SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 2001
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 000-22117
Delaware 06-1269834
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(State of Incorporation) (I.R.S. Employer Identification No.)
4 Landmark Square, Stamford, Connecticut 06901
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(Address of Principal Executive Offices) (Zip Code)
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Registrant's telephone number, including area code (203) 975-7110
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
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 for 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]
As of March 1, 2002, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $328.4 million.
As of March 1, 2002, the number of shares outstanding of the Registrant's Common Stock, par value $0.01 per share, was 18,005,685.
Documents Incorporated by Reference:
Portions of the Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held on May 29, 2002 are incorporated by reference in Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
Page
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Part I........................................................................................... 1
Item 1. Business........................................................................... 1
Item 2. Properties.........................................................................12
Item 3. Legal Proceedings..................................................................13
Item 4. Submission of Matters to a Vote of Security Holders................................13
PART II..........................................................................................14
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..............14
Item 6. Selected Financial Data............................................................14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................35
Item 8. Financial Statements and Supplementary Data........................................36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.....................................................................36
PART III.........................................................................................37
Item 10. Directors and Executive Officers of the Registrant.................................37
Item 11. Executive Compensation.............................................................41
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................41
Item 13. Certain Relationships and Related Transactions.....................................41
PART IV..........................................................................................42
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K..................42
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PART I
Item 1. Business.
General
We are a leading North American manufacturer of metal and plastic consumer goods packaging products. We had consolidated net sales of $1.941 billion in 2001. Our products are used for a wide variety of end markets and we have 59 manufacturing plants throughout North America. Our product lines include:
o steel and aluminum containers for human and pet food; and
o custom designed plastic containers and closures for personal care, health care, pharmaceutical, household and industrial chemical, food, pet care, agricultural chemical, automotive and marine chemical products.
We are the largest manufacturer of metal food containers in North America, with a unit volume market share in the United States of approximately 47% in 2001. Our leadership in this market is driven by our high levels of quality, service and technological support, low cost producer position, strong long-term customer relationships and our proximity to customers through our widespread geographic presence. We believe we have the most comprehensive equipment capabilities in the industry. For 2001, our metal food container business had net sales of $1,401.1 million (approximately 72% of our total net sales) and income from operations before net rationalization charges of $114.2 million (approximately 68% of our total income from operations before net rationalization charges).
We are also a leading manufacturer of plastic containers in North America for personal care products. Our success in the plastic packaging market is largely due to our demonstrated ability to provide high levels of quality, service and technological support, our value-added design-focused products and our extensive geographic presence. We produce plastic containers from a full range of resin materials and offer a comprehensive array of molding and decorating capabilities. For 2001, our plastic container business had net sales of $493.6 million (approximately 26% of our total net sales) and income from operations before rationalization charges of $49.5 million (approximately 30% of our total income from operations before net rationalization charges).
Our customer base includes some of the world's best-known branded consumer products companies. Our philosophy has been to develop long-term customer relationships by acting in partnership with our customers by providing reliable quality, service and technological support and utilizing our low cost producer position. The strength of our customer relationships is evidenced by our large number of long-term supply contracts, our high retention of customers' business and our continued recognition from customers, as demonstrated by the many quality and service awards we have received. We estimate that in 2002 approximately 85% of our projected metal food container sales and more than a majority of our projected plastic container sales will be under long-term supply arrangements.
Our objective is to increase shareholder value through efficiently deploying our capital and management resources to grow our business and reduce costs in our existing operations and to make acquisitions at attractive cash flow multiples. We believe we will accomplish this goal because of our leading market positions and management expertise in acquiring, financing, integrating and efficiently operating consumer goods packaging businesses.
We were founded in 1987 by our Co-Chief Executive Officers, R. Philip Silver and D. Greg Horrigan, former members of senior management of the packaging operations of Continental Group Inc., or Continental Can, which in the mid-1980's was one of the largest packaging companies in the world. Our senior management has on average 29 years of experience in the packaging industry. Mr. Silver and
Mr. Horrigan have approximately a 40% ownership interest in Silgan Holdings. Management's large ownership interest in Silgan Holdings fosters an entrepreneurial management style and places a primary focus on creating shareholder value.
Our History
Since our inception in 1987, we have acquired seventeen businesses, including most recently RXI Holdings, Inc., or RXI, in October 2000. As a result of the benefits of these acquisitions and organic growth, we have increased our overall share of the U.S. metal food container market from approximately 10% in 1987 to approximately 47% in 2001. Our plastic container and closure business has also improved its market position since 1987, with sales increasing more than fivefold to $493.6 million in 2001. The following chart shows our acquisitions since our inception:
Acquired Business Year Products
----------------- ---- --------
Nestle Food Company's metal container 1987 Metal food containers
manufacturing division
Monsanto Company's plastic container business 1987 Plastic containers
Fort Madison Can Company of The Dial 1988 Metal food containers
Corporation
Seaboard Carton Division of Nestle Food 1988 Paperboard containers
Company
Aim Packaging, Inc. 1989 Plastic containers
Fortune Plastics Inc. 1989 Plastic containers
Express Plastic Containers Limited 1989 Plastic containers
Amoco Container Company 1989 Plastic containers
Del Monte Corporation's U.S. can 1993 Metal food containers
manufacturing operations
Food Metal and Specialty business of 1995 Metal food containers,
American National Can Company steel closures and Omni
plastic containers
Finger Lakes Packaging Company, Inc., a 1996 Metal food containers
subsidiary of Agrilink Foods, Inc.
Alcoa Inc.'s North American aluminum roll-on 1997 Aluminum roll-on
closure business closures
Rexam plc's North American plastic container 1997 Plastic containers and
business closures
Winn Packaging Co. 1998 Plastic containers
Campbell Soup Company's steel container 1998 Metal food containers
manufacturing business
Clearplass Containers, Inc. 1998 Plastic containers
RXI Holdings, Inc. 2000 Plastic containers and
plastic closures, caps,
sifters and fitments
Our Strategy
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We intend to enhance our position as a leading supplier of consumer goods packaging products by continuing to aggressively pursue a strategy designed to achieve future growth and increase shareholder value by focusing on the following key elements:
Expand Through Acquisitions at Attractive Cash Flow Multiples and Through Internal Growth
We intend to continue to increase our market share in our current business lines through acquisitions and internal growth. We use a disciplined approach to acquire businesses at attractive cash flow multiples. As a result, we expect to continue to expand and diversify our customer base, geographic presence and product lines. This strategy has enabled us to rapidly increase our net sales and income from operations before rationalization and stock option charges, which have grown at a compound annual growth rate of 12.3% and 11.6%, respectively, since 1994.
During the past fourteen years, the metal food container market has experienced significant consolidation primarily due to the desire by food processors to reduce costs and focus resources on their core operations. Our acquisitions of the metal food container manufacturing operations of Nestle Food
Company, or Nestle, The Dial Corporation, or Dial, Del Monte Corporation, or Del Monte, Agrilink Foods, Inc., or Agrilink, and Campbell Soup Company, or Campbell, reflect this trend. We estimate that approximately 15% of the market for metal food containers is still served by self-manufacturers.
We have improved our market position for our plastic container and closure business since 1987, with sales increasing more than fivefold to $493.6 million in 2001. We achieved this improvement primarily through strategic acquisitions, including most recently RXI, as well as through internal growth. The plastic container and closure business of the consumer goods packaging industry is highly fragmented, and we intend to pursue further consolidation opportunities in this market. We also believe that we can successfully apply our acquisition and operating expertise to new markets of the consumer goods packaging industry. For example, with the acquisition of RXI we expanded our business into plastic closures, caps, sifters and fitments and thermoformed plastic tubs. We expect to continue to generate internal growth in our plastic container and closure business. For example, we intend to aggressively market our plastic closures to existing customers of our plastic container business. Additionally, we intend to continue to expand our customer base in the markets that we serve, such as the personal care, health care, pharmaceutical, household and industrial chemical, food, pet care, agricultural chemical, automotive and marine chemical markets.
Enhance Profitability of Acquired Companies Through Productivity Improvements and Cost Reductions
We intend to continue to enhance profitability through productivity and cost reduction opportunities from acquired businesses. The additional sales and production capacity provided through acquisitions have enabled us to rationalize plant operations and decrease overhead costs through plant closings and downsizings. In addition, we expect that our acquisitions will continue to enable us to realize manufacturing efficiencies as a result of optimizing production scheduling and minimizing product transportation costs. We expect to continue to benefit from our economies of scale and from the elimination of redundant selling and administrative functions. In addition to the benefits realized through the integration of acquired businesses, we have improved the operating performance of our plant facilities by making capital investments for productivity improvements and manufacturing cost reductions.
Supply "Best Value" Packaging Products With High Levels of Quality, Service and Technological Support
Since our inception we have been, and intend to continue to be, devoted to consistently supplying our products with the combination of quality, price and service that our customers consider to be "best value." Within our metal food container business, we focus on providing high quality and high levels of service and utilizing our low cost producer position. We also offer value added features for our metal food containers such as easy-open ends. Within our plastic container and closure business, we provide high levels of quality and service and focus on value added, custom designed plastic containers to meet changing product and packaging demands of brand owners. Furthermore, with the acquisition of RXI, we believe that we are one of the few plastic container packaging businesses that can custom design and manufacture both plastic containers and plastic closures. We will continue to supply customized products that can be delivered quickly to our customers with superior levels of design, development and technology support.
Maintain Low Cost Producer Position
We will continue pursuing opportunities to strengthen our low cost position in the metal food container and plastic container segments by:
o maintaining a flat, efficient organizational structure, resulting in low selling, general and administrative expenses as a percentage of total net sales;
o achieving and maintaining our economies of scale;
o investing in new technologies to increase manufacturing and production efficiency;
o rationalizing our existing plant structure; and
o serving our customers from our strategically located plants.
Through our facilities dedicated to our metal food container products, we believe that we provide the most comprehensive equipment capabilities in the industry. Through our facilities dedicated to our plastic container and closure products, we have the capacity to manufacture customized products across the entire spectrum of resin materials, decorating techniques and molding processes required by our customers. We intend to leverage our manufacturing, design, and engineering capabilities to continue to create cost-effective manufacturing systems that will drive our improvements in product quality, operating efficiency and customer support.
Utilize Leverage to Support Growth and Increase Shareholder Value
Our financial strategy is to use leverage to support our growth and increase shareholder returns. Our stable and predictable cash flow, generated largely as a result of our long-term customer relationships and generally recession resistant business, supports our financial strategy. We intend to continue using leverage, supported by our stable cash flows, to make value-enhancing acquisitions. In the absence of attractive acquisition opportunities, we intend to use our free cash flow to repay indebtedness or for other permitted purposes. In 2001, for example, we did not complete any acquisitions, and we reduced our total debt by $86.3 million as compared to 2000. Similarly, in 1999, we did not complete any acquisitions, and we reduced our total debt by $44.7 million despite, among other things, the incurrence of $16.6 million of debt for common stock repurchases.
Business Segments
We are a holding company that conducts our business through two wholly owned operating subsidiaries, Silgan Containers Corporation, or Silgan Containers, and Silgan Plastics Corporation, or Silgan Plastics. Silgan Containers includes the metal food container operations and Silgan Plastics includes the plastic container and closure operations.
Metal Food Containers--72% of our total net sales in 2001
We are the largest manufacturer of metal food containers in North America, with a unit volume market share in the United States of 47% in 2001. Our metal food container business is engaged in the manufacture and sale of steel and aluminum containers that are used primarily by processors and packagers for food products, such as metal containers for soup, vegetables, fruit, meat, tomato based products, coffee, seafood, adult nutritional drinks, pet food and other miscellaneous food products. For 2001, our metal food container business had net sales of $1,401.1 million (approximately 72% of our total net sales) and income from operations before net rationalization charges of $114.2 million (approximately 68% of our total income from operations before net rationalization charges). Since 1994, our metal food container business has realized compound annual unit sales growth of approximately 10%. We estimate that approximately 85% of our projected metal food container sales in 2002 will be pursuant to long-term supply arrangements.
Although metal containers face competition from plastic, paper, glass and composite containers, we believe metal containers are superior to plastic and paper containers in applications where the contents are processed at high temperatures, where the contents are packaged in larger consumer or institutional quantities (8 to 64 oz.) or where the long-term storage of the product is desirable while
maintaining the product's quality. We also believe that metal containers are generally more desirable than glass containers because metal containers are more durable and less costly to transport.
Plastic Containers--26% of our total net sales in 2001
We are one of the leading manufacturers of custom designed high density polyethylene, or HDPE, and polyethylene terephthalate, or PET, containers for the personal care market in North America. We produce plastic containers from a full range of resin materials and offer a comprehensive array of molding and decorating capabilities. Approximately 60% of Silgan Plastics' sales in 2001 were to the personal care and health care markets. For 2001, Silgan Plastics had net sales of $493.6 million (approximately 26% of our total net sales) and income from operations before rationalization charges of $49.5 million (approximately 30% of our total income from operations before net rationalization charges). Since 1987, we have improved our market position for our plastic container and closure business, with sales increasing more than fivefold.
We manufacture custom designed and stock HDPE containers for: personal care and health care products, including containers for shampoos, conditioners, hand creams, lotions, cosmetics and toiletries; household and industrial chemical products, including containers for scouring cleaners, cleaning agents and lawn and garden chemicals; and pharmaceutical products, including containers for tablets, antacids and eye cleaning solutions. We also manufacture custom designed and stock PET containers for mouthwash, respiratory and gastrointestinal products, liquid soap, skin care lotions, peanut butter, salad dressings, condiments, premium bottled water and liquor. As a result of our acquisition of RXI, we manufacture plastic containers, closures, caps, sifters and fitments for food, household and pet care products, including salad dressings, peanut butter, spices, liquid margarine, powdered drink mixes, arts and crafts supplies and kitty litter, as well as thermoformed plastic tubs for personal care and household products, including soft fabric wipes. Additionally, we manufacture our licensed Omni plastic container (a multi-layer microwaveable and retortable plastic bowl) for food products and our proprietary Polystar easy-open plastic end which we market with our Omni plastic container as an all-plastic microwaveable package.
Our leading position in the plastic container market is largely driven by our rapid response to our customers' design, development and technology support needs. Our value-added, diverse product line is the result of our ability to produce plastic containers from a full range of resin materials using a broad array of manufacturing, molding and decorating capabilities. We benefit from our unique scale and nationwide presence, as significant consolidation is occurring in many of our customers' markets. Through these capabilities, we are well-positioned to serve our personal care market customers, who demand customized solutions as they continue to seek innovative means to differentiate their products in the marketplace using packaging.
Metal Closures--2% of our total net sales in 2001
Historically, we have reported a third business segment, specialty packaging, in our results of operations. We manufactured and sold in our specialty packaging business steel closures for glass and plastic containers, aluminum roll-on closures for glass and plastic containers, our licensed Omni plastic container, our proprietary Polystar easy-open plastic end and paperboard containers, all for use in the food and beverage industries.
On July 1, 2001, we formed a joint venture company with Schmalbach-Lubeca AG that supplies an extensive range of metal and plastic closures to the food and beverage industries in North America. The new venture operates under the name White Cap LLC, or White Cap. We contributed to the venture certain metal closure assets and liabilities, including our manufacturing plants in Evansville and Richmond, Indiana, in return for a 35% interest in the joint venture and $32.4 million of cash proceeds from the joint venture.
As a result of this transaction we no longer report the financial results of our remaining specialty packaging business as a separate business segment. We report the results of our Omni plastic container and Polystar easy-open plastic end businesses with our plastic container business and the results of our paperboard container business with our metal food container business. We also report the historical results of our metal closure business separately. We have restated prior year amounts to conform to this presentation.
Manufacturing and Production
As is the practice in the industry, most of our customers provide us with quarterly or annual estimates of products and quantities pursuant to which periodic commitments are given. These estimates enable us to effectively manage production and control working capital requirements. We schedule our production to meet customers' requirements. Because the production time for our products is short, the backlog of customer orders in relation to our sales is not material. As of March 1, 2002, we operated 59 manufacturing facilities, geographically dispersed throughout the United States and Canada, that serve the distribution needs of our customers.
Metal Food Container Business
The manufacturing operations of our metal food container business include cutting, coating, lithographing, fabricating, assembling and packaging finished cans. We use three basic processes to produce cans. The traditional three-piece method requires three pieces of flat metal to form a cylindrical body with a welded side seam, a bottom and a top. High integrity of the side seam is assured by the use of sophisticated electronic weld monitors and organic coatings that are thermally cured by induction and convection processes. The other two methods of producing cans start by forming a shallow cup that is then formed into the desired height using either the draw and iron process or the draw and redraw process. Using the draw and redraw process, we manufacture steel and aluminum two-piece cans, the height of which generally does not exceed the diameter. For cans the height of which is greater than the diameter, we manufacture steel two-piece cans by using a drawing and ironing process. Quality and stackability of these cans are comparable to that of the shallow two-piece cans described above. We manufacture can bodies and ends from thin, high-strength aluminum alloys and steels by utilizing proprietary tool and die designs and selected can making equipment.
