 145,290 1.2 $ 8.58 145,290 $ 8.58 15.50 - 23.75....... 293,445 3.4 18.61 262,763 18.46 24.44 - 29.75....... 288,495 8.9 25.83 23,070 26.05 30.13 - 40.80....... 495,915 7.4 32.98 135,744 32.31 --------- --- ------ ------- ------ 4.00 - 40.80....... 1,223,145 6.0 24.95 566,867 19.55
An accrual of approximately $254,000 and $301,000 related to the outstanding incentive stock options is included in deferred compensation in the accompanying balance sheets at December 31, 1999 and 1998, respectively. As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation, "the Company accounts for the director equity plan and the incentive stock option and bonus plans under APB Opinion No. 25; however, the Company has computed for pro forma disclosure purposes the value of all options granted during 1999, 1998, and 1997 using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following weighted average assumptions for grants in 1999, 1998, and 1997:
1999 1998 1997 ----------- ----------- ----------- Risk-free interest rate...................... 5.09%-6.18% 4.68%-5.76% 5.4%-6.86% Expected dividend yield...................... 2.72%-2.92% 1.87%-2.97% 1.61%-2.53% Expected option lives........................ 8-10 years 8-10 years 6-10 years Expected volatility.......................... 30% 30% 25%-30%
The total values of the options granted during the years ended December 31, 1999, 1998, and 1997 were computed to be approximately $2,600,000, $2,577,000, and $2,061,000, respectively, which would be amortized over the vesting period of the options. If the Company had accounted for these plans in accordance with SFAS No. 123, the Company's reported and pro forma net income and net income per share for the years ended December 31, 1999, 1998, and 1997 would have been as follows (in thousands, except per share data):
1999 1998 1997 ------- ------- ------- Net income: As reported............................................. $41,069 $51,818 $51,124 Pro forma............................................... 39,975 51,022 50,824 Diluted income per common share: As reported............................................. $ 1.63 $ 2.04 $ 2.03 Pro forma............................................... 1.59 2.01 2.02
DEFERRED COMPENSATION PLANS The Parent Company and certain of its subsidiaries have deferred compensation plans for several of their present and former officers and key employees. These plans provide for retirement, involuntary termination, and death benefits. The involuntary termination and retirement benefits are accrued over the period of active employment from the execution dates of the plans to the normal retirement dates (age 65) of the employees covered. Deferred compensation expense applicable to the plans was approximately $292,000, $324,000, and $368,000 for the years ended December 31, 1999, 1998, and 1997, respectively. Accruals of approximately $2,644,000 and $3,312,000 related to these plans are included in deferred compensation in the accompanying balance sheets at December 31, 1999 and 1998, respectively. 33 35 CARAUSTAR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS PENSION PLAN AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Substantially all of the Company's employees participate in a non-contributory defined benefit pension plan (the "Pension Plan"). The Pension Plan calls for benefits to be paid to all eligible employees at retirement based primarily on years of service with the Company and compensation rates in effect near retirement. The Pension Plan's assets consist of shares held in collective investment funds and group annuity contracts. The Company's policy is to fund benefits attributed to employees' service to date as well as service expected to be earned in the future. Contributions to the Pension Plan totaled approximately $5,526,000, $4,784,000, and $3,478,000 in 1999, 1998, and 1997, respectively. Effective December 31, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits." The provisions of SFAS No. 132 revise employers' disclosures about pension and other postretirement benefit plans. SFAS No. 132 does not change the measurement or recognition of these plans. It standardizes the disclosure requirements for pensions and other postretirement benefits. During 1996, the Company adopted a supplemental executive retirement plan ("SERP"), which provides benefits to participants based on average compensation. The SERP covers certain executives of the Company commencing upon retirement. The SERP is unfunded at December 31, 1999. Pension expense for the Pension Plan and the SERP includes the following components for the years ended December 31, 1999, 1998, and 1997 (in thousands):
1999 1998 1997 ------- ------- ------- Service cost of benefits earned........................... $ 3,236 $ 2,569 $ 2,153 Interest cost on projected benefit obligation............. 3,649 3,281 2,629 Actual gain on plan assets................................ (8,485) (5,293) (4,480) Net amortization and deferral............................. 5,219 2,832 2,622 ------- ------- ------- Net pension expense....................................... $ 3,619 $ 3,389 $ 2,924 ======= ======= =======
34 36 CARAUSTAR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The table below represents a reconciliation of the funded status of the Pension Plan and the SERP to prepaid (accrued) pension cost as of December 31, 1999 and 1998 (in thousands):
SERP PENSION PLAN ---------------- ----------------- 1999 1998 1999 1998 ------- ------ ------- ------- Change in benefit obligation: Projected benefit obligation at end of prior year........ $ 2,320 $1,918 $48,558 $36,995 Service cost.......................................... 123 93 3,113 2,476 Interest cost......................................... 190 155 3,459 3,126 Actuarial loss (gain)................................. 181 154 (1,738) 3,130 Plan amendments....................................... -- -- 786 475 Acquisitions.......................................... -- -- 1,282 4,717 Benefits paid......................................... -- -- (3,106) (2,361) ------- ------ ------- ------- Projected benefit obligation at end of year.............. 2,814 2,320 52,354 48,558 ------- ------ ------- ------- Change in plan assets: Fair value of plan assets at end of prior year........... -- -- 43,196 31,725 Actual return on plan assets.......................... -- -- 8,485 5,293 Employer contributions................................ -- -- 5,526 4,784 Benefits paid......................................... -- -- (3,106) (2,361) Acquisitions.......................................... -- -- 1,005 3,755 ------- ------ ------- ------- Fair value of plan assets at end of year................. -- -- 55,106 43,196 ------- ------ ------- ------- Funded status of the plans................................. (2,814) (2,320) 2,752 (5,362) Unrecognized transition obligation......................... 1,366 1,480 -- -- Unrecognized prior service cost............................ -- -- 1,168 694 Unrecognized net loss...................................... 307 154 1,338 7,564 ------- ------ ------- ------- (Accrued) prepaid pension cost before minimum pension liability adjustment..................................... $(1,141) $ (686) $ 5,258 $ 2,896 ======= ====== ======= ======= Other comprehensive income: Increase (decrease) in intangible asset.................. $ 55 $ (22) $ (695) $ 252 (Increase) decrease in additional minimum pension liability............................................. (55) 22 3,572 (1,730) ------- ------ ------- ------- Other comprehensive income................................. $ -- $ -- $ 2,877 $(1,478) ======= ====== ======= =======
In accordance with SFAS No. 87, the Company has recorded an additional minimum pension liability for underfunded plans representing the excess of unfunded accumulated benefit obligations over previously recorded pension liabilities. The cumulative additional liability totaled $1,076,000 and $4,592,000 at December 31, 1999 and 1998, respectively, and has been offset by intangible assets to the extent of previously unrecognized prior service costs. Amounts in excess of previously unrecognized prior service cost are recorded as reductions in shareholders' equity. Net pension expense and projected benefit obligations are calculated using assumptions of weighted average discount rates, future compensation levels, and expected long-term rates of return on assets. The weighted average discount rate used to measure the projected benefit obligation at December 31, 1999 and 1998 is 7.5 percent, the rate of increase in future compensation levels is 3.0 percent and 3.5 percent at December 31, 1999 and 1998, respectively, and the expected long-term rate of return on assets is 9.5 percent. 35 37 CARAUSTAR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OTHER POSTRETIREMENT BENEFITS The Company provides postretirement medical benefits at certain of its subsidiaries. The Company accounts for these postretirement medical benefits in accordance with SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits." Net periodic postretirement benefit cost for the years ended December 31, 1999, 1998, and 1997 included the following components (in thousands):
1999 1998 1997 ---- ---- ---- Service cost of benefits earned............................. $107 $ 94 $100 Interest cost on accumulated postretirement benefit obligation................................................ 306 291 287 ---- ---- ---- Net periodic postretirement benefit cost.................... $413 $385 $387 ==== ==== ====
Postretirement benefits totaling $550,000, $544,000, and $305,000 were paid during 1999, 1998, and 1997, respectively. The accrued postretirement benefit cost as of December 31, 1999 and 1998 consists of the following (in thousands):