Plastic Container Business
We utilize two basic processes to produce plastic containers. In the extrusion blowmolding process, pellets of plastic resin are heated and extruded into a tube of plastic. A two-piece metal mold is then closed around the plastic tube and high pressure air is blown into it causing a bottle to form in the mold's shape. In the injection and injection stretch blowmolding processes, pellets of plastic resin are heated and injected into a mold, forming a plastic preform. The plastic preform is then blown into a bottle-shaped metal mold, creating a plastic bottle.
We also manufacture plastic closures, caps, sifters and fitments using runnerless injection molding technology. In this process, pellets of plastic resin are melted and forced under pressure into a mold, where they take the mold's shape. Our thermoformed plastic tubs are manufactured by melting pellets of plastic resin into a plastic sheet. The plastic sheets are then stamped by hot molds to form plastic tubs. Our Omni plastic containers are manufactured using a plastic injection blowmolding process where dissimilar pellets of plastic are heated and co-injected in a proprietary process to form a five-layer preform, which is immediately transferred to a blowmold for final shaping. We designed the equipment for this manufacturing process, and the equipment utilizes a variety of proprietary processes to make rigid plastic containers capable of holding processed foods for extended shelf lives. We manufacture Omni plastic containers pursuant to a royalty-free, perpetual license with American National Can Company, or ANC, which was entered into at the time of our acquisition of the Food Metal and Specialty business of ANC.
We have state-of-the-art decorating equipment, including several of the largest sophisticated decorating facilities in the country. Our decorating methods for plastic containers are in-mold labeling, which applies a plastic film label to the bottle during the blowing process, and post-mold decoration. Post-mold decoration includes:
o silk screen decoration which enables the applications of images in multiple colors to the bottle;
o pressure sensitive decoration which uses a plastic film or paper label with an adhesive;
o heat transfer decoration which uses a plastic coated label applied by heat; and
o hot stamping decoration which transfers images from a die using metallic foils.
Raw Materials
We do not believe that we are materially dependent upon any single supplier for any of our raw materials, and, based upon the existing arrangements with suppliers, our current and anticipated requirements and market conditions, we believe that we have made adequate provisions for acquiring raw materials. Increases in the prices of raw materials have generally been passed along to our customers in accordance with our long-term supply arrangements and otherwise.
Metal Food Container Business
We use tin plated and chromium plated steel, aluminum, copper wire, organic coatings, lining compound and inks in the manufacture and decoration of our metal food container products. Our material requirements are supplied through contracts and purchase orders with suppliers with whom we have long-term relationships. If our suppliers fail to deliver under their arrangements, we would be forced to purchase raw materials on the open market, and no assurances can be given that we would be able to make the purchases at comparable prices or terms. We believe that we will be able to purchase sufficient quantities of steel and aluminum can sheet for the foreseeable future.
Plastic Container Business
The raw materials we use in our plastic container and closure business are primarily resins in pellet form such as virgin HDPE, virgin PET, recycled HDPE, recycled PET, polypropylene and, to a lesser extent, polystyrene, low density polyethylene, polyethylene terephthalate glycol, polyvinyl chloride and medium density polyethylene. Our resin requirements are acquired through multi-year arrangements for specific quantities of resins with several major suppliers of resins. The price that we pay for resin raw materials is not fixed and is subject to market pricing. We believe that we will be able to purchase sufficient quantities of resins for the foreseeable future.
Sales and Marketing
Our philosophy has been to develop long-term customer relationships by acting in partnership with our customers, providing reliable quality and service. We market our products in most areas of North America primarily by a direct sales force and for our plastic container business, in part, through a network of distributors. Because of the high cost of transporting empty containers, our metal food and plastic container businesses generally sell to customers within a 300 mile radius of their manufacturing plants.
In 2001, 2000, and 1999, approximately 11%, 12%, and 12%, respectively, of our sales were to Nestle; approximately 10%, 11%, and 11%, respectively, of our sales were to Del Monte; and
approximately 12%, 11% and 11%, respectively, of our sales were to Campbell. No other customer accounted for more than 10% of our total sales during those years.
Metal Food Container Business
We are the largest manufacturer of metal food containers in North America, with a unit sale market share in 2001 in the United States of approximately 47%. Our largest customers for this segment include Nestle, Del Monte, Campbell, Hormel Foods Corp., or Hormel, Kraft Foods Inc., or Kraft, ConAgra Foods Inc., Unilever, N.V., General Mills, Inc., Dial and Agrilink.
We have entered into multi-year supply arrangements with many of our customers, including Nestle, Del Monte, Campbell and several other major food producers. We estimate that approximately 85% of our projected metal food container sales in 2002 will be pursuant to multi-year supply arrangements. Historically, we have been successful in continuing these multi-year supply arrangements with our customers.
Since our inception in 1987, we have supplied Nestle with substantially all of its U.S. metal container requirements. In 2001, our total sales of metal containers to Nestle were $218.4 million.
We currently have three supply agreements with Nestle under which we supply Nestle with a large majority of its U.S. metal container requirements (representing approximately 8.4% of our total 2001 sales and, together with additional sales to Nestle under purchase orders, approximately 11.2% of our total 2001 sales). The terms of the Nestle agreements were recently extended for an additional seven years through 2008 for approximately half of the metal container sales under the Nestle agreements, in return for certain price reductions for metal containers that began in 2001. These price reductions did not materially affect our financial condition or results of operations. The terms of the Nestle agreements for the remaining metal containers currently supplied thereunder continue through 2004.
The Nestle agreements provide for certain prices and specify that those prices will be increased or decreased based upon cost change formulas. These agreements contain provisions that require us to maintain levels of product quality, service and delivery in order to retain the business. In the event we breach any one of the agreements, Nestle may terminate the agreement but the other Nestle agreements would remain in effect.
Under limited circumstances, Nestle may provide to us a competitive bid for metal containers sales under these agreements. We have the right to retain the business subject to the terms of the bid. In the event we choose not to match the bid, the Nestle agreements will terminate only with respect to the metal containers which are the subject of the bid.
In connection with our acquisition of Del Monte's U.S. metal container manufacturing operations in December 1993, we entered into a supply agreement with Del Monte. Del Monte has agreed to purchase from us substantially all of its annual requirements for metal containers to be used for the packaging of food and beverages in the United States. The term of the Del Monte agreement continues until December 21, 2006. In 2001, our sales of metal containers to Del Monte amounted to $195.4 million.
The Del Monte agreement provides certain prices for our metal containers and specifies that those prices will be increased or decreased based upon specified cost change formulas. Del Monte may, under certain circumstances, receive proposals from independent commercial can manufacturers for the supply of containers of a type and quality similar to the metal containers that we furnish to Del Monte. The proposals must be for the remainder of the term of the Del Monte agreement and for 100% of the annual volume of containers at one or more of Del Monte's processing facilities. We have the right to retain the business subject to the terms and conditions of the competitive proposal. In addition, during
the term of our agreement, Del Monte is not permitted to purchase pursuant to the proposals more than 50% of its metal containers from any other suppliers.
In connection with our June 1998 acquisition of the steel container manufacturing business of Campbell, or CS Can, we entered into a ten-year supply agreement with Campbell. Campbell has agreed to purchase from us substantially all of its steel container requirements to be used for the packaging of foods and beverages in the United States. In 2001, our sales of metal containers to Campbell were $236.4 million.
The Campbell agreement provides certain prices for containers supplied by us to Campbell and specifies that those prices will be increased or decreased based upon specified cost change formulas. The Campbell agreement permits Campbell, beginning in June 2003, to receive proposals from independent commercial can manufacturers for the supply of containers of a type and quality similar to the metal containers that we supply to Campbell. The proposals must be for the remainder of the term of the Campbell agreement and for 100% of the annual volume of containers at one or more of Campbell's food processing plants. We have the right to retain the business subject to the terms and conditions of the competitive proposal. Upon any material breach by us, Campbell has the right to terminate this agreement. In addition, Campbell has the right, at the end of the term of the Campbell agreement or upon the occurrence of specified material defaults under other agreements with Campbell, to purchase from us the assets used to manufacture containers for Campbell. These assets are located at the facilities we lease from Campbell. The purchase price for the assets would be determined at the time of purchase in accordance with an agreed upon formula that is based upon the net book value of the assets.
Plastic Container Business
We are one of the leading manufacturers of custom designed and stock HDPE and PET containers sold in North America. We market our plastic containers and closures in most areas of North America through a direct sales force, through a large network of distributors and, more recently, through e-commerce.
We are a leading manufacturer of plastic containers in North America for personal care products. Approximately 60% of our plastic containers are sold for personal care and health care products, such as hair care, skin care and oral care, and pharmaceutical products. Our largest customers in these product segments include Unilever Home and Personal Care North America (a unit of Unilever, N.V.), Pfizer Inc., The Procter & Gamble Company, L'Oreal Retail Division of Cosmair, Inc., Avon Products Inc., Alberto Culver USA, Inc. and Johnson & Johnson.
We also manufacture plastic containers for food and beverage, pet care and household and industrial chemical products. Customers in these product segments include The Procter & Gamble Company, Kraft, Nestle's Purina Pet Care, The Clorox Company and S.C. Johnson & Sons, Inc. In addition, we manufacture plastic closures, caps, sifters and fitments for food, household and pet care products, as well as thermoformed plastic tubs for personal care and household products and Omni plastic bowls for microwaveable prepared foods. Customers in these product segments include Lipton (a unit of Unilever Home and Personal Care North America), The Kroger Company, McCormick & Co., Nice-Pak Products, Inc., Nestle's Purina Pet Care, Campbell and Hormel.
We have arrangements to sell some of our plastic containers and closures to distributors, who in turn resell those products primarily to regional customers. Plastic containers sold to distributors are manufactured by using generic and custom molds with decoration added to meet the end users' requirements. The distributors' warehouses and their sales personnel enable us to market and inventory a wide range of such products to a variety of customers.
We have written purchase orders or contracts for the supply of containers with the majority of our customers. In general, these purchase orders and contracts are for containers made from proprietary molds and are for a duration of one to seven years.
Competition
The packaging industry is highly competitive. We compete in this industry with other packaging manufacturers as well as fillers, food processors and packers who manufacture containers for their own use and for sale to others. We attempt to compete effectively through the quality of our products, competitive pricing and our ability to meet customer requirements for delivery, performance and technical assistance.
Because of the high cost of transporting empty containers, our metal food and our plastic container businesses generally sell to customers within a 300 mile radius of our manufacturing plants. Strategically located existing plants give us an advantage over competitors from other areas, but we could be disadvantaged by the relocation of a major customer.
Metal Food Container Business
Of the commercial metal food container manufacturers, Crown Cork and Seal Company, Inc. and Ball Corporation are our most significant national competitors. As an alternative to purchasing containers from commercial can manufacturers, customers have the ability to invest in equipment to self-manufacture their containers.
Although metal containers face competition from plastic, paper, glass and composite containers, we believe that metal containers are superior to plastic and paper containers in applications where the contents are processed at high temperatures, where the contents are packaged in larger consumer or institutional quantities (8 to 64 oz.) or where long-term storage of the product is desirable while maintaining the product's quality. We also believe that metal containers are more desirable generally than glass containers because metal containers are more durable and less costly to transport.
Plastic Container Business
Our plastic container and closure business competes with a number of large national producers of plastic containers and closures for personal care, health care, pharmaceutical, household and industrial chemical, food, pet care, agricultural chemical, automotive and marine chemical products. These competitors include Owens-Illinois, Inc., Crown Cork and Seal Company, Inc., Plastipak Packaging Inc., Consolidated Container Company LLC and Rexam plc. To compete effectively in the constantly changing market for plastic containers and closures, we must remain current with, and to some extent anticipate, innovations in resin composition and applications and changes in the technology for the manufacturing of plastic containers and closures.
Employees
As of December 31, 2001, we employed approximately 1,400 salaried and 6,000 hourly employees on a full-time basis. Approximately 49% of our hourly plant employees as of that date were represented by a variety of unions. In addition, as of December 31, 2001, in connection with our acquisition of Campbell's steel container manufacturing business, Campbell provided us with approximately 20 salaried and 200 hourly employees on a full-time basis at one of the facilities that we lease from Campbell.
Our labor contracts expire at various times between 2002 and 2005. As of December 31, 2001, contracts covering approximately 6% of our hourly employees will expire during 2002. We expect no
significant changes in our relations with these unions. We believe that we have a good relationship with our employees.
Regulation
We are subject to federal, state and local environmental laws and regulations. In general, these laws and regulations limit the discharge of pollutants into the environment and establish standards for the treatment, storage, and disposal of solid and hazardous waste. We believe that all of our facilities are either in compliance in all material respects with all presently applicable environmental laws and regulations or are operating in accordance with appropriate variances, delayed compliance orders or similar arrangements.
In addition to costs associated with regulatory compliance, we may be held liable for alleged environmental damage associated with the past disposal of hazardous substances. Those that generate hazardous substances that are disposed of at sites at which environmental problems are alleged to exist, as well as the owners of those sites and other classes of persons, are subject to claims under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or CERCLA, regardless of fault or the legality of the original disposal. CERCLA and many similar state statutes may hold a responsible party liable for the entire cleanup cost at a particular site even though that party may not have caused the entire problem. Other state statutes may impose proportionate rather than joint and several liability. The federal Environmental Protection Agency or a state agency may also issue orders requiring responsible parties to undertake removal or remedial actions at sites.
We are also subject to the Occupational Safety and Health Act and other laws regulating noise exposure levels and other safety and health concerns in the production areas of our plants.
On June 18, 2001, we received a fine from the Jefferson County, Alabama Department of Health for $2.3 million for alleged air violations at our Tarrant City, Alabama leased facility. The alleged violations stem from activities occurring during the facility's ownership by a predecessor owner, which we discovered and voluntarily disclosed to the Jefferson County agency last year. Initial review of the fine indicates that most of it is related to our alleged "economic benefit" for operating certain equipment without upgraded control devices that the former owner should have installed. Based on the discovery of these alleged violations, we filed an indemnity claim against the former owner seeking to offset any costs or penalties we incur. We are reviewing this matter with Jefferson County, as well as all of our legal options. We do not expect to incur any material liability in excess of the indemnification available to us.
Our management does not believe that any of the regulatory matters described above, individually or in the aggregate, will have a material effect on our capital expenditures, earnings, financial position or competitive position.
Research and Product Development
Our research, product development and product engineering efforts relating to our metal food container business are conducted at our research facility in Oconomowoc, Wisconsin. Our research, product development and product engineering efforts with respect to our plastic container business are performed by our manufacturing and engineering personnel located at our Norcross, Georgia facility. The amounts we have spent on research and development during the last three fiscal years are not material.
Item 2. Properties.
Our principal executive offices are located at 4 Landmark Square, Stamford, Connecticut 06901. The administrative headquarters and principal places of business for our metal food container and plastic container businesses are located at 21800 Oxnard Street, Woodland Hills, California 91367 and 14515 N. Outer Forty, Chesterfield, Missouri 63017, respectively. We lease all of these offices.
We own and lease properties for use in the ordinary course of business. The properties consist primarily of 34 operating facilities for the metal food container business and 25 operating facilities for the plastic container business. We own 26 of these facilities and lease 33. The leases expire at various times through 2020. Some of these leases provide renewal options as well as various purchase options.