1999 1998 ------- ------- Change in benefit obligation: Projected benefit obligation at end of prior year......... $ 3,898 $ 4,063 Service cost........................................... 107 94 Interest cost.......................................... 306 291 Actuarial (gain) loss.................................. 611 (13) Special termination benefits........................... 284 -- Acquisition............................................ -- 7 Benefits paid.......................................... (550) (544) ------- ------- Projected benefit obligation at end of year............... $ 4,656 $ 3,898 ======= ======= Funded status............................................... $(4,656) $(3,898) Unrecognized net loss....................................... 830 272 ------- ------- Net amount recognized....................................... $(3,826) $(3,626) ======= =======
The accumulated postretirement benefit obligations at December 31, 1999 and 1998 were determined using a weighted average discount rate of 7.5 percent. The rate of increase in the costs of covered health care benefits is assumed to be 6.5 percent in 2000, gradually decreasing to 5 percent by the year 2002. Increasing the assumed health care costs trend rate by one percentage point would increase the accumulated postretirement benefit obligation as of December 31, 1999 by approximately $505,000 and would increase net periodic postretirement benefit cost by approximately $52,000 for the year ended December 31, 1999. 36 38 CARAUSTAR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires the use of the liability method of accounting for deferred income taxes. The provision for income taxes for the years ended December 31, 1999, 1998, and 1997 consisted of the following (in thousands):
1999 1998 1997 ------- ------- ------- Current: Federal................................................. $11,063 $19,444 $26,128 State................................................... 3,081 2,950 3,306 ------- ------- ------- 14,144 22,394 29,434 Deferred.................................................. 9,072 8,076 1,109 ------- ------- ------- $23,216 $30,470 $30,543 ======= ======= =======
The principal differences between the federal statutory tax rate and the provision for income taxes for the years ended December 31, 1999, 1998, and 1997 are as follows:
1999 1998 1997 ---- ---- ---- Federal statutory tax rate.................................. 35.0% 35.0% 35.0% State taxes, net of federal tax benefit..................... 2.7 2.7 3.2 Other....................................................... (1.6) (0.7) (0.8) ---- ---- ---- Effective tax rate.......................................... 36.1% 37.0% 37.4% ==== ==== ====
Significant components of the Company's deferred income tax assets and liabilities as of December 31, 1999 and 1998 are summarized as follows (in thousands):
1999 1998 -------- -------- Deferred income tax assets: Deferred employee benefits................................ $ 2,724 $ 1,677 Postemployment benefits................................... -- 61 Postretirement benefits other than pensions............... 1,370 1,060 Accounts receivable....................................... 671 351 Losses on contractual sales commitments................... 3,686 -- Other..................................................... 481 396 -------- -------- Total deferred income tax assets.................. 8,932 3,545 -------- -------- Deferred income tax liabilities: Depreciation and amortization............................. (51,894) (41,862) Asset revaluations........................................ (3,846) (3,846) Postemployment benefits................................... (1,307) -- Other..................................................... (1,038) (1,274) -------- -------- Total deferred income tax liabilities............. (58,085) (46,982) -------- -------- Valuation allowance......................................... -- -- -------- -------- $(49,153) $(43,437) ======== ========
37 39 CARAUSTAR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth certain quarterly financial data for the periods indicated (in thousands, except per share data):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- 1999: Net sales................................... $187,565 $212,456 $241,292 $248,776 Gross profit................................ 48,776 51,305 53,277 53,155 Net income.................................. 11,415 10,316 10,055 9,283 Diluted income per common share............. 0.46 0.41 0.40 0.36 1998: Net sales................................... $176,871 $189,658 $188,532 $181,797 Gross profit................................ 49,755 51,229 51,516 47,433 Net income.................................. 13,177 13,331 12,793 12,517 Diluted income per common share............. 0.52 0.52 0.50 0.50
12. SEGMENT INFORMATION The Company operates principally in three business segments organized by products. The paperboard segment consists of facilities that manufacture 100 percent recycled uncoated and clay-coated paperboard and facilities that collect recycled paper and broker recycled paper and other paper rolls. The tube, core, and composite container segment is principally made up of facilities that produce spiral and convolute-wound tubes, cores, and cans. The carton and custom packaging segment consists of facilities that produce printed and unprinted folding and set-up cartons and facilities that provide contract manufacturing and contract packaging services. Intersegment sales are recorded at prices which approximate market prices. Sales to external customers located in foreign countries accounted for approximately 6.7 percent, 7.8 percent, and 7.4 percent of the Company's sales for 1999, 1998, and 1997, respectively. Operating income includes all costs and expenses directly related to the segment involved. Corporate expenses include corporate, general, administrative, and unallocated information systems expenses. Identifiable assets are accumulated by facility within each business segment. Corporate assets consist primarily of cash and cash equivalents; refundable income taxes; property, plant, and equipment; and investments in unconsolidated affiliates. The following table presents certain business segment information for the years ended December 31, 1999, 1998, and 1997 (in thousands):
1999 1998 1997 ---------- -------- -------- Net sales (aggregate): Paperboard........................................ $ 505,608 $419,421 $412,382 Tube, core, and composite container............... 257,642 254,096 242,434 Carton and custom packaging....................... 251,672 178,464 117,222 ---------- -------- -------- Total..................................... $1,014,922 $851,981 $772,038 ========== ======== ======== Less net sales (intersegment): Paperboard........................................ $ 120,465 $112,581 $102,311 Tube, core, and composite container............... 3,877 2,315 1,587 Carton and custom packaging....................... 491 227 2 ---------- -------- -------- Total..................................... $ 124,833 $115,123 $103,900 ========== ======== ========
38 40 CARAUSTAR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 1998 1997 ---------- -------- -------- Net sales (external customers): Paperboard........................................ $ 385,143 $306,840 $310,071 Tube, core, and composite container............... 253,765 251,781 240,847 Carton and custom packaging....................... 251,181 178,237 117,220 ---------- -------- -------- Total..................................... $ 890,089 $736,858 $668,138 ========== ======== ======== Operating income: Paperboard........................................ $ 58,882 $ 79,281 $ 81,312 Tube, core, and composite container............... 20,715 18,477 18,974 Carton and custom packaging....................... 13,010 8,053 5,804 ---------- -------- -------- 92,607 105,811 106,090 Corporate expense................................... (11,878) (10,930) (9,894) ---------- -------- -------- Operating income.................................... 80,729 94,881 96,196 Interest expense.................................... (25,456) (16,072) (14,111) Interest income..................................... 603 334 312 Equity in income of unconsolidated affiliates....... 9,224 4,308 1,665 Other, net.......................................... (459) (433) (674) ---------- -------- -------- Income before income taxes and minority interest.... 64,641 83,018 83,388 Minority interest................................... (356) (730) (1,721) Provision for income taxes.......................... 23,216 30,470 30,543 ---------- -------- -------- Net income................................ $ 41,069 $ 51,818 $ 51,124 ========== ======== ======== Identifiable assets: Paperboard........................................ $ 456,343 $294,480 $263,596 Tube, core, and composite container............... 126,994 127,852 127,591 Carton and custom packaging....................... 241,688 171,244 139,395 Corporate......................................... 53,618 25,221 19,508 ---------- -------- -------- Total..................................... $ 878,643 $618,797 $550,090 ========== ======== ======== Depreciation and amortization: Paperboard........................................ $ 31,410 $ 21,185 $ 19,155 Tube, core, and composite container............... 7,580 7,808 7,099 Carton and custom packaging....................... 12,657 9,250 6,466 Corporate......................................... 1,094 462 941 ---------- -------- -------- Total..................................... $ 52,741 $ 38,705 $ 33,661 ========== ======== ======== Capital expenditures, excluding acquisitions of businesses: Paperboard........................................ $ 23,745 $ 26,382 $ 21,373 Tube, core, and composite container............... 4,550 6,966 8,331 Carton and custom packaging....................... 5,305 6,415 5,892 Corporate......................................... 2,096 953 679 ---------- -------- -------- Total..................................... $ 35,696 $ 40,716 $ 36,275 ========== ======== ========