Below is a list of our operating facilities, including attached warehouses, as of March 1, 2002 for our metal food container business:
Approximate Building Area
Location (square feet)
-------- -------------------------
Tarrant, AL........................ 89,100 (leased)
Kingsburg, CA...................... 35,600 (leased)
Modesto, CA........................ 37,800 (leased)
Modesto, CA........................ 128,000 (leased)
Modesto, CA........................ 150,000 (leased)
Riverbank, CA...................... 167,000
Sacramento, CA..................... 284,900 (leased)
Stockton, CA....................... 243,500
Broadview, IL...................... 85,000
Hoopeston, IL...................... 323,000
Rochelle, IL....................... 175,000
Waukegan, IL....................... 40,000 (leased)
Hammond, IN........................ 158,000 (leased)
Laporte, IN........................ 144,000 (leased)
Fort Madison, IA................... 121,000 (56,000 leased)
Ft. Dodge, IA...................... 155,200 (leased)
Benton Harbor, MI.................. 20,200 (leased)
Savage, MN......................... 160,000
St. Paul, MN....................... 470,000
Mt. Vernon, MO..................... 100,000
Northtown, MO...................... 111,700 (leased)
St. Joseph, MO..................... 173,700
Maxton, NC......................... 231,800 (leased)
Edison, NJ......................... 265,500
Lyons, NY.......................... 149,700
Napoleon, OH....................... 339,600 (leased)
Crystal City, TX................... 26,000 (leased)
Paris, TX.......................... 266,300 (leased)
Toppenish, WA...................... 105,000
Menomonee Falls, WI................ 116,000
Menomonie, WI...................... 129,400 (leased)
Oconomowoc, WI..................... 105,200
Plover, WI......................... 91,400 (leased)
Waupun, WI......................... 212,000
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Below is a list of the Company's operating facilities, including attached warehouses, as of March 1, 2002 for our plastic container business:
Approximate Building Area
Location (square feet)
-------- -------------------------
Anaheim, CA........................ 127,000 (leased)
Valencia, CA....................... 122,500 (leased)
Deep River, CT..................... 140,000
Norwalk, CT........................ 14,400 (leased)
Monroe, GA......................... 139,600
Norcross, GA....................... 59,000 (leased)
Flora, IL.......................... 56,400
Woodstock, IL...................... 186,700 (leased)
Ligonier, IN....................... 469,000 (276,000 leased)
Plainfield, IN..................... 105,700 (leased)
Seymour, IN........................ 450,000
Franklin, KY....................... 122,000 (leased)
Cape Girardeau, MO................. 71,700 (leased)
Penn Yan, NY....................... 100,000
Ottawa, OH......................... 267,000
Port Clinton, OH................... 257,400 (leased)
Langhorne, PA...................... 156,000 (leased)
Houston, TX........................ 335,200
Richmond, VA....................... 70,000 (leased)
Triadelphia, WV.................... 168,400
Mississauga, Ontario............... 75,000 (leased)
Mississauga, Ontario............... 62,600 (leased)
Scarborough, Ontario............... 117,000
Lachine, Quebec.................... 113,300 (leased)
Lachine, Quebec.................... 77,800 (leased)
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We own and lease other warehouse facilities that are detached from our manufacturing facilities. We believe that our plants, warehouses and other facilities are in good operating condition, adequately maintained, and suitable to meet our present needs and future plans. We believe that we have sufficient capacity to satisfy the demand for our products in the foreseeable future. To the extent that we need additional capacity, we believe that we can convert certain facilities to continuous operation or make the appropriate capital expenditures to increase capacity.
All of our U.S. facilities are subject to liens in favor of the banks under our U.S. credit agreement, and all of our Canadian facilities are subject to liens in favor of the banks under our Canadian credit agreement.
Item 3. Legal Proceedings.
We are a party to routine legal proceedings arising in the ordinary course of our business. We are not a party to, and none of our properties are subject to, any pending legal proceedings which could have a material adverse effect on our business or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our Common Stock is quoted on the Nasdaq National Market System under the symbol SLGN. As of March 1, 2002, we had approximately 71 holders of record of our Common Stock. We have never declared or paid cash dividends on our Common Stock. We currently anticipate that we will retain all available funds for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our consolidated results of operations and financial condition, applicable contractual restrictions and other factors deemed relevant by our Board of Directors. We are allowed to pay cash dividends on our Common Stock up to specified limits under our U.S. and Canadian senior secured credit agreements and our indenture for our 9% Senior Subordinated Debentures due 2009, or the 9% Debentures. The table below sets forth the high and low closing sales prices of our Common Stock as reported by the Nasdaq National Market System for the periods indicated below.
High Low
---- ---
2000
----
First Quarter...................... $17.000 $11.750
Second Quarter..................... 13.750 7.250
Third Quarter...................... 10.000 7.750
Fourth Quarter..................... 9.750 5.750
High Low
2001 ---- ---
----
First Quarter...................... $12.563 $ 7.875
Second Quarter..................... 22.940 10.875
Third Quarter...................... 25.290 16.500
Fourth Quarter..................... 26.160 18.650
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Item 6. Selected Financial Data.
In the table that follows, we provide you with selected financial data of Silgan Holdings Inc. We have prepared this data using our consolidated financial statements for the five years ended December 31, 2001. Our consolidated financial statements for the five years ended December 31, 2001 were audited by Ernst & Young LLP, independent auditors.
You should read this selected financial data along with the financial statements and related notes included elsewhere in this Annual Report, as well as the section of this Annual Report titled "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Selected Financial Data
Year Ended December 31,
-----------------------
2001 2000(a) 1999 1998(b) 1997
---- ---- ---- ---- ----
(Dollars in millions, except per share data)
Operating Data:
Net sales .......................................... $1,941.0 $1,877.5 $1,892.1 $1,768.7 $1,541.3
Cost of goods sold ................................. 1,700.7 1,648.3 1,656.7 1,546.3 1,333.4
-------- -------- -------- -------- --------
Gross profit ....................................... 240.3 229.2 235.4 222.4 207.9
Selling, general and administrative expenses ....... 78.6 72.1 75.0 68.1 60.8
Non-cash stock option charge (c) ................... -- -- -- -- 22.5
Rationalization charges, net (d) ................... 9.3 -- 36.1 -- --
-------- -------- -------- -------- --------
Income from operations ............................. 152.4 157.1 124.3 154.3 124.6
Gain on assets contributed to affiliate ............ 4.9 -- -- -- --
Interest and other debt expense .................... 81.2 91.2 86.1 81.5 80.7
-------- -------- -------- -------- --------
Income before income taxes and equity in
losses of affiliates ............................ 76.1 65.9 38.2 72.8 43.9
Provision for (benefit from) income taxes (e) ...... 30.2 25.8 14.3 26.9 (6.7)
-------- -------- -------- -------- --------
Income before equity in losses of affiliates and
extraordinary items ............................. 45.9 40.1 23.9 45.9 50.6
Equity in losses of affiliates ..................... 4.1 4.6 -- -- --
-------- -------- -------- -------- --------
Income before extraordinary items .................. 41.8 35.5 23.9 45.9 50.6
Extraordinary items - loss on early
extinguishment of debt, net of income taxes ..... -- 4.2 -- -- 16.4
-------- -------- -------- -------- --------
Income before preferred stock dividend
requirement ..................................... 41.8 31.3 23.9 45.9 34.2
Preferred stock dividend requirement ............... -- -- -- -- 3.2
-------- -------- -------- -------- --------
Net income applicable to common
stockholders .................................... $ 41.8 $ 31.3 $ 23.9 $ 45.9 $ 31.0
======== ======== ======== ======== ========
Per Share Data:
Basic earnings per common share:
Income before extraordinary items and
preferred stock dividend requirement .......... $2.35 $ 2.01 $1.35 $2.41 $ 2.75
Extraordinary items ............................. -- (0.24) -- -- (0.89)
Preferred stock dividend requirement ............ -- -- -- -- (0.18)
----- ------ ----- ----- ------
Net income per basic common share ............... $2.35 $ 1.77 $1.35 $2.41 $ 1.68
===== ====== ===== ===== ======
Diluted earnings per common share:
Income before extraordinary items and
preferred stock dividend requirement .......... $2.31 $ 1.97 $1.32 $2.30 $ 2.56
Extraordinary items ............................. -- (0.23) -- -- (0.83)
Preferred stock dividend requirement ............ -- -- -- -- (0.16)
----- ------ ----- ----- ------
Net income per diluted common share ........... $2.31 $ 1.74 $1.32 $2.30 $ 1.57
===== ====== ===== ===== ======
(continued)
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Selected Financial Data (continued)
Year Ended December 31,
-----------------------
2001 2000(a) 1999 1998(b) 1997
---- ---- ---- ---- ----
(Dollars in millions, except per share data)
Selected Segment Data (f):
Net sales:
Metal food containers ........................... $1,401.1 $1,387.7 $1,440.0 $1,333.0 $1,170.3
Plastic containers .............................. 493.6 399.0 350.5 337.5 289.3
Metal closures ................................. 46.3 90.8 101.6 98.2 81.7
Income from operations (g):
Metal food containers ........................... 114.2 120.2 120.6 115.7 117.9
Plastic containers .............................. 49.5 36.9 40.0 37.4 28.5
Metal closures .................................. 3.3 3.7 3.7 4.3 2.5
Other Data:
Adjusted EBITDA (h) ................................ $ 257.3 $ 246.1 $ 246.4 $ 231.8 $ 210.5
Capital expenditures ............................... 93.0 89.2 87.4 86.1 62.2
Depreciation and amortization (i) .................. 95.5 89.0 86.0 77.5 63.4
Cash flows provided by operating activities ........ 143.0 95.1 143.3 147.4 117.9
Cash flows used in investing activities ............ (59.8) (218.5) (84.9) (278.3) (100.5)
Cash flows (used in) provided by financing
activities ...................................... (85.3) 141.0 (60.7) 82.0 35.3
Balance Sheet Data (at end of period):
Goodwill, net ...................................... $ 141.5 $ 153.0 $ 107.6 $ 109.2 $ 66.9
Total assets ....................................... 1,311.8 1,383.8 1,185.3 1,224.0 1,050.6
Total debt ......................................... 944.8 1,031.5 883.3 927.0 805.3
Stockholders' equity (deficiency) .................. 15.1 (20.4) (48.7) (57.3) (67.3)
(footnotes follow)
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Notes to Selected Financial Data
(a) On October 1, 2000, we acquired RXI. The acquisition was accounted for
as a purchase transaction and the results of operations have been included with
our consolidated results of operations from the date of acquisition.
(b) On June 1, 1998, we acquired CS Can. The acquisition was accounted for
as a purchase transaction and the results of operations have been included with
our consolidated results of operations from the date of acquisition.
(c) In connection with our initial public offering of our Common Stock, or
IPO, we recognized a non-cash charge of $22.5 million at the time of our IPO for
the excess of the fair market value over the grant price of certain stock
options, less $3.7 million previously accrued.
(d) During 2001, we approved and announced plans primarily related to
closing two metal food container facilities and a plastic container facility.
These decisions resulted in pre-tax charges to earnings of $9.3 million, net
(including $3.0 million for the non-cash write-down in carrying value of
assets). In 1999, we approved and announced plans to close two manufacturing
facilities of the metal food container business, resulting in a charge of $11.9
million (including $7.3 million for the non-cash write-down in carrying value of
assets). Additionally, based upon a review of the depreciable assets of the
metal food container business in 1999, we determined that adjustments were
necessary to properly reflect net realizable values and recorded a non-cash,
pre-tax write-down of $24.2 million in 1999 for the excess of carrying value
over estimated net realizable value of machinery and equipment which had become
obsolete or surplus. You should also see Note 3 to our Consolidated Financial
Statements for the year ended December 31, 2001 included elsewhere in this
Annual Report.
(e) During 1997, we determined that it was more likely than not that future
tax benefits arising from our net operating loss carryforwards would be realized
in future years due to our continued improvement in earnings and the probability
of future taxable income. Accordingly, in accordance with Statement of Financial
Accounting Standards No. 109, we recognized an income tax benefit of $27.4
million for our recoverable net operating loss carryforwards.
(f) As a result of the White Cap joint venture, we no longer report the
results of our remaining specialty packaging business, which had net sales of
approximately $34.3 million, $33.1 million and $36.5 million in 2001, 2000 and
1999, respectively, as a separate business segment. The results of the Omni
plastic container and Polystar easy-open plastic end businesses are reported
with our plastic container business, and the results of the paperboard container
business are reported with our metal food container business. The historical
results of the metal closure business are reported separately. Prior year
amounts have been restated to conform with the current presentation.
(g) Income from operations in the selected segment data excludes (1) net
charges of $9.3 million for the year ended December 31, 2001 as referred to in
footnote (d) above, (2) charges of $36.1 million for the year ended December 31,
1999 as referred to in footnote (d) above, (3) the non-cash stock option charge
of $22.5 million incurred as a result of our IPO in February 1997 as referred
to in footnote (c) above, and (4) corporate expense.
(h) "Adjusted EBITDA" means consolidated net income before equity in losses
of affiliates, extraordinary items and preferred stock dividends, plus
consolidated interest expense, income tax expense and depreciation and
amortization expense, as adjusted to (1) add back charges incurred for the
closing of facilities ($9.3 million, net, for the year ended December 31, 2001
and $11.9 million for the year ended December 31, 1999, each as referred to in
footnote (d) above), charges incurred for the reduction in carrying value of
assets ($24.2 million for the year ended December 31, 1999 as referred to in
footnote (d) above) and the non-cash charge of $22.5 million incurred in 1997 in
connection with our IPO as referred to in footnote (c) above, and (2) subtract
the gain on assets contributed to affiliate of $4.9 million for the year ended
December 31, 2001. We have included information regarding Adjusted EBITDA
because management believes that many investors and lenders consider it
important in assessing a company's ability to service and incur debt.
Accordingly, this information has been disclosed herein to permit a more
complete analysis of our financial condition. Adjusted EBITDA should not be
considered in isolation or as a substitute for net income or other consolidated
statement of income or cash flows data prepared in accordance with accounting
principles generally accepted in the United States as a measure of our
profitability or liquidity. You should also see our Consolidated Statements of
Income and Consolidated Statements of Cash Flows, including the notes thereto,
included elsewhere in this Annual Report. Adjusted EBITDA does not take into
account our debt service requirements and other commitments and, accordingly, is
not necessarily indicative of amounts that may be available for discretionary
uses. Additionally, Adjusted EBITDA is not computed in accordance with
accounting principles generally accepted in the United States and may not be
comparable to other similarly titled measures of other companies.
(i) Depreciation and amortization excludes amortization of debt financing
costs.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis is intended to assist you in an understanding of our consolidated financial condition and results of operations for the three-year period ended December 31, 2001. Our consolidated financial statements and the accompanying notes included elsewhere in this Annual Report contain detailed information that you should refer to in conjunction with the following discussion and analysis.
General
We are a leading North American manufacturer of metal and plastic consumer goods packaging products. We currently produce steel and aluminum containers for human and pet food and custom designed plastic containers and closures for personal care, health care, pharmaceutical, household and industrial chemical, food, pet care, agricultural chemical, automotive and marine chemical products. We are the largest manufacturer of metal food containers in North America, with a unit sale market share for the year ended December 31, 2001 of approximately 47% in the United States and a leading manufacturer of plastic containers in North America for personal care products.
Revenue Growth
Our objective is to increase shareholder value through efficiently deploying capital and management resources to grow our business and reduce costs of existing operations and to make acquisitions at attractive cash flow multiples. We have increased our revenues and market share in the metal food container and plastic container and closure markets through acquisitions and internal growth. As a result, we have expanded and diversified our customer base, geographic presence and product line.
For example, during the past fourteen years, the metal food container market has experienced significant consolidation primarily due to the desire by food processors to reduce costs and focus resources on their core operations. Our acquisitions of the metal food container manufacturing operations of Nestle, Dial, Del Monte, Agrilink and Campbell reflect this trend.
We have improved the market position of our plastic container and closure business since 1987, with sales increasing more than fivefold to $493.6 million in 2001. We achieved this improvement primarily through strategic acquisitions, including most recently RXI, as well as through internal growth. The plastic container and closure business of the consumer goods packaging industry is highly fragmented, and we intend to pursue further consolidation opportunities in this market. We also believe that we can successfully apply our acquisition and operating expertise to new markets of the consumer goods packaging industry. For example, with the acquisition of RXI we expanded our business into plastic closures, caps, sifters and fitments and thermoformed plastic tubs. We expect to continue to generate internal growth in our plastic container and closure business. For example, we intend to aggressively market our plastic closures to existing customers of our plastic container business. Additionally, we intend to continue to expand our customer base in the markets that we serve, such as the personal care, health care, pharmaceutical, household and industrial chemical, food, pet care, agricultural chemical, automotive and marine chemical markets.
Operating Performance
We use a disciplined approach to acquire businesses at attractive cash flow multiples and to enhance profitability through productivity and cost reduction opportunities. The additional sales and production capacity provided through acquisitions have enabled us to rationalize plant operations and decrease overhead costs through plant closings and downsizings. In addition, our acquisitions have enabled us to realize manufacturing efficiencies as a result of optimizing production scheduling and minimizing product transportation costs. We have also benefited from our economies of scale and from
the elimination of redundant selling and administrative functions. In addition to the benefits realized through the integration of acquired businesses, we have improved the operating performance of our plant facilities by making capital investments for productivity improvements and manufacturing cost reductions.
Historically, we have been able to improve the operating margins of our acquired businesses through productivity and cost reduction opportunities. Following an acquisition, we initiate a systematic program implemented over a number of years to optimize our manufacturing facilities. As a result, an improvement to operating margins of the acquired businesses has in general been realized over a number of years.
In addition to the benefits realized through the integration of acquired businesses, we have improved the operating performance of our existing plant facilities through the investment of capital for productivity improvements and manufacturing cost reductions. We have also invested capital for new market opportunities, such as easy-open ends for metal food containers. Over the past five years, we have invested $418.0 million in capital to improve our productivity, reduce our manufacturing costs and invest in new market opportunities.
For the period from 1995 through 2001, the operating margins of our metal food container business (without giving effect to rationalization charges in 1995 and 2001) improved from approximately 6.5% in 1995 to 8.2% in 2001. We achieved this improvement principally as a result of the following factors and despite competitive pricing pressure:
o the benefits realized from rationalization and integration activities;
o economies of scale and the elimination of redundant costs related to acquisitions;
o the investment of capital for productivity improvements and manufacturing cost reductions; and
o an improved sales mix.