39 41 CARAUSTAR INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of December 31, 1999: - Cash and Cash Equivalents. The carrying amount approximates fair value because of the short maturity of these instruments. - Long-Term Debt. The fair values of the Company's senior notes and revolving credit facility are based on the current rates available to the Company for debt of the same remaining maturity and, as of December 31, 1999, approximate the carrying amounts. The carrying amounts of the other notes payable are assumed to approximate fair value due to the short maturity and variable rate structure of the instruments. 40 42 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Caraustar Industries, Inc.: We have audited the accompanying consolidated balance sheets of CARAUSTAR INDUSTRIES, INC. (a North Carolina corporation) AND SUBSIDIARIES as of December 31, 1999 and 1998 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Caraustar Industries, Inc. and subsidiaries as of December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Atlanta, Georgia February 4, 2000 41 43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company had no disagreements on accounting or financial disclosure matters with its independent public accountants to report under this Item 9. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information contained under the caption "Election of Directors" in the Proxy Statement is incorporated herein by reference in response to this Item 10. The information in response to this Item 10 regarding the executive officers of the Company is contained in Item 1, Part I hereof under the caption "Executive Officers." ITEM 11. EXECUTIVE COMPENSATION Information contained under the caption "Executive Compensation" in the Proxy Statement, except the item captioned "Compensation Committee Report" is incorporated herein by reference in response to this Item 11. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information contained under the caption "Share Ownership" in the Proxy Statement is incorporated by reference herein in response to this Item 12. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Russell M. Robinson, II, Chairman of the Company's Board of Directors, is a shareholder in the firm of Robinson, Bradshaw & Hinson, P.A., the Company's principal outside legal counsel, which performed services for the Company during the last fiscal year and during the current fiscal year. Certain members of such firm beneficially owned approximately 115,000 of the Company's common shares as of March 1, 2000. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K a. Documents filed as part of the Report (1) The following financial statements of the Company and Report of Independent Public Accountants are included in Part II, Item 8 above. CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 42 44 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS (2) The Report of Independent Public Accountants as to Schedule and the following financial statement schedule are filed as part of the report: SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included elsewhere in the financial statements. (3) Exhibits: The Exhibits to this report on Form 10-K are listed in the accompanying Exhibit Index. b. Reports on Form 8-K. No current reports on Form 8-K were filed during the quarter ending December 31, 1999. 43 45 SCHEDULE II CARAUSTAR INDUSTRIES, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 (IN THOUSANDS)
BALANCE AT CHARGED TO BEGINNING COSTS AND BALANCE AT OF YEAR EXPENSES DEDUCTIONS* END OF YEAR ---------- ---------- ----------- ----------- 1997: Allowances for doubtful accounts receivable, returns, and discounts....................... $1,314 $4,734 $(4,909) $1,139 1998: Allowances for doubtful accounts receivable, returns, and discounts....................... $1,139 $6,301 $(6,371) $1,069 1999: Allowances for doubtful accounts receivable, returns, and discounts....................... $1,069 $4,866 $(3,517) $2,418
- --------------- * Principally charges for which reserves were provided, net of recoveries. 44 46 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To Caraustar Industries, Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of CARAUSTAR INDUSTRIES, INC. (a North Carolina corporation) AND SUBSIDIARIES as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 included in this Form 10-K and have issued our report thereon dated February 4, 2000. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14a.(2) is the responsibility of the Company's management, is presented for purposes of complying with the Securities and Exchange Commission's rules, and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP - ------------------------------------- ARTHUR ANDERSEN LLP Atlanta, Georgia February 4, 2000 45 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CARAUSTAR INDUSTRIES, INC. By: /s/ H. LEE THRASH, III ---------------------------------- H. Lee Thrash, III Vice President and Chief Financial Officer Date: March 23, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities indicated on March 23, 2000.
SIGNATURE --------- /s/ THOMAS V. BROWN - ------------------------------------------------------------ Thomas V. Brown, President and Chief Executive Officer (Principal Executive Officer); Director /s/ H. LEE THRASH, III - ------------------------------------------------------------ H. Lee Thrash, III, Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer); Director /s/ JAMES E. ROGERS - ------------------------------------------------------------ James E. Rogers, Director /s/ BOB M. PRILLAMAN - ------------------------------------------------------------ Bob M. Prillaman, Director /s/ RUSSELL M. ROBINSON, II - ------------------------------------------------------------ Russell M. Robinson, II, Chairman of the Board
46 48 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 3.01 -- Amended and Restated Articles of Incorporation of the Company (Incorporated by reference -- Exhibit 3.01 to Annual Report for 1992 on Form 10-K [SEC File No. 0-20646]) 3.02 -- Second Amended and Restated Bylaws of the Company (Incorporated by reference -- Exhibit 3.02 to Registration Statement on Form S-4 [SEC File No. 333-29937]) 4.01 -- Specimen Common Stock Certificate (Incorporated by reference -- Exhibit 4.01 to Registration Statement on Form S-1 [SEC File No. 33-50582]) 4.02 -- Articles 3 and 4 of the Company's Amended and Restated Articles of Incorporation (included in Exhibit 3.01) 4.03 -- Article II of the Company's Second Amended and Restated Bylaws (included in Exhibit 3.02) 4.04 -- Amended and Restated Rights Agreement, dated as of May 24, 1999, between Caraustar Industries, Inc. and The Bank of New York as Rights Agent (Incorporated by reference -- Exhibit 10.1 to current report on Form 8-K dated June 1, 1999 [SEC File No. 020646]) 4.05 -- Indenture, dated as of June 1, 1999, between Caraustar Industries, Inc. and The Bank of New York, as Trustee (Incorporated by reference -- Exhibit 4.05 to report on Form 10-Q for the quarter ended June 30, 1999 [SEC File No. 0-20646]) 4.06 -- First Supplemental Indenture, dated as of June 1, 1999, between Caraustar Industries, Inc. and The Bank of New York, as Trustee (Incorporated by reference -- Exhibit 4.06 to report on Form 10-Q for the quarter ended June 30, 1999 [SEC File No. 0-20646]) 10.01 -- Note Agreement, dated as of October 1, 1992, between the Company and the Prudential Insurance Company of America, regarding the Company's 7.89% Senior Subordinated Notes (Incorporated by reference -- Exhibit 10.02 to Annual Report for 1992 on Form 10-K [SEC File No. 0-20646]) 10.02 -- Amendment Agreement, dated as of June 2, 1995, between the Company and the Prudential Insurance Company of America regarding the Company's 7.89% Senior Subordinated Notes (Incorporated by reference -- Exhibit 10.03 to report on Form 10-Q for the quarter ended September 30, 1995 [SEC File No. 0-20646]) 10.03 -- Amendment Agreement, dated as of July 23, 1997, between the Company and the Prudential Insurance Company of America regarding the Company's 7.89% Senior Subordinated Notes (Incorporated by reference -- Exhibit 10.03 to report on Form 10-Q for the quarter ended June 30, 1997 [SEC File No. 0-20646]) 10.04 -- Amendment Agreement, dated as of August 12, 1998, between the Company and the Prudential Insurance Company of America regarding the Company's 7.89% Senior Subordinated Notes (Incorporated by reference -- Exhibit 10.04 to report on Form 10-Q for the quarter ended September 30, 1998 [SEC File No. 0-20646]) 10.05* -- Employment Agreement, dated December 31, 1990, between the Company and Thomas V. Brown (Incorporated by reference -- Exhibit 10.06 to Registration Statement on Form S-1 [SEC File No. 33-50582]) 10.06 -- Asset Purchase Agreement, dated August 7, 1992, between the Company and Domtar Gypsum Inc. (Incorporated by reference -- Exhibit 10.07 to Registration Statement on Form S-1 [SEC File No. 33-50582]) 10.07* -- Deferred Compensation Plan, together with copies of existing individual deferred compensation agreements (Incorporated by reference -- Exhibit 10.08 to Registration Statement on Form S-1 [SEC File No. 33-50582]) 10.08* -- 1987 Executive Stock Option Plan (Incorporated by reference -- Exhibit 10.09 to Registration Statement on Form S-1 [SEC File No. 33-50582])
47 49