The operating margins of our plastic container business (without giving effect to a rationalization charge in 2001) also improved from approximately 6.0% in 1995 to 10.0% in 2001. This improvement was primarily due to:
o volume benefits realized principally as a result of acquisitions;
o economies of scale and the elimination of redundant costs related to acquisitions;
o the investment of capital for productivity improvements; and
o an improved sales mix.
We operate in a competitive industry where it is necessary to realize cost reduction opportunities to offset continued competitive pricing pressure. Further, the multi-year supply arrangements entered into by our businesses with many of our customers limit our ability to increase our margins. We estimate that approximately 85% of our projected metal food container sales in 2002 and more than a majority of our projected plastic container and closure sales in 2002 will be under multi-year arrangements. These multi-year supply arrangements generally provide for the pass through of changes in material, labor and other manufacturing costs, thereby significantly reducing the exposure of our results of operations to the volatility of these costs.
Historically, we have been successful in continuing our multi-year supply arrangements with our customers, without any resulting material adverse effect on our financial condition or results of operations. Recently, we agreed to extend the term of our supply agreements with Nestle for approximately half of the metal containers sales covered under these agreements by seven years from 2001 through 2008, in return for price reductions which took effect in 2001. These price reductions did not have a material adverse effect on our financial condition or results of operations.
Our metal food container business sales and, to a lesser extent, operating income are dependent, in part, upon the vegetable and fruit harvests in the midwest and western regions of the United States. The size and quality of these harvests varies from year to year, depending in large part upon the weather conditions in those regions. Because of the seasonality of the harvests, we have historically experienced higher unit sales volume in the third quarter of our fiscal year and generated a disproportionate amount of our annual income from operations during that quarter. This seasonal impact has been mitigated somewhat by the acquisition of CS Can from Campbell. Sales to Campbell generally have been highest in the fourth quarter due to the seasonal demand for soup products.
Use of Capital
We use leverage to support our growth and increase shareholder returns. Our stable and predictable cash flow, generated largely as a result of our long-term customer relationships and generally recession resistant business, supports our financial strategy. We intend to continue using leverage, supported by our stable cash flows, to make value-enhancing acquisitions. In the absence of attractive acquisition opportunities, we intend to use our free cash flow to repay indebtedness or for other permitted purposes. For example, in 2001, we did not complete any acquisitions, and we reduced our total debt by $86.3 million. Similarly, in 1999, we did not complete any acquisitions, and we reduced our total debt by $44.7 million despite, among other things, the incurrence of $16.6 million of debt for common stock repurchases.
To the extent we utilize debt for acquisitions or other permitted purposes in future periods, our interest expense may increase. Further, since the revolving loan and term loan borrowings under our senior secured credit facilities bear interest at floating rates, our interest expense is sensitive to changes in prevailing rates of interest and, accordingly, our interest expense may vary from period to period. After taking into account interest rate swap arrangements that we entered into to mitigate the effect of interest rate fluctuations, at December 31, 2001 we had $366.7 million of indebtedness which bore interest at floating rates.
In light of our strategy to use leverage to support our growth and optimize shareholder returns, we have incurred and will continue to incur significant interest expense. For 2001, our aggregate financing costs were 50.2% of our income from operations as compared to 58.0%, 53.6%, 52.8%, and 57.1% for 2000, 1999, 1998 and 1997, respectively (without giving effect to rationalization charges in 2001 and 1999 and a non-cash stock option charge in 1997).
We are currently discussing with financial institutions a refinancing of our U.S. senior secured credit facility. Our revolving loan facility and a portion of our term loan debt under our U.S. senior secured credit facility matures on December 31, 2003. As early as the second quarter of 2002, we may refinance our current U.S. senior secured credit facility with a new U.S. senior secured credit facility and possibly from an issuance of additional subordinated indebtedness. However, we can not guarantee that we will be able to refinance our current U.S. senior secured credit facility. We anticipate that our new U.S. senior secured credit facility will provide us with term loans and a new revolving loan facility. We expect to be able to use the new revolving loan facility and additional term loans for working capital purposes, acquisitions and other permitted purposes.
Packtion Investment
In April 2000, we, together with Morgan Stanley Private Equity and Diamondcluster International, Inc., agreed to invest in Packtion Corporation, or Packtion, an e-commerce joint venture aimed at integrating the packaging supply chain, from design through manufacture and procurement. The parties agreed to make the investments through Packaging Markets LLC, a limited liability company. The joint venture was expected to provide a comprehensive online marketplace for packaging goods and services and to combine content, tools and collaboration capabilities to streamline the product development process and enhance transaction opportunities for buyers and sellers of packaging. The products that Packtion was developing included a web-based software tool to enable product and package design, development and collaboration; an internet-based secure environment enabling the sharing of packaging related product information and the transaction of business electronically; and an informational source of packaging related knowledge, tools and expert services. Packtion had insignificant sales for internet consulting services and incurred net losses.
In June and August 2000, we invested a total of $7.0 million in Packtion representing approximately a 45% interest in Packtion. For the year ended December 31, 2000, we recorded equity losses of $4.6 million in Packtion. In addition, we recorded our share of Packtion's closing costs, $0.2 million, as a reduction to our investment. In the first quarter of 2001 in connection with an investment by The Procter & Gamble Company and E.I. Du Pont de Nemours & Co. in Packtion, we funded additional investments of $3.1 million, bringing our total investment to $10.1 million representing approximately a 25% interest in Packtion. In connection with this transaction, we also recorded a reduction to paid-in capital of $1.4 million due to the dilution of our investment. Packtion was dissolved on May 31, 2001 after its board of directors determined that there had been slower than anticipated market acceptance of its business. During 2001, we recorded equity losses of Packtion aggregating $3.8 million, which included our final losses and eliminated our investment.
White Cap Joint Venture
Effective July 1, 2001, we formed a joint venture company with Schmalbach-Lubeca AG that supplies an extensive range of metal and plastic closures to the food and beverage industries in North America. The new venture operates under the name White Cap LLC. We contributed $48.4 million of metal closure assets, including our manufacturing facilities in Evansville and Richmond, Indiana, and $7.1 million of metal closure liabilities to White Cap in return for a 35% interest in and $32.4 million of cash proceeds from the joint venture. Net sales of our metal closure business which was contributed to the White Cap joint venture totaled $46.3 million, $90.8 million and $101.6 million in 2001, 2000 and 1999, respectively. During 2001, we recorded equity losses of the White Cap joint venture of $0.3 million and a gain on the assets contributed to the joint venture of $4.9 million.
Historically, we reported the results of our specialty packaging business as a separate business segment, which included our metal closure business. As a result of the White Cap joint venture on July 1, 2001, we no longer report the financial results of our remaining specialty packaging business, which had net sales of $34.3 million, $33.1 million and $36.5 million in 2001, 2000 and 1999, respectively, as a separate business segment. We report the results of our Omni plastic container and our Polystar easy-open plastic end businesses with our plastic container business and the results of our paperboard container business with our metal food container business. We report the historical results of our metal closures business separately. We have restated prior year amounts to conform with the current presentation.
Results of Operations
The following table sets forth certain income statement data expressed as a percentage of net sales for each of the periods presented. You should read this table in conjunction with our Consolidated Financial Statements for the year ended December 31, 2001 and the accompanying notes included elsewhere in this Annual Report.
Year Ended December 31,
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2001 2000 1999
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Operating Data:
Net sales:(1)
Metal food containers.......................... 72.2% 73.9% 76.1%
Plastic containers............................. 25.4 21.3 18.5
Metal closures................................. 2.4 4.8 5.4
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Total....................................... 100.0 100.0 100.0
Cost of goods sold............................... 87.6 87.8 87.6
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Gross profit..................................... 12.4 12.2 12.4
Selling, general and administrative expenses..... 4.0 3.8 3.9
Rationalization charges, net(2).................. 0.5 -- 1.9
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Income from operations........................... 7.9 8.4 6.6
Gain on assets contributed to affiliate.......... 0.3 -- --
Interest and other debt expense.................. 4.2 4.9 4.6
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Income before income taxes and equity in
losses of affiliates .......................... 4.0 3.5 2.0
Provision for income taxes....................... 1.6 1.4 0.7
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Income before equity in losses of affiliates
and extraordinary item......................... 2.4 2.1 1.3
Equity in losses of affiliates................... 0.2 0.2 --
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Income before extraordinary item................. 2.2 1.9 1.3
Extraordinary item - loss on early extinguishment
of debt, net of income taxes................... -- 0.2 --
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Net income....................................... 2.2% 1.7% 1.3%
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Summary results for our business segments, metal food containers, plastic containers and metal closures, for the years ended December 31, 2001, 2000, and 1999 are provided below.
Year Ended December 31,
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2001 2000 1999
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(Dollars in millions)
Net sales:(1)
Metal food containers.............. $1,401.1 $1,387.7 $1,440.0
Plastic containers................. 493.6 399.0 350.5
Metal closures..................... 46.3 90.8 101.6
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Consolidated.................... $1,941.0 $1,877.5 $1,892.1
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Income from operations:(1)
Metal food containers.............. $ 114.2 $ 120.2 $ 120.6
Plastic containers................. 49.5 36.9 40.0
Metal closures..................... 3.3 3.7 3.7
Rationalization charges, net(2).... (9.3) -- (36.1)
Corporate.......................... (5.3) (3.7) (3.9)
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Consolidated.................... $ 152.4 $ 157.1 $ 124.3
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(1) As a result of the White Cap joint venture, we no longer report the results of our remaining specialty packaging business, which had net sales of $34.3 million, $33.1 million and $36.5 million in 2001, 2000 and 1999, respectively, as a separate business segment. The results of the Omni plastic container and Polystar easy-open
plastic end businesses are reported with our plastic container business, and the results of the paperboard container business are reported with our metal food container business. The historical results of the metal closure business are reported separately. Prior year amounts have been restated to conform with the current presentation.
(2) Included in income from operations in 2001 are net rationalization charges of $9.3 million, consisting of $5.8 million (including $3.0 million for the non-cash write-down in carrying value of certain assets) relating primarily to closing two metal food container manufacturing facilities and $3.5 million relating to closing a plastic container manufacturing facility. Included in income from operations in 1999 are $36.1 million of rationalization charges, consisting of a charge of $11.9 million relating to the closing of two manufacturing facilities of the metal food container business (which included $7.3 million for the non-cash write-down in carrying value of assets) and a non-cash charge of $24.2 million for the excess of carrying value over estimated net realizable value of machinery and equipment of the metal food container business which had become obsolete or surplus. You should also read Note 3 to our Consolidated Financial Statements for the year ended December 31, 2001 included elsewhere in this Annual Report.
Year Ended December 31, 2001 Compared with Year Ended December 31, 2000
Net Sales. Consolidated net sales increased $63.5 million, or 3.4%, to $1.941 billion for the year ended December 31, 2001, as compared to net sales of $1.878 billion for the prior year. This increase was the result of increased net sales of the plastic container business largely due to the acquisition of RXI in October 2000 and slightly higher net sales of the metal food container business, partially offset by the impact of contributing the metal closure business to the White Cap joint venture. Excluding incremental sales added by RXI and the impact of the White Cap joint venture, consolidated net sales for 2001 increased by $21.5 million, or 1.2%, from the prior year.
Net sales for the metal food container business were $1.401 billion for the year ended December 31, 2001, an increase of $13.4 million, or 1.0%, from net sales of $1.388 billion for the prior year. This increase was primarily due to the acquisition of new food can customers and a favorable sales mix primarily driven by increased sales of convenience ends, largely offset by weaker fruit and vegetable packs in 2001 as compared to 2000 and generally softer market conditions in the first half of the year as compared to last year.
Net sales for the plastic container business of $493.6 million for the year ended December 31, 2001 increased $94.6 million, or 23.7%, from net sales of $399.0 million for 2000. This increase in net sales was largely due to the acquisition of RXI in October 2000. Excluding incremental sales added by RXI, net sales for the plastic container business for 2001 increased $10.3 million, or 2.6%, from the prior year as customer inventory restocking in the first half of the year more than offset generally softer market conditions later in the year.
Net sales for the metal closure business were $46.3 million for the year ended December 31, 2001, as compared to net sales of $90.8 million for the prior year. The decrease in net sales was a result of contributing the metal closure business to the White Cap joint venture on July 1, 2001.
Cost of Goods Sold. Cost of goods sold as a percentage of consolidated net sales was 87.6% ($1.701 billion) for the year ended December 31, 2001, a decrease of 0.2 percentage point as compared to 87.8% ($1.648 billion) in 2000. The increase in gross profit margin was attributable to higher margins from the plastic container business and was offset in part by lower margins realized by the metal food container business.
Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of consolidated net sales for the year ended December 31, 2001 increased to 4.0% ($78.5 million), as compared to 3.8% ($72.1 million) for the prior year. This increase in selling, general and
administrative expenses as a percentage of consolidated net sales was primarily a result of costs we incurred related to the secondary public offering by a selling stockholder in November 2001.
Income from Operations. Excluding net rationalization charges of $9.3 million recorded in 2001, income from operations increased $4.6 million, or 2.9%, to $161.7 million for the year ended December 31, 2001, as compared to income from operations of $157.1 million for the prior year. This increase was primarily a result of higher sales in the plastic container business, partially offset by lower operating income in the metal food container business and the impact of contributing the metal closure business to the White Cap joint venture. Including rationalization charges, income from operations for the year ended December 31, 2001 was $152.4 million. Excluding rationalization charges, income from operations as a percentage of consolidated net sales for the year ended December 31, 2001 was 8.3%, as compared to 8.4% for 2000. The slight decline in operating margins was attributable to lower operating margins of the metal food container business, which was largely offset by the improved performance of the plastic container business.
During the fourth quarter of 2001, we recorded a net rationalization charge of $5.8 million. This charge was comprised of a charge of $7.0 million, including $4.2 million for the non-cash write-down in carrying value of assets, primarily relating to closing two metal food container manufacturing facilities and a $1.2 million credit to income as a result of placing certain assets with carrying values that were previously written-down back in service. In the first quarter of 2001, we recorded a rationalization charge of $3.5 million relating to closing a plastic container manufacturing facility.
Excluding the effect of the net rationalization charge recorded in the fourth quarter of 2001, income from operations for the metal food container business for the year ended December 31, 2001 was $114.2 million, a $6.0 million decrease from income from operations of $120.2 million for the prior year. Including the effect of the rationalization charge, income from operations for the metal food container business for the year ended December 31, 2001 was $108.4 million.
Excluding the effect of the rationalization charge, income from operations as a percentage of net sales for the metal food container business was 8.2% for the year ended December 31, 2001, as compared to 8.7% in 2000. The lower operating margins of the metal food container business was principally attributable to higher energy costs, higher depreciation expense, start-up costs related to the manufacture of convenience ends and higher employee medical costs, partially offset by benefits realized from a previous plant rationalization and a favorable sales mix.
Excluding the first quarter 2001 rationalization charge, income from operations for the plastic container business for the year ended December 31, 2001 was $49.5 million, a $12.6 million increase over income from operations of $36.9 million for the prior year. Including the effect of the rationalization charge, income from operations for the plastic container business for the year ended December 31, 2001 was $46.0 million.
Excluding the effect of the rationalization charge, income from operations as a percentage of net sales for the plastic container business for the year ended December 31, 2001 was 10.0%, as compared to 9.2% for 2000. The increase in income from operations as a percentage of net sales for the plastic container business was primarily a result of higher unit volume.
Income from operations for the metal closure business for the year ended December 31, 2001 was $3.3 million, as compared to income from operations of $3.7 million for the prior year. The decrease in income from operations was the result of contributing the metal closure business to the White Cap joint venture on July 1, 2001.
Interest Expense. Interest expense decreased $10.0 million to $81.2 million for the year ended December 31, 2001, as compared to $91.2 million in 2000. This decrease was principally a result of the benefit of lower interest rates that more than offset the impact of higher average borrowings outstanding, principally due to debt incurred in the fourth quarter of 2000 for the acquisition of RXI.
Income Taxes. The provision for income taxes for the year ended December 31, 2001 was recorded at an effective tax rate of 39.7% ($30.2 million), as compared to 39.1% ($25.8 million) for 2000.
Net Income and Earnings per Share. Before net rationalization charges and the impact of our equity investments, income for the year ended December 31, 2001 was $48.5 million, or $2.69 per diluted share. Income for the year ended December 31, 2000 was $40.1 million, or $2.23 per diluted share, before equity in losses of Packtion and an extraordinary loss related to the early extinguishment of our 13-1/4% Subordinated Debentures. Including net rationalization charges of $9.3 million, or $0.31 per diluted share, equity in losses of Packtion and White Cap of $4.1 million, or $0.23 per diluted share, and the gain on assets contributed to the White Cap joint venture of $4.9 million, or $0.16 per diluted share, net income for the year ended December 31, 2001 was $41.8 million, or $2.31 per diluted share. Including equity in losses of Packtion of $4.6 million, or $0.26 per diluted share, and the extraordinary loss, net of tax, of $4.2 million, or $0.23 per diluted share, net income for the year ended December 31, 2000 was $31.3 million, or $1.74 per diluted share.
Year Ended December 31, 2000 Compared with Year Ended December 31, 1999
Net Sales. Consolidated net sales decreased $14.6 million, or 0.7%, to $1.878 billion for the year ended December 31, 2000, as compared to net sales of $1.892 billion for the prior year. This decrease resulted primarily from lower unit sales of the metal food container and metal closure businesses, which was largely offset by higher net sales of the plastic container business. Excluding incremental sales added by the October 2000 acquisition of RXI, consolidated net sales for 2000 decreased by $41.2 million, or 2.2%, from the prior year.
Net sales for the metal food container business were $1.388 billion for the year ended December 31, 2000, a decrease of $52.3 million, or 3.6%, from net sales of $1.440 billion for the prior year. This decrease was primarily due to the withdrawal from lower margin sales related to the closure of a West Coast facility at the beginning of 2000 and to lower unit sales principally due to a reduced fruit and vegetable pack in 2000 and generally lower demand from customers.
Net sales for the plastic container business of $399.0 million for the year ended December 31, 2000 increased $48.5 million, or 13.8%, from net sales of $350.5 million for 1999. This increase in net sales was principally attributable to higher average sales prices due to the pass through of increased resin costs and to incremental sales added by RXI. Excluding incremental sales added by RXI, net sales for the plastic container business for 2000 increased $21.9 million, or 6.2%, from the prior year.
Net sales for the metal closure business were $90.8 million for the year ended December 31, 2000, as compared to $101.6 million for the prior year. The decrease in net sales was primarily due to generally soft demand from customers and to the continued conversion of metal closures to plastic closures.
Cost of Goods Sold. Cost of goods sold as a percentage of consolidated net sales was 87.8% ($1.648 billion) for the year ended December 31, 2000, an increase of 0.2 percentage point as compared to 87.6% ($1.657 billion) in 1999. The decline in gross profit margin was attributable to lower margins realized by the plastic container and metal closure businesses as discussed below, and was offset in part by higher margins from the metal food container business.
Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of consolidated net sales for the year ended December 31, 2000 decreased to 3.8% ($72.1 million), as compared to 3.9% ($75.0 million) for the prior year. This decrease was primarily a result of the absence in 2000 of costs incurred in 1999 for Year 2000 readiness issues, lower headcount and generally lower spending.
Income from Operations. Income from operations decreased $3.3 million, or 2.1%, to $157.1 million for the year ended December 31, 2000, as compared to income from operations of $160.4 million for the prior year excluding the effect of an aggregate of $36.1 million of rationalization charges recorded in 1999. This decrease was primarily a result of lower operating income of the plastic container business. Including the effect of the rationalization charges, income from operations for the year ended December 31, 1999 was $124.3 million. Income from operations as a percentage of consolidated net sales for the year ended December 31, 2000 was 8.4%, as compared to 8.5% for 1999 excluding the effect of the rationalization charges recorded in 1999. The slight decline in operating margins was attributable to lower operating margins of the plastic container business, which was largely offset by the improved operating performance of the metal food container business.
Income from operations for the metal food container business for the year ended December 31, 2000 was $120.2 million, a $0.4 million decrease from income from operations, excluding the effect of the rationalization charges recorded in 1999, of $120.6 million for the prior year. Including the effect of the rationalization charges, income from operations for the metal food container business for the year ended December 31, 1999 was $84.5 million. Income from operations as a percentage of net sales for the metal food container business was 8.7% for the year ended December 31, 2000, as compared to 8.4% in 1999 excluding the effect of the rationalization charges recorded in 1999. The improved operating margins of the metal food container business was principally attributable to benefits realized from an improved sales mix, plant rationalizations and lower selling, general and administrative expenses, and was partially offset by higher energy costs and depreciation expense.
Pursuant to continued efforts to optimize production efficiencies and to withdraw from lower margin business, we decided in the fourth quarter of 1999 to close two West Coast manufacturing facilities of the metal food container business, and accordingly recorded a pre-tax charge to earnings of $11.9 million, which included $7.3 million for the non-cash write-down in carrying value of certain assets. Additionally, in the third quarter of 1999, we recorded a non-cash pre-tax charge to earnings of $24.2 million to reduce the carrying value of certain assets of the metal food container business determined to be surplus or obsolete.
Income from operations for the plastic container business for the year ended December 31, 2000 was $36.9 million, a $3.1 million decrease from income from operations for the prior year. Income from operations as a percentage of net sales for the plastic container business for the year ended December 31, 2000 was 9.2%, as compared to 11.4% for 1999. The decrease in income from operations as a percentage of net sales for the plastic container business was principally attributable to the effects of increased resin prices which resulted in an increase in net sales but not in income from operations and to lower selling prices relating to the extension of certain long-term contracts.
Income from operations for the metal closure business for the year ended December 31, 2000 of $3.7 million remained essentially even with income from operations for the prior year. Income from operations as a percentage of net sales for the metal closure business increased to 4.1% for the year ended December 31, 2000, as compared to 3.6% in 1999. The increase in operating margins of the metal closure business was primarily a result of lower selling, general and administrative expenses, partially offset by lower unit sales, operating inefficiencies at two plants and higher energy costs.
Interest Expense. Interest expense increased $5.1 million to $91.2 million for the year ended December 31, 2000, as compared to $86.1 million in 1999. This increase was principally a result of increased borrowing in the fourth quarter of 2000 to finance the acquisition of RXI and higher interest rates in 2000, and was offset in part by lower average borrowings outstanding during the first nine months of 2000 primarily as a result of the planned inventory reduction by our metal food container business.
Income Taxes. The provision for income taxes for the year ended December 31, 2000 was recorded at an effective tax rate of 39.1% ($25.8 million), as compared to 37.4% ($14.3 million) for 1999. The effective tax rate in 2000 increased as compared to 1999 primarily due to the utilization of state tax net operating loss carryforwards in 1999 that were not available in 2000.
Net Income and Earnings per Share. As a result of the items discussed above, income for the year ended December 31, 2000 was $40.1 million, or $2.23 per diluted share, before losses in our equity investment in Packtion and an extraordinary loss related to the early extinguishment of our 13-1/4% Subordinated Debentures. Income for the year ended December 31, 1999 was $46.6 million, or $2.56 per diluted share, before rationalization charges recorded in 1999. Including our share of losses in our equity investment in Packtion of $4.6 million, or $0.26 per diluted share, and the extraordinary loss, net of tax, of $4.2 million, or $0.23 per diluted share, net income for the year ended December 31, 2000 was $31.3 million, or $1.74 per diluted share. For the year ended December 31, 1999, including rationalization charges of $36.1 million, or $1.24 per diluted share, net income was $23.9 million, or $1.32 per diluted share.
Capital Resources and Liquidity
Our principal sources of liquidity have been net cash from operating activities and corporate borrowings under our revolving loan facilities. Our liquidity requirements arise primarily from our obligations under the indebtedness incurred in connection with our acquisitions and the refinancing of that indebtedness, capital investment in new and existing equipment and the funding of our seasonal working capital needs.
In 2001, we used cash generated from operations of $143.0 million, cash proceeds from the White Cap joint venture of $32.4 million, proceeds from asset sales of $3.9 million, cash balances of $2.0 million and proceeds from the exercise of employee stock options of $1.0 million to fund capital expenditures of $93.0 million, repayments of borrowings under our senior secured credit facilities of $86.3 million and our investment in Packtion of $3.0 million.
In 2001, trade accounts receivable, net decreased $23.4 million to $144.9 million as compared to 2000. This decrease was primarily due to the impact of contributing our metal closure business to the White Cap joint venture and the impact of a few customers delaying payments in 2000 until the beginning of 2001. Inventories decreased $17.1 million to $262.6 million in 2001 as compared to 2000. This decrease was primarily due to the impact of contributing our metal closure business to the White Cap joint venture and the timing of raw material purchases and business requirements. Trade accounts payable decreased $34.3 million to $173.9 million principally due to the timing of payments and raw material purchases.
In 2000, we used net borrowings of revolving loans of $243.7 million ($242.1 million under our U.S. senior secured credit facility and $1.6 million under our Canadian senior secured credit facility), cash generated from operations of $95.1 million, proceeds from asset sales of $1.8 million and proceeds from the exercise of employee stock options of $0.5 million to fund our acquisition of RXI for $124.0 million, capital expenditures of $89.2 million, the redemption of the 13-1/4% Subordinated Debentures for $61.8 million, the repayment of $39.3 million of term loan borrowings under our senior secured
credit facilities, the increase in our cash balances of $17.7 million, our investment in Packtion of $7.0 million, repurchases of common stock for $1.1 million and debt financing costs of $1.0 million.
In 2000, trade accounts receivable, net increased $40.2 million to $168.3 million as compared to 1999. This increase was primarily due to a few customers delaying payments until the beginning of 2001 and the acquisition of RXI. Inventories, net increased $30.2 million to $279.7 million in 2000 as compared to 1999. This increase was primarily due to the acquisition of RXI, the timing of raw material purchases and the timing of business requirements for new and existing customers. Trade accounts payable increased $32.7 million to $208.1 million primarily due to the timing of payments and raw material purchases.
In December 2000, we redeemed all of our outstanding 13-1/4% Subordinated Debentures ($56.2 million principal amount) with lower cost revolving loans under our U.S. senior secured credit facility. The redemption price for all of the 13-1/4% Subordinated Debentures, including premiums, was $61.8 million. We benefited from this redemption because of the lower interest rate applicable to such indebtedness, despite the slight increase in our indebtedness as a result.
In 1999, we used cash generated from operations of $143.3 million, $2.4 million of cash balances and $0.5 million of cash proceeds from the exercise of employee stock options to repay $44.7 million of borrowings under our senior secured credit facilities, fund net capital expenditures of $84.9 million and repurchase $16.6 million of our common stock.
Our senior secured credit facilities currently provide us with revolving loans of up to approximately $675.0 million (including $125.0 million added in October 2000). Revolving loans are available to us for our seasonal working capital requirements and general corporate purposes, including acquisitions. In addition, we may request to borrow up to an additional $75.0 million of revolving loans from one or more lenders under our U.S. senior secured credit facility. Revolving loans under our senior secured credit facilities may be borrowed, repaid and reborrowed until December 31, 2003, their final maturity, at which point all such outstanding revolving loans must be repaid. As of December 31, 2001, we had $333.0 million of revolving loans outstanding under our U.S. senior secured credit facility, and, after taking into account outstanding letters of credit, the available portion of the revolving loan facility under our U.S. senior secured credit facility was $321.5 million.
Additionally, as of December 31, 2001, there were no outstanding revolving loans under our Canadian senior secured credit facility, and after taking into account outstanding letters of credit, the available portion of the revolving loan facility under our Canadian senior secured credit facility was approximately $4.1 million.
Our U.S. senior secured credit facility also provided us with A Term Loans ($119.4 million outstanding at December 31, 2001) and B Term Loans ($186.6 million outstanding at December 31, 2001), which are required to be repaid in annual installments through December 31, 2003 and December 31, 2005, respectively. Additionally, our Canadian senior secured credit facility provided us with term loans ($2.6 million outstanding at December 31, 2001), which are required to be repaid in annual installments through December 31, 2003. You should also read Note 9 to our Consolidated Financial Statements for the year ended December 31, 2001 included elsewhere in this Annual Report.
We are currently discussing with financial institutions a refinancing of our U.S. senior secured credit facility. As early as the second quarter of 2002, we may refinance all outstanding term loans and revolving loans under our current U.S. senior secured credit facility with new term loans and a revolving loan facility under a new U.S. senior secured credit facility and possibly from an issuance of additional subordinated indebtedness. However, we can not guarantee that we will be able to refinance our current U.S. senior secured credit facility. We expect to be able to use the new revolving loan facility and
additional term loans for working capital purposes, acquisitions and other permitted purposes. Based on the current market, we also expect that the interest rate margins under the new U.S. senior secured credit facility will be higher than the interest rate margins under our current U.S. senior secured credit facility. Accordingly, if we complete a refinancing of our U.S. senior secured credit facility, we expect that our interest expense will increase during the second half of 2002 as compared to the second half of 2001.
Because we sell metal containers used in fruit and vegetable pack processing, we have seasonal sales. As is common in the industry, we must access working capital to build inventory and then carry accounts receivable for some customers beyond the end of the summer and fall packing season. Seasonal accounts are generally settled by year end. Due to our seasonal requirements, we incur short term indebtedness to finance our working capital requirements.
For 2002, we estimate that we will utilize approximately $190-200 million of revolving loans under our senior secured credit facilities for our month-end peak seasonal working capital requirements. We may use the available portion of our revolving loan facilities, after taking into account our seasonal needs and outstanding letters of credit, for acquisitions and other permitted purposes.
Our board of directors has authorized the repurchase of up to $70 million of our common stock. As of December 31, 2001, we have repurchased 2,708,975 shares of our common stock for an aggregate cost of approximately $61.0 million. The repurchases were financed through revolving loan borrowings under our U.S. senior secured credit facility. We intend to finance future repurchases, if any, of our Common Stock with revolving loans from our U.S. senior secured credit facility.
In addition to our operating cash needs, we believe our cash requirements over the next few years (without taking into account the effect of future acquisitions) will consist primarily of:
o annual capital expenditures of $80 to $110 million;
o annual principal amortization payments of bank term loans under our current senior secured credit facilities in 2002 through 2005 of approximately $58.0 million, $68.1 million, $2.0 million and $180.7 million and the repayment of outstanding revolving loans under our current senior secured credit facilities ($333.0 million outstanding at December 31, 2001) no later than December 31, 2003;
o our interest requirements, including interest on revolving loans (the principal amount of which will vary depending upon seasonal requirements) and bank term loans under our senior secured credit facilities, which bear fluctuating rates of interest, and the 9% Debentures; and
o payments of approximately $20 million for federal, state and foreign tax liabilities in 2002, which will increase annually thereafter.
We believe that cash generated from operations and funds from the revolving loans available under our current senior secured credit facilities as well as proceeds and available loans from the refinancing of our current U.S. senior secured credit facility as discussed above will be sufficient to meet our expected operating needs, planned capital expenditures, debt service and tax obligations for the foreseeable future. We are also continually evaluating and pursuing acquisition opportunities in the consumer goods packaging market and may incur additional indebtedness, including indebtedness under our senior secured credit facilities, to finance any such acquisition.
A portion of our term loan indebtedness and all of our revolving loan indebtedness under our current U.S. senior secured credit facility matures on December 31, 2003. As discussed above, we may refinance our current U.S. senior secured credit facility as early as the second quarter of 2002 with a new
U.S. senior secured credit facility and possibly from an issuance of additional subordinated indebtedness. However, we may not be able to effect such refinancing and, if we are able to effect such refinancing, we may not be able to do so on the same terms (including interest rate margins) as our current U.S. senior secured credit facility. Our ability to effect this refinancing and the terms of this refinancing will depend upon a variety of factors, including:
o our future prospects, which will be subject to prevailing economic conditions and to financial, business and other factors (including the state of the economy and the financial markets and other factors beyond our control) affecting our business and operations;
o prevailing interest rates;
o the timing of the refinancing; and
o the amount of debt to be refinanced.
Our senior secured credit facilities and the indenture with respect to the 9% Debentures contain restrictive covenants that, among other things, limit our ability to incur debt, sell assets and engage in certain transactions. We do not expect these limitations, or any limitations that may exist in any new U.S. senior secured credit facility, to have a material effect on our business or our results of operations. We are in compliance with all financial and operating covenants contained in our financing agreements and believe that we will continue to be in compliance during 2002 with all of these covenants.
Our contractual obligations at December 31, 2001 are provided below:
Payments Due By Period
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Less Than 1-3 4-5
Total 1 Year Years Years Thereafter
Long-term debt ......................... $ 944.8 $58.0 $403.1 $180.7 $303.0
Minimum rental commitments ............. 94.7 18.6 26.8 18.5 30.8
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Total contractual cash obligations ..... $1,039.5 $76.6 $429.9 $199.2 $333.8
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At December 31, 2001, we also had outstanding letters of credit of $16.0 million that were issued under our U.S. senior secured credit facility.
Effect of Inflation and Interest Rate Fluctuations
Historically, inflation has not had a material effect on us, other than to increase our cost of borrowing. In general, we have been able to increase the sales prices of our products to reflect any increases in the prices of raw materials.
Because we have indebtedness which bears interest at floating rates, our financial results will be sensitive to changes in prevailing market rates of interest. As of December 31, 2001, we had $944.8 million of indebtedness outstanding, of which $366.7 million bore interest at floating rates, taking into account interest rate swap agreements we entered into as of that date to mitigate the effect of interest rate fluctuations. Under these agreements, floating rate interest based on the three month LIBOR rate was exchanged for fixed rates of interest ranging from 3.8% to 6.4%. The aggregate notional principal amounts of these agreements totals $275 million, with $100 million aggregate notional principal amount maturing in 2002, $125 million aggregate notional principal amount maturing in 2003 and $50 million aggregate notional principal amount maturing in 2004. Depending upon market conditions, we may enter into additional interest rate swap or hedge agreements (with counterparties that, in our judgment,
have sufficient creditworthiness) to hedge our exposure against interest rate volatility.