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.09* -- 1993 Key Employees' Share Ownership Plan (Incorporated by reference -- Exhibit 10.10 to Registration Statement on Form S-1 [SEC File No. 33-50582]) 10.10 -- Energy Purchase Agreement, dated December 18, 1989, between Camden Paperboard Corporation and Camden Cogen, L.P. (Incorporated by reference -- Exhibit 10.11 to Registration Statement on Form S-1 [SEC File No. 33-50582]) 10.11* -- Incentive Bonus Plan of the Company (Incorporated by reference -- Exhibit 10.10 to Annual Report for 1993 on Form 10-K [SEC File No. 0-20646]) 10.12* -- 1996 Director Equity Plan of the Company (Incorporated by reference -- Exhibit 10.12 to report on Form 10-Q for the quarter ended March 31, 1996 [SEC File No. 0-20646]) 10.13* -- Amendment No. 1 to the Company's 1996 Director Equity Plan, dated July 16, 1998 (Incorporated by reference -- Exhibit 10.2 to Current Report on Form 8-K dated June 1, 1999 [SEC File No. 0-20646]) 10.14* -- 1998 Key Employee Incentive Compensation Plan (Incorporated by reference -- Exhibit 10.14 to Annual Report for 1997 on Form 10-K [SEC File No. 0-20646]) 10.15 -- Credit Agreement, dated as of July 23, 1997, by and among the Company, as Borrower, the banks listed therein, Bankers Trust Company, as Administrative Agent, NationsBank, N.A., as Syndication Agent, SunTrust Bank, Atlanta, as Documentation Agent, First Union National Bank, as Managing Agent and each of Credit Lyonnais, The Bank of New York, The Bank of Nova Scotia, The Bank of Tokyo -- Mitsubishi, Ltd., and Wachovia Bank, as Co-Agents (Incorporated by Reference -- Exhibit 10.13 to report on Form 10-Q for the Quarter Ended June 30, 1997 (SEC File No. 0-20646]) 10.16 -- Amendment No. 1 to Credit Agreement, dated as of October 8, 1997, by and among the Company, as Borrower, the banks listed therein, Bankers Trust Company, as Administrative Agent, NationsBank, N.A., as Syndication Agent, SunTrust Bank, Atlanta, as Documentation Agent, First Union National Bank, as Managing Agent and each of Credit Lyannais, The Bank of New York, The Bank of Nova Scotia, The Bank of Tokyo -- Mitsubishi, Ltd., and Wachovia Bank, as Co-Agents (Incorporated by reference -- Exhibit 10.15 to report on Form 10-Q for the quarter ended September 30, 1998 [SEC File No. 0-20646]) 10.17 -- Amendment No. 2 to Credit Agreement, dated as of October 30, 1998, by and among the Company, as Borrower, the banks listed therein, Bankers Trust Company, as Administrative Agent, NationsBank, N.A., as Syndication Agent, SunTrust Bank, Atlanta, as Documentation Agent, First Union National Bank, as Managing Agent and each of Credit Lyannais, The Bank of New York, The Bank of Nova Scotia, The Bank of Tokyo -- Mitsubishi, Ltd., and Wachovia Bank, as Co-Agents (Incorporated by reference -- Exhibit 10.16 to report on Form 10-Q for the quarter ended September 30, 1998 [SEC File No. 0-20646]) 10.18 -- Asset Purchase Agreement between Caraustar Industries, Inc., Sprague Paperboard, Inc. and International Paper Company, dated as of March 4, 1999 (Incorporated by reference -- Exhibit 10.17 to report on Form 10-Q for the quarter ended March 31, 1999 [SEC File No. 0-20646]) 12.01+ -- Computation of Ratio of Earnings to Fixed Charges 21.01+ -- Subsidiaries of the Company 23.01+ -- Consent of Arthur Andersen LLP 27.01+ -- Financial Data Schedule (For SEC purposes only)
- --------------- + Filed herewith * Management contract or compensatory plan required to be filed under Item 14(c) of Form 10-K and Item 601 of Regulation S-K of the Securities and Exchange Commission. 48 EX-12.01 2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.01 CARAUSTAR INDUSTRIES, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
------------------------------------------------------------- 1995 1996 1997 1998 1999 ------- -------- -------- -------- -------- Earnings: Income from continuing operations before income taxes, minority interest, reversal of loss on discontinued operations and cumulative effect of accounting changes $69,100 $ 95,230 $83,388 $ 83,018 $64,641 Equity in income of less-than-50-percent-owned entities -- (104) (40) 12 0 Fixed charges 9,716 12,865 16,536 19,469 30,528 Less capitalized interest expense -- -- -- (219) (626) ------- -------- ------- -------- ------- Earnings $78,816 $107,991 $99,884 $102,280 $94,543 ======= ======== ======= ======== ======= Fixed charges: Interest expense $ 6,955 $ 10,698 $14,111 $ 16,072 $25,735 Amortization of debt issuance costs 116 348 -- -- 142 Estimate of the interest cost within rental expense 2,645 1,819 2,425 3,178 4,025 Capitalized interest expense -- -- -- 219 626 ------- -------- ------- -------- ------- Fixed charges $ 9,716 $ 12,865 $16,536 $ 19,469 $30,528 ======= ======== ======= ======== ======= Ratio of earnings to fixed charges 8.11 8.39 6.04 5.25 3.10 ======= ======== ======= ======== =======
EX-21.01 3 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.01 SUBSIDIARIES* OF CARAUSTAR INDUSTRIES, INC.