Rationalization Charges and Acquisition Reserves
During the fourth quarter of 2001, we approved and announced to employees separate plans to exit our Northtown, Missouri and Kingsburg, California metal food container facilities and to cease operation of our composite container department at our Waukegan, Illinois metal food container facility. These plans included the termination of approximately 80 plant employees, the termination of an operating lease and other plant related exit costs including equipment dismantle costs. These decisions resulted in a fourth quarter pre-tax charge to earnings of $7.0 million. This charge consisted of $4.2 million for the non-cash write-down in carrying value of assets, $1.4 million for employee severance and benefits and $1.4 million for plant exit costs. Through December 31, 2001, excluding the non-cash write-down, a total of $0.1 million has been expended relating to these plans. At December 31, 2001, this reserve had a balance of $2.7 million. Cash payments relating to these plans are expected through 2002.
During the first quarter of 2001, we approved and announced to employees a plan to exit our Fairfield, Ohio plastic container facility. The plan included the termination of approximately 150 plant employees and other related exit costs including equipment dismantle costs and contractual rent obligations. This decision resulted in a first quarter pre-tax charge to earnings of $3.5 million, which consisted of $2.6 million for plant exit costs and $0.9 million for employee severance and benefits. Through December 31, 2001, a total of $1.4 million has been expended relating to this plan. These expenditures consisted of $0.7 million related to employee severance and benefits and $0.7 million for plant exit costs. At December 31, 2001, this reserve had a balance of $2.1 million. Although we have closed the plant, the timing of cash payments is dependent upon the expiration of a lease obligation. Accordingly, cash payments related to closing this facility are expected primarily through 2002.
During the fourth quarter of 1999, we approved and announced to employees separate plans to exit our San Leandro and City of Industry, California metal food container facilities. These plans included the termination of approximately 130 plant employees, termination of two operating leases and other plant related exit costs including equipment dismantle costs and contractual rent obligations. These decisions resulted in a fourth quarter pre-tax charge to earnings of $11.9 million. This charge consisted of $7.3 million for the non-cash write-down in carrying value of assets, $2.2 million for employee severance and benefits and $2.4 million for plant exit costs. Through December 31, 2001, excluding the non-cash write-down, a total of $4.4 million has been expended relating to these plans. These expenditures consisted of $2.2 million related to employee severance and benefits and $2.2 million for plant exit costs. During the fourth quarter of 2001, certain assets with carrying values that were previously written down as part of this rationalization charge were placed back in service. As a result, we recorded $1.2 million as a credit to rationalization charges, net in our Consolidated Statements of Income, and recorded those assets in our Consolidated Balance Sheets at their depreciated cost, which approximates fair value. At December 31, 2001, this reserve had a balance of $0.2 million. Although we have closed both plants, the timing of cash payments has been dependent upon the resolution of various matters with the lessor of one of the facilities. Accordingly, cash payments related to closing these facilities are expected through 2002.
During 1999, we initiated and concluded a study to evaluate the long-term utilization of all assets of our metal food container business. As a result, during the third quarter of 1999, we determined that certain adjustments were necessary to properly reflect the net realizable values of machinery and equipment which had become surplus or obsolete and recorded a non-cash pre-tax charge to earnings of $24.2 million to reduce the carrying value of those assets.
Acquisition reserves established in connection with our 1998 purchases of CS Can, Clearplass Containers, Inc., and Winn Packaging Co., were recorded pursuant to plans that we began to assess and formulate at the time of the acquisitions and which were finalized in 1999. As a result of these plans, we recorded acquisition reserves totaling $5.4 million, of which $0.5 million related to employee severance and benefits, $4.6 million related to plant exit costs necessary to comply with environmental requirements that existed at the time of the acquisition and to exit the acquired Albia, Iowa and Sheffield, Alabama plastic container manufacturing facilities and $0.3 million related to liabilities incurred in connection with these acquisitions. Through December 31, 2001, a total of $3.5 million has been expended relating to these plans, which consisted of $0.5 million related to employee severance and benefits, $2.9 million for plant exit costs and $0.1 million for the payment of acquisition related liabilities. The timing of cash payments relating to the CS Can activities has been primarily dependent upon obtaining necessary environmental permits and approvals in connection with a consent order with the U.S. Environmental Protection Agency to which we are subject as a result of our acquisition of CS Can. All actions under these plans were completed during the fourth quarter of 2001 at amounts less than previously estimated, and, accordingly, we reversed $1.9 million of acquisition reserves as a reduction to goodwill.
Acquisition reserves established in connection with our purchase of the Food Metal and Specialty Business of ANC in 1995 aggregating approximately $49.5 million were recorded pursuant to plans that we began to assess and formulate at the date of the acquisition and which were finalized in 1996. These reserves consisted of employee severance and benefits costs ($26.1 million) for the termination of approximately 500 plant, selling and administrative employees, plant exit costs ($6.6 million) related to the planned closure of the St. Louis, Missouri plant, the downsizing of the Hoopeston, Illinois and Savage, Minnesota facilities and the restructuring of the St. Paul, Minnesota plant and liabilities incurred in connection with the acquisition ($16.8 million). Through December 31, 2001, a total of $44.0 million has been expended related to these plans, which consisted of $24.6 million for employee severance and benefits, $4.6 million for plant exit costs and $14.8 million for payment of acquisition related liabilities. At December 31, 2001, this reserve had a balance of $5.5 million. Although we have completed our plan, cash payments are expected to continue for pension obligations totaling $1.5 million which are required to be paid pursuant to a labor agreement in place at the time of acquisition, the last in a series of $2.0 million annual contractual payments that began in 1996 and continue through 2002 to resolve a contract dispute that arose in connection with the acquisition and the resolution of various environmental liabilities, estimated at $2.0 million, that existed at the time of the acquisition.
You should also read Note 3 to our Consolidated Financial Statements for the year ended December 31, 2001 included elsewhere in this Annual Report.
Critical Accounting Policies
Accounting principles generally accepted in the United States require estimates and assumptions that affect the reported amounts in our consolidated financial statements and the accompanying notes. Some of these estimates and assumptions require difficult, subjective and/or complex judgments. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. We believe that our accounting policies for deferred income taxes, pension and postretirement benefits and acquisition and rationalization reserves reflect the more significant judgments and estimates in our consolidated financial statements. You should also read our Consolidated Financial Statements for the year ended December 31, 2001 and the accompanying notes included elsewhere in this Annual Report.
At December 31, 2001, we had approximately $39.1 million of deferred tax assets relating to $102.6 million of net operating loss carryforwards, or NOLs, that expire between 2011 and 2021, for
which no valuation allowance has been established. We had NOLs of approximately $39.7 million available to offset furture consolidated taxable income (excluding CS Can), and CS Can had NOLs of approximately $62.9 million available to offset its future taxable income. We believe that it is more likely than not that these NOLs will be available to reduce future income tax liabilities based on estimated future taxable income, the reversal of temporary differences in future periods and the utilization of tax planning strategies. Current levels of consolidated pre-tax earnings (excluding CS Can) are sufficient to generate the taxable income required to realize our deferred tax assets. Pre-tax earnings levels for CS Can would need to increase from current levels to generate sufficient taxable income to realize its deferred tax assets. We would reduce our deferred tax assets by a valuation allowance if it became more likely than not that a portion of these NOLs would not be utilized. If a valuation allowance were established, additional expense would be recorded within the provision for income taxes in our Consolidated Statements of Income in the period that the determination was made. This process requires the use of significant judgment and estimates.
Our pension and postretirement benefit costs and liabilities are developed from actuarial valuations. Inherent in these valuations are assumptions, including the discount rate, expected return on plan assets, rate of compensation increase and health care cost trend rate. In making these assumptions, we consider current market conditions, including changes in interest rates. Changes in assumptions could have a significant effect on related pension and postretirement benefit costs and liabilities in the future.
Historically, we have maintained a strategy of acquiring businesses and enhancing profitability through productivity and cost reduction opportunities. Acquisitions require us to estimate the fair value of the assets acquired and liabilities assumed in the transactions. These estimates of fair value are based on our business plans for the acquired entities, which includes eliminating operating redundancies, facility closings and rationalizations and assumptions as to the ultimate resolution of liabilities assumed. We also continually evaluate the operating performance of our existing facilities and our business requirements and, when deemed appropriate, we exit or rationalize existing operating facilities. Establishing reserves for acquisition plans and facility rationalizations requires the use of estimates. Although we believe that these estimates accurately reflect the costs of these plans, actual costs incurred may differ from these estimates.
New Accounting Pronouncements
Effective January 1, 2001, we adopted Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138. SFAS No. 133 requires all derivative instruments to be recorded in the consolidated balance sheets at their fair values. Changes in the fair value of derivatives will be recorded each period in earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The adoption of SFAS No. 133, as amended, did not have a significant impact on our financial position or results of operations.
During July 2001, the Financial Accounting Standards Board, or the Board, issued SFAS No. 141, "Business Combinations," which revises the accounting treatment for business combinations to require the use of purchase accounting and prohibit the use of the pooling-of-interests method for business combinations initiated after June 30, 2001. During July 2001, the Board also issued SFAS No. 142, "Goodwill and Other Intangible Assets," which revises the accounting for goodwill to eliminate amortization of goodwill on transactions consummated after June 30, 2001 and of all other goodwill as of January 1, 2002. Other intangible assets will continue to be amortized over their useful lives. SFAS No. 142 requires goodwill and other intangibles to be assessed for impairment each year and more frequently if circumstances indicate a possible impairment. During 2002, we will perform our first impairment test as of January 1, 2002. We estimate that net income and diluted earnings per share would
have been approximately $44.8 million and $2.48, respectively, for the year ended December 31, 2001; $33.9 million and $1.88, respectively, for the year ended December 31, 2000; and $26.4 million and $1.45, respectively, for the year ended December 31, 1999, had the provisions of SFAS No. 142 been applied in those years. We do not anticipate having to record a charge to net income for the potential impairment of goodwill or other intangible assets as a result of adoption of SFAS No. 142.
In October 2001, the Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121 and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets and expands the scope of a discontinued operation to include a component of an entity. SFAS No. 144 is effective on January 1, 2002. We do not expect the adoption of SFAS No. 144 to have a significant impact on our 2002 financial statements.
Forward-Looking Statements
The statements we have made in "Management's Discussion and Analysis of Results of Operations and Financial Condition" and elsewhere in this Annual Report which are not historical facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934, as amended. These forward-looking statements are made based upon our management's expectations and beliefs concerning future events impacting us and therefore involve a number of uncertainties and risks. As a result, the actual results of our operations or our financial condition could differ materially from those expressed or implied in these forward-looking statements. Important factors that could cause the actual results of our operations or our financial condition to differ from those expressed or implied in these forward-looking statements include, but are not necessarily limited to:
o our ability to effect cost reduction initiatives and realize benefits from capital investments;
o our ability to locate or acquire suitable acquisition candidates at attractive cash flow multiples and on acceptable terms;
o our ability to assimilate the operations of our acquired businesses into our existing operations;
o our ability to generate free cash flow to invest in our business and service our indebtedness;
o limitations and restrictions contained in our instruments and agreements governing our indebtedness;
o our ability to retain sales with our major customers;
o the size and quality of the vegetable and fruit harvests in the midwest and west regions of the United States;
o changes in the pricing and availability to us of raw materials or our ability generally to pass raw material price increases through to our customers;
o changes in consumer preferences for different packaging products;
o competitive pressures, including new product developments or changes in competitors' pricing for products;
o changes in governmental regulations or enforcement practices;
o changes in general economic conditions, such as fluctuations in interest rates and changes in energy costs (such as natural gas and electricity);
o changes in labor relations and costs;
o our ability to refinance our current U.S. senior secured credit facility and, if we are able to effect this refinancing, the terms of this refinancing, all of which will be dependant upon a variety of factors, including our future prospects, the state of the economy and the financial markets, prevailing interest rates, the timing of the refinancing, the amount of debt to be refinanced and other factors beyond our control; and
o other factors described elsewhere in this Annual Report or in our other filings with the Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risks relating to our operations result primarily from changes in interest rates. In the normal course of business, we also have limited foreign currency risk associated with our Canadian operations and risk related to commodity price changes for items such as natural gas. We employ established policies and procedures to manage our exposure to these risks. Interest rate, foreign currency and commodity pricing transactions are used only to the extent considered necessary to meet our objectives. We do not utilize derivative financial instruments for trading or other speculative purposes.
Interest Rate Risk
Our interest rate risk management objective is to limit the impact of interest rate changes on our net income and cash flow and to lower our overall borrowing cost. To achieve our objectives, we regularly evaluate the amount of our variable rate debt as a percentage of our aggregate debt. We manage our exposure to interest rate fluctuations in our variable rate debt through interest rate swap agreements. These agreements effectively convert interest rate exposure from variable rates to fixed rates of interest. We have entered into these agreements with banks under our U.S. senior secured credit facility, and our obligations under these agreements are guaranteed and secured on a pari passu basis with our obligations under our U.S. senior secured credit facility. You should also read Notes 9 and 10 to our Consolidated Financial Statements included elsewhere in this Annual Report which outline the principal amounts, interest rates, fair values and other terms required to evaluate the expected cash flows from these agreements.
Based on the average outstanding amount of our variable rate indebtedness in 2001, a one percentage point change in the interest rates for our variable rate indebtedness would have impacted 2001 interest expense by an aggregate of approximately $6.4 million, after taking into account the average outstanding notional amount of our interest rate swap agreements during 2001.
Foreign Currency Exchange Rate Risk
We do not conduct a significant portion of our manufacturing or sales activity in foreign markets. Presently, our only foreign activities are conducted in Canada. When the U.S. dollar
strengthens against such foreign currencies, the reported U.S. dollar value of local currency operating profits generally decreases; when the U.S. dollar weakens against such foreign currencies, the reported U.S. dollar value of local currency operating profits generally increases. Since we do not have significant foreign operations, we do not believe it is necessary to enter into any derivative financial instruments to reduce our exposure to foreign currency exchange rate risk.
Because our Canadian subsidiary operates within its local economic environment, we believe it is appropriate to finance such operation with local currency borrowings. In determining the amount of such borrowings, we evaluate the operation's short and long-term business plans, tax implications, and the availability of borrowings with acceptable interest rates and terms. This strategy mitigates the risk of reported losses or gains in the event that the Canadian currency strengthens or weakens against the U.S. dollar. Furthermore, our Canadian operating profit is used to repay its local borrowings or is reinvested in Canada, and is not expected to be remitted to us or invested elsewhere. As a result, it is not necessary for us to mitigate the economic effects of currency rate fluctuations on our Canadian earnings.
Commodity Pricing Risk
We purchase commodities for our products such as metal and resins. These commodities are generally purchased pursuant to contracts or at market prices established with the vendor. In general, we do not engage in hedging activities for these commodities due to our ability to pass on price changes to our customers.
We also purchase other commodities, such as natural gas and electricity, and are subject to risks on the pricing of these commodities. In general, we purchase these commodities pursuant to contracts or at market prices. We manage a significant portion of our exposure to natural gas price fluctuations through natural gas swap agreements. These agreements effectively convert pricing exposure for natural gas from market pricing to a fixed price. You should also read Note 10 to our Consolidated Financial Statements included elsewhere in this Annual Report which outlines the terms necessary to evaluate these transactions.
Item 8. Financial Statements and Supplementary Data.
We refer you to Item 14, "Exhibits, Financial Statements, Schedules and Reports on Form 8-K," below for a listing of financial statements and schedules included in this Annual Report which are incorporated here in this Annual Report by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item is set forth in our Proxy Statement for our annual meeting of stockholders to be held on May 29, 2002 in the sections entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance", and is incorporated in this Annual Report by this reference.
Our Directors and Executive Officers
The following table sets forth certain information (ages as of December 31, 2001) concerning our directors and executive officers. We are a holding company and our operations are conducted through Silgan Containers and Silgan Plastics, each of which has its own independent management.
Name Age Position
---- --- --------
R. Philip Silver.......... 59 Chairman of the Board and Co-Chief Executive
Officer and Director
D. Greg Horrigan.......... 58 President and Co-Chief Executive Officer and
Director
Leigh J. Abramson......... 33 Director
John W. Alden............. 60 Director
Jeffrey C. Crowe.......... 55 Director
Edward A. Lapekas......... 58 Director
Harley Rankin, Jr......... 62 Executive Vice President and Chief Financial
Officer
Frank W. Hogan, III....... 41 Vice President, General Counsel and Secretary
Glenn A. Paulson.......... 58 Vice President--Corporate Development
Nancy Merola.............. 39 Vice President and Controller
Malcolm E. Miller......... 34 Vice President and Treasurer
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Executive Officers of Silgan Containers
The following table sets forth certain information (ages as of December 31, 2001) concerning the executive officers of Silgan Containers.
Name Age Position ---- --- -------- James D. Beam............. 58 President Gary M. Hughes............ 59 Executive Vice President Thomas Richmond........... 43 Executive Vice President L. Geoffrey Greulich...... 40 Senior Vice President John Wilbert.............. 43 Senior Vice President--Operations Michael A. Beninato....... 53 Vice President--Supply Chain Management Joseph A. Heaney.......... 48 Vice President--Finance H. Schuyler Todd.......... 61 Vice President--Human Resources |
Executive Officers of Silgan Plastics
The following table sets forth certain information (ages as of December 31, 2001) concerning the executive officers of Silgan Plastics.
Name Age Position
---- --- --------
Russell F. Gervais........ 58 President
Alan H. Koblin............ 49 Senior Vice President
Charles Minarik........... 64 Senior Vice President--Commercial Development
Colleen J. Jones.......... 41 Senior Vice President--Finance and
Administration
Emidio DiMeo.............. 42 Senior Vice President
Donald E. Bliss........... 50 Vice President--Sales
Howard H. Cole............ 56 Vice President--Human Resources and
Administration
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Mr. Silver has been our Chairman of the Board and Co-Chief Executive Officer since March 1994. Mr. Silver is one of our founders and was formerly our President. Mr. Silver has been a director since our inception. Mr. Silver has been a director of Silgan Containers since its inception in August 1987 and Vice President of Silgan Containers since May 1995. Mr. Silver has been a director of Silgan Plastics since its inception in August 1987 and Chairman of the Board of Silgan Plastics since March 1994. Prior to founding Silgan Holdings in 1987, Mr. Silver was a consultant to the packaging industry. Mr. Silver was President of Continental Can Company from June 1983 to August 1986.
Mr. Horrigan has been our President and Co-Chief Executive Officer since March 1994. Mr. Horrigan is one of our founders and was formerly our Chairman of the Board. Mr. Horrigan has been a director since our inception. Mr. Horrigan has been Chairman of the Board of Silgan Containers and a director of Silgan Plastics since their inception in August 1987. Mr. Horrigan was Executive Vice President and Operating Officer of Continental Can Company from 1984 to 1987.
Mr. Abramson has been one of our directors since September 1996. He has been with Morgan Stanley & Co. Incorporated since 1990 and Morgan Stanley Private Equity since 1992 and has been a Managing Director of Morgan Stanley & Co. Incorporated since December 2001. Mr. Abramson is also a director of Weblink Wireless, Inc., Smurfit Stone Container Corp. and several private companies.
Mr. Alden has been one of our directors since November 2001. From 1965 until 2000, Mr. Alden was employed by United Parcel Service of America, Inc., or UPS, serving in various management positions. Until his retirement in 2000, Mr. Alden was Vice Chairman of UPS since 1996 and a director of UPS since 1988. Mr. Alden is also a director of Barnes Group Inc.
Mr. Crowe has been one of our directors since May 1997. Mr. Crowe has been Chairman of the Board, President and Chief Executive Officer of Landstar System, Inc., or Landstar, since April 1991, and President and Chief Executive Officer of Landstar System Holdings, Inc., or LSHI, since June 1989 and Chairman of LSHI since March 1991. Mr. Crowe has also been President of Signature Insurance Company, a subsidiary of LSHI, since February 1997. Mr. Crowe has served as Chairman of the National Defense Transportation Association since October 1993. From November 1989 to November 1998, Mr. Crowe served in a number of capacities at the American Trucking Association, Inc., or ATA, including Director, Secretary and as a member of the ATA Executive Committee. Mr. Crowe has served as a Director of the National Chamber Foundation since November 1997, a Director of the U.S. Chamber of Commerce since February 1998 and a Director of Sun Trust Bank North-Florida, N.A. since January 1999.
Mr. Lapekas has been one of our directors since October 2001. Mr. Lapekas was Executive Chairman of Packtion Corporation, an e-commerce packaging venture, from October 2000 until June 2001. From May 1996 until July 2000, Mr. Lapekas was employed by American National Can Group, Inc., last serving as Chairman and Chief Executive Officer. Prior to that, Mr. Lapekas served as Deputy Chairman and Chief Operating Officer of Schmalbach-Lubeca AG. From 1971 until 1991, Mr. Lapekas was employed by Continental Can Company where he served in various strategy, planning, operating and marketing capacities.
Mr. Rankin has been our Executive Vice President and Chief Financial Officer since our inception. Mr. Rankin was also our Treasurer from January 1992 until October 2001. Mr. Rankin has indicated his intention to retire in May 2002. Mr. Rankin has been Vice President of Silgan Containers and Silgan Plastics since January 1991 and May 1991, respectively, and was Treasurer of Silgan Plastics from January 1994 to December 1994. Prior to joining us, Mr. Rankin was Senior Vice President and Chief Financial Officer of Armtek Corporation. Mr. Rankin was Vice President and Chief Financial Officer of Continental Can Company from November 1984 to August 1986.
Mr. Hogan has been our Vice President, General Counsel and Secretary since June 1997. Mr. Hogan has also been Vice President, General Counsel and Secretary of Silgan Containers and Silgan Plastics since June 1997. From September 1995 until June 1997, Mr. Hogan was a partner at the law firm of Winthrop, Stimson, Putnam & Roberts. From April 1988 to September 1995, Mr. Hogan was an associate at that firm.
Mr. Paulson has been our Vice President--Corporate Development since January 1996. Mr. Paulson has also been Vice President of Silgan Containers since January 1999. Mr. Paulson was employed by Silgan Containers to manage the transition of AN Can from August 1995 to December 1995. From January 1989 to July 1995, Mr. Paulson was employed by ANC, last serving as Senior Vice President and General Manager, Food Metal and Specialty, North America. Prior to his employment with ANC, Mr. Paulson was President of the beverage packaging operations of Continental Can Company.
Ms. Merola has been our Vice President and Controller since October 2000. Ms. Merola has also been Vice President of Silgan Containers and Silgan Plastics since October 2000. From February 2000 to October 2000, Ms. Merola was Manager, Reporting and Specialized Accounting, for Texaco Inc. Previously, Ms. Merola was Director, Corporate Accounting and Headquarters Planning, at RJR Nabisco Holdings, Inc. since January 1997. From September 1995 to January 1997, Ms. Merola was Financial Manager--Operations Finance at Kraft Foods Inc., a subsidiary of Philip Morris Companies Inc. From 1989 to 1995, Ms. Merola held various positions with Philip Morris Companies Inc., last serving as Manager, Financial Planning and Analysis.
Mr. Miller has been our Vice President and Treasurer since October 2001. Mr. Miller has also been Vice President of Silgan Containers and Silgan Plastics since October 2001. Previously, Mr. Miller was Assistant Vice President and Assistant Treasurer of Primedia Inc. from April 2000 until October 2001. Prior to that, Mr. Miller was employed by us from June 1997 until April 2000, last serving as Assistant Treasurer. From June 1995 until June 1997, Mr. Miller was employed by International Paper Company, last serving as a Senior Financial Analyst.
Mr. Beam has been President of Silgan Containers since July 1990. From September 1987 to July 1990, Mr. Beam was Vice President--Marketing & Sales of Silgan Containers. Mr. Beam was Vice President and General Manager of Continental Can Company, Western Food Can Division, from March 1986 to September 1987.
Mr. Hughes has been Executive Vice President of Silgan Containers since January 1998. Previously, Mr. Hughes was Vice President--Sales & Marketing of Silgan Containers since July 1990. From February 1988 to July 1990, Mr. Hughes was Vice President, Sales and Marketing of the Beverage Division of Continental Can Company. Prior to February 1988, Mr. Hughes was employed by Continental Can Company in various sales positions.
Mr. Richmond has been Executive Vice President of Silgan Containers since September 2001. Previously, he was Senior Vice President of Silgan Plastics since October 2000. Prior to that, Mr. Richmond was President of RXI from October 1995 to October 2000. From January 1993 to October 1995, Mr. Richmond was Executive Vice President of Plastic Engineered Components. From February 1991 to January 1993, he was Vice President and General Manager of Berry Plastics Corporation. From October 1988 to February 1991, Mr. Richmond was Vice President and General Manager of Carnaud Metalbox in the United States. Prior to that, he was employed by American Can Company since September 1979, last serving as an Area Manager.
Mr. Greulich has been Senior Vice President of Silgan Containers since July 2000. From October 1998 to June 2000 he was Vice President of Corporate Development for American Business Products
Corp. Prior to that, Mr. Greulich was employed by Tenneco Packaging, a unit of Tenneco Inc., last serving as Regional Operations Director.
Mr. Wilbert has been Senior Vice President--Operations of Silgan Containers since September 2001. Prior to that, Mr. Wilbert was Vice President-Operations of Silgan Containers since January 1998. From October 1992 to January 1998, Mr. Wilbert was Area Manager of Operations of Silgan Containers. Prior to 1992, Mr. Wilbert was employed by Silgan Containers in various positions.
Mr. Beninato has been Vice President--Supply Chain Management of Silgan Containers since January 2001. Prior to that, Mr. Beninato was Director of Production Planning and Warehousing of Silgan Containers from August 1995 to January 2001. Prior to joining Silgan Containers in August 1995, Mr. Beninato was employed by ANC for over 28 years in various production control positions.
Mr. Heaney has been Vice President--Finance of Silgan Containers since October 1995. From September 1990 to October 1995, Mr. Heaney was Controller, Food Metal and Specialty Division of ANC. From August 1977 to August 1990, Mr. Heaney was employed by ANC and American Can Company in various divisional, regional and plant finance/accounting positions.
Mr. Todd has been Vice President--Human Resources of Silgan Containers since April 1999. From September 1987 to April 1999, Mr. Todd was Director of Human Resources of Silgan Containers. Previously, Mr. Todd was employed for approximately eleven years by the Can Division of the Carnation Company as Industrial Relations Manager.
Mr. Gervais has been President of Silgan Plastics since December 1992. From September 1989 to December 1992, Mr. Gervais was Vice President--Sales & Marketing of Silgan Plastics. From March 1984 to September 1989, Mr. Gervais was President and Chief Executive Officer of Aim Packaging, Inc.
Mr. Koblin has been Senior Vice President of Silgan Plastics since January 2000. Previously, Mr. Koblin was Vice President--Sales & Marketing of Silgan Plastics since December 1994. From 1992 to 1994, Mr. Koblin was Director of Sales & Marketing of Silgan Plastics. From 1990 to 1992, Mr. Koblin was Vice President of Churchill Industries.
Mr. Minarik has been Senior Vice President--Commercial Development of Silgan Plastics since January 2000. Previously, he was Vice President--Operations and Commercial Development of Silgan Plastics since May 1993. From February 1991 to August 1992, Mr. Minarik was President of Wheaton Industries Plastics Group. Mr. Minarik was Vice President--Marketing of Constar International, Inc. from March 1983 to February 1991.
Ms. Jones has been Senior Vice President--Finance and Administration of Silgan Plastics since October 2000. Prior to that, Ms. Jones was Vice President--Finance of Silgan Plastics since December 1994. From November 1993 to December 1994, Ms. Jones was Corporate Controller of Silgan Plastics and from July 1989 to November 1993, she was Manager--Finance of Silgan Plastics.
Mr. DiMeo has been Senior Vice President of Silgan Plastics and of Silgan Plastics Canada Inc. since October 2000. Prior to that, Mr. DiMeo was Vice President of Silgan Plastics Canada Inc. since May 1999. From April 1997 to May 1999, Mr. DiMeo was General Manager of Silgan Plastics Canada Inc. From March 1995 to April 1997, Mr. DiMeo was President and General Manager of Rexam Containers Limited of Canada.
Mr. Bliss has been Vice President--Sales of Silgan Plastics since January 2000. From November 1993 to December 1999, Mr. Bliss was National Sales Director at Silgan Plastics. Prior to that, Mr. Bliss was employed by Graham Packaging Company, last serving as Regional Sales Director.
Mr. Cole has been Vice President--Human Resources and Administration and Assistant Secretary of Silgan Plastics since September 1987. From April 1986 to September 1987, Mr. Cole was Manager of Personnel of the Monsanto Engineered Products Division of Monsanto Company.
Item 11. Executive Compensation.
The information required by this Item is set forth in our Proxy Statement for our annual meeting of stockholders to be held on May 29, 2002 in the sections entitled "Election of Directors--Compensation of Directors", "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation", and is incorporated here in this Annual Report by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is set forth in our Proxy Statement for our annual meeting of stockholders to be held on May 29, 2002 in the section entitled "Security Ownership of Certain Beneficial Owners and Management", and is incorporated here in this Annual Report by this reference.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is set forth in our Proxy Statement for our annual meeting of stockholders to be held on May 29, 2002 in the section entitled "Certain Relationships and Related Transactions", and is incorporated here in this Annual Report by this reference.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a)
Financial Statements:
Report of Independent Auditors......................................................... F-1
Consolidated Balance Sheets at December 31, 2001 and 2000.............................. F-2
Consolidated Statements of Income for the years ended December 31, 2001, 2000
and 1999.......................................................................... F-3
Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended
December 31, 2001, 2000 and 1999.................................................. F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000
and 1999.......................................................................... F-5
Notes to Consolidated Financial Statements............................................. F-6
Schedules:
II. Valuation and Qualifying Accounts for the years ended December 31,
2001, 2000 and 1999.................................................... F-42
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All other financial statements and schedules not listed have been omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes thereto.
Exhibits:
Exhibit
Number Description
------ -----------
3.1 Restated Certificate of Incorporation of Silgan Holdings (incorporated
by reference to Exhibit 3.1 filed with our Annual Report on Form 10-K
for the year ended December 31, 1996, Commission File No. 000-22117).
3.2 Amended and Restated By-laws of Silgan Holdings (incorporated by
reference to Exhibit 3.2 filed with our Annual Report on Form 10-K for
the year ended December 31, 1996, Commission File No. 000-22117).
4.1 Indenture, dated as of June 9, 1997, between Silgan Holdings (as
successor to Silgan Corporation) and The First National Bank of
Chicago, as trustee, with respect to the 9% Debentures (incorporated
by reference to Exhibit 4.1 filed with our Current Report on Form 8-K,
dated June 9, 1997, Commission File No. 000-22117).
4.2 First Supplemental Indenture, dated as of June 24, 1997 among Silgan
Holdings, Silgan Corporation and The First National Bank of Chicago,
as trustee, to the Indenture, dated as of June 9, 1997, between Silgan
Holdings (as successor to Silgan Corporation) and The First National
Bank of Chicago, as trustee, with respect to the 9% Debentures
(incorporated by reference to Exhibit 4.2 filed with our Registration
Statement on Form S-4, dated July 8, 1997, Registration Statement No.
333-30881).
4.3 Form of Silgan Holdings' 9% Senior Subordinated Debentures due 2009
(incorporated by reference to Exhibit 4.10 filed with our Registration
Statement on Form S-4, dated July 8, 1997, Registration Statement No.
333-30881).
*10.1 Amended and Restated Stockholders Agreement, dated as of November 6,
2001, among R. Philip Silver, D. Greg Horrigan and Silgan Holdings.
*10.2 Letter agreement dated November 6, 2001 between Silgan Holdings and
The Morgan Stanley Leveraged Equity Fund II, L.P.
+10.3 Amended and Restated Management Services Agreement, dated as of
February 14, 1997, between S&H Inc. and Silgan Holdings (incorporated
by reference to Exhibit 10.25 filed with our Annual Report on Form
10-K for the year ended December 31, 1996, Commission File No.
000-22117).
+10.4 Amended and Restated Management Services Agreement, dated as of
February 14, 1997, between S&H Inc. and Silgan Containers
(incorporated by reference to Exhibit 10.26 filed with our Annual
Report on Form 10-K for the year ended December 31, 1996, Commission
File No. 000-22117).
+10.5 Amended and Restated Management Services Agreement, dated as of
February 14, 1997, between S&H Inc. and Silgan Plastics (incorporated
by reference to Exhibit 10.27 filed with our Annual Report on Form
10-K for the year ended December 31, 1996, Commission File No.
000-22117).
|
Exhibit
Number Description
------ -----------
10.6 Credit Agreement, dated as of July 29, 1997, among Silgan Holdings,
Silgan Containers, Silgan Plastics, certain other subsidiaries,
various lenders, Bankers Trust Company, as Administrative Agent and as
a Co-Arranger, Bank of America National Trust & Savings Association,
as Syndication Agent and as a Co-Arranger, Goldman Sachs Credit
Partners L.P., as Co-Documentation Agent and as a Co-Arranger, and
Morgan Stanley Senior Funding, Inc., as Co-Documentation Agent and as
a Co-Arranger (incorporated by reference to Exhibit 99.1 filed with
our Current Report on Form 8-K, dated August 8, 1997, Commission File
No. 000-22117).
10.7 First Amendment and Consent, dated as of December 3, 1997, among
Silgan Holdings, Silgan Containers, Silgan Plastics, various lenders,
Bankers Trust Company, as Administrative Agent and as a Co-Arranger,
Bank of America National Trust & Savings Association, as Syndication
Agent and as a Co-Arranger, Goldman Sachs Credit Partners L.P., as
Co-Documentation Agent and as a Co-Arranger, and Morgan Stanley Senior
Funding, Inc., as Co-Documentation Agent and as a Co-Arranger
(incorporated by reference to Exhibit 10.7 filed with our Annual
Report on Form 10-K for the year ended December 31, 2000, Commission
File No. 000-22117).