STATE OF NAME INCORPORATION Trade, D/B/A Names ----- ------------- ------------------ Austell Box Board Corporation Georgia Buffalo Paperboard Corporation New York Camden Paperboard Corporation New Jersey Caraustar Custom Packaging Group, Inc. Delaware Caraustar Custom Packaging Group (Maryland), Inc. Maryland Caraustar Exports, Inc. U.S. Virgin Islands Caraustar Industrial & Consumer Products Group, Inc. Delaware Caraustar Industrial & Consumer Products Group, Ltd. Leyland, Lancaster, United Kingdom Caraustar Paperboard Corporation Ohio ** Caraustar de Mexico, S.A. de C.V. (65% owned) Mexico Caraustar Recovered Fiber Group, Inc. Delaware Carolina Component Concepts, Inc. North Carolina Carolina Converting, Inc. North Carolina Carolina Paper Board Corporation North Carolina Carotell Paper Board Corporation South Carolina Chattanooga Paperboard Corporation Tennessee Chesapeake Paperboard Company Maryland Chicago Paperboard Corporation Illinois Cincinnati Paperboard Corporation Ohio Columbus Recycling, Inc. Georgia Federal Transport, Inc. Ohio Halifax Paperboard Company, Inc. North Carolina Macon Recycling, Inc. Georgia McQueeny Gypsum Corporation Delaware MilPak, Inc. New Jersey Oak Tree Packaging Corporation New Jersey PBL, Inc. Delaware Paper Recycling, Inc. Georgia Paragon Plastics, Inc. (80% owned) South Carolina Reading Paperboard Corporation Pennsylvania Richmond Paperboard Corporation Virginia Sprague Paperboard, Inc. Connecticut Star Paper Tube, Inc. South Carolina Sweetwater Paper Board Company, Inc. Georgia
* Each subsidiary is wholly-owned (directly or, indirectly) by Caraustar Industries, Inc. unless otherwise indicated. ** Does business in Ohio as Rittman Paperboard and Cleveland Paper Stock and in Iowa as Tama Paperboard. EX-23.01 4 CONSENT OF ARTHUR ANDERSON LLP 1 EXHIBIT 23.01 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountant, we hereby consent to the incorporation of our reports dated February 4, 2000, included in this Form 10-K, into Caraustar Industries, Inc.'s previously filed Registration Statements on Forms S-8 (File No. 33-77682, File No. 33-75838, File No. 33-53808, File No. 33-53726, File No. 333-02948, and File No. 333-57965), Forms S-3 (File No. 333-66943 and File No. 333-6555) and Forms S-4 (File No. 333-66945 and File No. 333-31618). /s/ ARTHUR ANDERSEN LLP - ----------------------- ARTHUR ANDERSEN LLP Atlanta, Georgia March 24, 1999 EX-27.01 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 18,771 0 108,819 0 89,770 227,122 727,314 247,458 878,643 127,396 409,739 0 0 2,549 275,910 878,643 890,089 890,089 809,360 809,360 0 0 25,456 64,641 23,216 41,069 0 0 0 41,069 1.64 1.63 RECEIVABLES - ARE PRESENTED NET OF THE ALLOWANCES FOR DOUBTFUL ACCOUNTS. BONDS - REPRESENT REVOLVING CREDIT LOANS AND LONG-TERM DEBT, LESS CURRENT MATURITIES.
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