10.8 Second Amendment and Consent, dated as of June 1, 1998, among Silgan
Holdings, Silgan Containers, Silgan Plastics, Silgan Containers
Manufacturing Corporation, various lenders, Bankers Trust Company, as
Administrative Agent and as a Co-Arranger, Bank of America National
Trust & Savings Association, as Syndication Agent and as a
Co-Arranger, Goldman Sachs Credit Partners L.P., as Co-Documentation
Agent and as a Co-Arranger, and Morgan Stanley Senior Funding, Inc.,
as Co-Documentation Agent and as a Co-Arranger (incorporated by
reference to Exhibit 10.8 filed with our Annual Report on Form 10-K
for the year ended December 31, 2000, Commission File No. 000-22117).
10.9 Third Amendment, dated as of August 29, 2000, among Silgan Holdings,
Silgan Containers, Silgan Plastics, Silgan Containers Manufacturing
Corporation, various lenders, Bankers Trust Company, as Administrative
Agent and as a Co-Arranger, Bank of America National Trust & Savings
Association, as Syndication Agent and as a Co-Arranger, Goldman Sachs
Credit Partners L.P., as Co-Documentation Agent and as a Co-Arranger,
and Morgan Stanley Senior Funding, Inc., as Co-Documentation Agent and
as a Co-Arranger (incorporated by reference to Exhibit 10.9 filed with
our Annual Report on Form 10-K for the year ended December 31, 2000,
Commission File No. 000-22117).
10.10 Security Agreement, dated as of July 29, 1997, among Silgan Holdings,
Silgan Containers, Silgan Plastics, certain other subsidiaries of any
of them and Bankers Trust Company, as Collateral Agent (incorporated
by reference to Exhibit 99.2 filed with our Current Report on Form
8-K, dated August 8, 1997, Commission File No. 000-22117).
10.11 Pledge Agreement dated as of July 29, 1997, made by Silgan Holdings,
Silgan Containers, Silgan Plastics and Silgan Containers Manufacturing
Corporation (as successor to California-Washington Can Corporation and
SCCW Can Corporation), as Pledgors, in favor of Bankers Trust Company,
as Collateral Agent and as Pledgee (incorporated by reference to
Exhibit 99.3 filed with our Current Report on Form 8-K, dated August
8, 1997, Commission File No. 000-22117).
|
Exhibit
Number Description
------ -----------
10.12 Borrowers/Subsidiaries Guaranty, dated as of July 29, 1997, made by
Silgan Holdings, Silgan Containers, Silgan Plastics and Silgan
Containers Manufacturing Corporation (as successor to
California-Washington Can Corporation and SCCW Can Corporation)
|
(incorporated by reference to Exhibit 99.4 filed with our Current Report on Form 8-K, dated August 8, 1997, Commission File No. 000-22117).
10.13 Asset Purchase Agreement, dated as of June 2, 1995, between American
National Can Company and Silgan Containers (incorporated by reference
to Exhibit 1 filed with our Current Report on Form 8-K dated August
14, 1995, Commission File No. 33-28409).
10.14 Purchase Agreement, dated as of June 1, 1998, by and among Campbell,
Silgan Can Company and Silgan Containers (incorporated by reference to
Exhibit 2 filed with our Current Report on Form 8-K dated June 15,
1998, Commission File No. 000-22117).
10.15 Underwriting Agreement, dated as of February 13, 1997, among Silgan
Holdings, Silgan Corporation, Silgan Containers, Silgan Plastics, The
Morgan Stanley Leveraged Equity Fund II, L.P., Bankers Trust New York
Corporation and the underwriters listed on Schedule I thereto
(incorporated by reference to Exhibit 10.40 filed with our Annual
Report on Form 10-K for the fiscal year ended December 31, 1996,
Commission File No. 000-22117).
10.16 Placement Agreement between Silgan Corporation and Morgan Stanley &
Co. Incorporated, dated June 3, 1997 (incorporated by reference to
Exhibit 99.1 filed with our Current Report on Form 8-K dated June 9,
1997, Commission File No. 000-22117).
*10.17 Equity Underwriting Agreement, dated November 6, 2001, among Silgan
Holdings, The Morgan Stanley Leveraged Equity Fund II, L.P., and
Deutsche Banc Alex. Brown Inc. and Morgan Stanley & Co. Incorporated
as representatives of the several underwriters listed on Schedule I
thereto.
+10.18 Employment Agreement, dated as of September 14, 1987, between James
Beam and Canaco Corporation (Silgan Containers) (incorporated by
reference to Exhibit 10(vi) filed with Silgan Corporation's
Registration Statement on Form S-1, dated January 11, 1988,
Registration Statement No. 33-18719).
+10.19 Employment Agreement, dated as of September 1, 1989, between Silgan
Corporation, InnoPak Plastics Corporation (Silgan Plastics), Russell
F. Gervais and Aim Packaging, Inc. (incorporated by reference to
Exhibit 5 filed with Silgan Corporation's Report on Form 8-K, dated
March 15, 1989, Commission File No. 33-18719).
+10.20 Employment Agreement dated as of August 1, 1995 between Silgan
Containers (as assignee of Silgan Holdings) and Glenn A. Paulson, as
amended pursuant to an amendment dated March 1, 1997 (incorporated by
reference to Exhibit 10.19 filed with our Annual Report on Form 10-K
for the year ended December 31, 1999, Commission File No. 000-22117).
|
Exhibit
Number Description
------ -----------
+10.21 InnoPak Plastics Corporation (Plastics) Pension Plan for Salaried
Employees (incorporated by reference to Exhibit 10.32 filed with
Silgan Corporation's Annual Report on Form 10-K for the year ended
December 31, 1988, Commission File No. 33-18719).
+10.22 Containers Pension Plan for Salaried Employees (incorporated by
reference to Exhibit 10.34 filed with Silgan Corporation's Annual
Report on Form 10-K for the year ended December 31, 1988, Commission
File No. 33-18719).
+10.23 Silgan Holdings Inc. Fourth Amended and Restated 1989 Stock Option
Plan (incorporated by reference to Exhibit 10.21 filed with our Annual
Report on Form 10-K for the year ended December 31, 1996, Commission
File No. 000-22117).
+10.24 Form of Silgan Holdings Nonstatutory Stock Option Agreement
(incorporated by reference to Exhibit 10.22 filed with our Annual
Report on Form 10-K for the year ended December 31, 1996, Commission
File No. 000-22117).
*12 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends for the years ended December 31, 2001, 2000,
1999, 1998 and 1997.
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit
21 filed with our Annual Report on Form 10-K for the year ended
December 31, 2000, Commission File No. 000-22117).
*23 Consent of Ernst & Young LLP.
|
(b) Reports on Form 8-K:
We did not file any reports on Form 8-K during the fourth quarter of 2001.
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.
SILGAN HOLDINGS INC.
Date: March 29, 2002 By /s/ R. Philip Silver
-------------------------
R. Philip Silver
Chairman of the Board and
Co-Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Chairman of the Board and
/s/ R. Philip Silver Co-Chief Executive Officer
---------------------- (Principal Executive Officer) March 29, 2002
(R. Philip Silver)
/s/ D. Greg Horrigan President, Co-Chief Executive
---------------------- Officer and Director March 29, 2002
(D. Greg Horrigan)
/s/ Leigh J. Abramson
---------------------- Director March 29, 2002
(Leigh J. Abramson)
/s/ John W. Alden
---------------------- Director March 29, 2002
(John W. Alden)
/s/ Jeffrey C. Crowe
---------------------- Director March 29, 2002
(Jeffrey C. Crowe)
/s/ Edward A. Lapekas
---------------------- Director March 29, 2002
(Edward A. Lapekas)
Executive Vice President and
/s/ Harley Rankin, Jr. Chief Financial Officer
---------------------- (Principal Financial Officer) March 29, 2002
(Harley Rankin, Jr.)
/s/ Nancy Merola Vice President and Controller
---------------------- (Principal Accounting Officer) March 29, 2002
(Nancy Merola)
|
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Silgan Holdings Inc.
We have audited the accompanying consolidated financial statements and schedules of Silgan Holdings Inc. as listed in the accompanying index to the financial statements (Item 14(a)). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 listed in the accompanying index to the financial statements (Item 14(a)) present fairly, in all material respects, the consolidated financial position of Silgan Holdings Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Stamford, Connecticut
January 29, 2002
|
SILGAN HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(Dollars in thousands)
2001 2000
---- ----
Assets
Current assets:
Cash and cash equivalents ........................ $ 18,009 $ 20,073
Trade accounts receivable, less allowances
of $3,449 and $3,001, respectively ............ 144,903 168,307
Inventories ...................................... 262,627 279,737
Prepaid expenses and other current assets ........ 12,053 11,874
---------- ----------
Total current assets ......................... 437,592 479,991
Property, plant and equipment, net .................... 677,542 709,513
Goodwill, net ......................................... 141,465 153,038
Other assets .......................................... 55,221 41,282
---------- ----------
$1,311,820 $1,383,824
========== ==========
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Current portion of long-term debt ................ $ 57,999 $ 44,948
Trade accounts payable ........................... 173,851 208,144
Accrued payroll and related costs ................ 59,215 56,452
Accrued interest payable ......................... 5,022 9,564
Accrued liabilities .............................. 21,631 13,142
---------- ----------
Total current liabilities .................... 317,718 332,250
Long-term debt ........................................ 886,770 986,527
Other liabilities ..................................... 92,184 85,427
---------- ----------
Total liabilities ............................ 1,296,672 1,404,204
Commitments and contingencies
Stockholders' equity (deficiency):
Common stock ($0.01 par value per share;
100,000,000 shares authorized, 20,539,145 and
20,388,372 shares issued and 17,853,670 and
17,702,897 shares outstanding, respectively) ... 205 204
Paid-in capital .................................. 118,319 118,099
Retained earnings (accumulated deficit) .......... (34,937) (76,702)
Accumulated other comprehensive income (loss) .... (8,046) (1,588)
Treasury stock at cost (2,685,475 shares) ........ (60,393) (60,393)
---------- ----------
Total stockholders' equity (deficiency) ...... 15,148 (20,380)
---------- ----------
$1,311,820 $1,383,824
========== ==========
|
See notes to consolidated financial statements.
SILGAN HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2001, 2000 and 1999
(Dollars in thousands, except per share data)
2001 2000 1999
---- ---- ----
Net sales .............................................. $1,940,994 $1,877,497 $1,892,078
Cost of goods sold ..................................... 1,700,708 1,648,247 1,656,694
---------- ---------- ----------
Gross profit ...................................... 240,286 229,250 235,384
Selling, general and administrative expenses ........... 78,541 72,148 74,943
Rationalization charges, net ........................... 9,334 -- 36,149
---------- ---------- ----------
Income from operations ............................ 152,411 157,102 124,292
Gain on assets contributed to affiliate ................ 4,908 -- --
Interest and other debt expense ........................ 81,192 91,178 86,057
---------- ---------- ----------
Income before income taxes and equity in
losses of affiliates .......................... 76,127 65,924 38,235
Provision for income taxes ............................. 30,222 25,790 14,305
---------- ---------- ----------
Income before equity in losses of affiliates and
extraordinary item ............................ 45,905 40,134 23,930
Equity in losses of affiliates ......................... 4,140 4,610 --
---------- ---------- ----------
Income before extraordinary item .................. 41,765 35,524 23,930
Extraordinary item - loss on early extinguishment
of debt, net of income taxes ......................... -- 4,216 --
---------- ---------- ----------
Net income ........................................ $ 41,765 $ 31,308 $ 23,930
========== ========== ==========
Basic earnings per share:
Income before extraordinary item .................. $2.35 $ 2.01 $1.35
Extraordinary item ................................ -- (0.24) --
----- ------ -----
Basic net income per share ............................. $2.35 $ 1.77 $1.35
===== ====== =====
Diluted earnings per share:
Income before extraordinary item .................. $2.31 $ 1.97 $1.32
Extraordinary item ................................ -- (0.23) --
----- ------ -----
Diluted net income per share ........................... $2.31 $ 1.74 $1.32
===== ====== =====
|
See notes to consolidated financial statements.
SILGAN HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For the years ended December 31, 2001, 2000 and 1999
(Dollars and shares in thousands)
Common Stock Retained Accumulated Total
------------ Earnings Other Stockholders'
Par Paid-in (Accumulated Comprehensive Treasury Equity
Shares Value Capital Deficit) Income (Loss) Stock (Deficiency)
------ ----- --------- ----------- ------------- -------- -------------
Balance at January 1, 1999 ............... 18,256 $199 $117,911 $(131,940) $ (723) $(42,755) $(57,308)
Comprehensive income:
Net income ............................ -- -- -- 23,930 -- -- 23,930
Minimum pension liability ............. -- -- -- -- (80) -- (80)
Foreign currency translation .......... -- -- -- -- 530 -- 530
--------
Comprehensive income .................. 24,380
--------
Stock option exercises, including
tax benefit of $243 .................... 193 2 755 -- -- -- 757
Repurchase of common stock ............... (902) -- -- -- -- (16,563) (16,563)
------ ---- -------- --------- ------- -------- --------
Balance at December 31, 1999 ............. 17,547 201 118,666 (108,010) (273) (59,318) (48,734)
Comprehensive income:
Net income ............................ -- -- -- 31,308 -- -- 31,308
Minimum pension liability ............. -- -- -- -- (797) -- (797)
Foreign currency translation .......... -- -- -- -- (518) -- (518)
--------
Comprehensive income .................. 29,993
--------
Stock option exercises, including
tax provision of $826 .................. 256 3 (317) -- -- -- (314)
Equity affiliate closing costs ........... -- -- (250) -- -- -- (250)
Repurchase of common stock ............... (100) -- -- -- -- (1,075) (1,075)
------ ---- -------- --------- ------- -------- --------
Balance at December 31, 2000 ............. 17,703 204 118,099 (76,702) (1,588) (60,393) (20,380)
Comprehensive income:
Net income ............................ -- -- -- 41,765 -- -- 41,765
Minimum pension liability ............. -- -- -- -- (1,966) -- (1,966)
Change in fair value of
derivatives, net of tax
benefit of $2,151 ................... -- -- -- -- (3,267) -- (3,267)
Foreign currency translation .......... -- -- -- -- (1,225) -- (1,225)
--------
Comprehensive income .................. 35,307
--------
Stock option exercises, including
tax benefit of $595 .................... 151 1 1,622 -- -- -- 1,623
Dilution of investment in
equity affiliate ....................... -- -- (1,402) -- -- -- (1,402)
------ ---- -------- --------- ------- -------- --------
Balance at December 31, 2001 ............. 17,854 $205 $118,319 $ (34,937) $(8,046) $(60,393) $ 15,148
====== ==== ======== ========= ======= ======== ========
See notes to consolidated financial statements.
|
SILGAN HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Cash flows provided by (used in) operating activities:
Net income ............................................ $ 41,765 $ 31,308 $ 23,930
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ..................................... 89,772 84,577 82,093
Amortization of goodwill and other intangibles.... 5,759 4,392 3,881
Amortization of debt issuance costs .............. 1,675 1,658 1,593
Rationalization charges, net ..................... 9,334 -- 36,149
Equity in losses of affiliates ................... 4,140 4,610 --
Gain on assets contributed to affiliate .......... (4,908) -- --
Deferred income tax provision .................... 13,852 11,749 4,629
Extraordinary item ............................... -- 6,926 --
Other changes that provided (used) cash,
net of effects of acquisitions:
Trade accounts receivable ................... 19,179 (26,995) 5,909
Inventories ................................. 1,220 (18,366) (870)
Trade accounts payable ...................... (34,293) 21,106 (9,113)
Accrued liabilities ......................... 4,312 (19,610) 7,143
Other, net .................................. (8,824) (6,210) (12,075)
--------- ---------- ---------
Net cash provided by operating activities ........ 142,983 95,145 143,269
--------- ---------- ---------
Cash flows provided by (used in) investing activities:
Investment in equity affiliate ........................ (3,039) (7,026) --
Proceeds from equity affiliate ........................ 32,388 -- --
Acquisition of businesses ............................. -- (124,015) --
Capital expenditures .................................. (93,042) (89,227) (87,421)
Proceeds from asset sales ............................. 3,901 1,789 2,514
--------- ---------- ---------
Net cash used in investing activities ............ (59,792) (218,479) (84,907)
--------- ---------- ---------
Cash flows provided by (used in) financing activities:
Borrowings under revolving loans ...................... 710,749 1,198,459 912,959
Repayments under revolving loans ...................... (746,719) (954,724) (923,659)
Proceeds from stock option exercises .................. 1,028 512 514
Repurchase of common stock ............................ -- (1,075) (16,563)
Repayments and redemptions of long-term debt .......... (50,313) (101,124) (33,955)
Debt financing costs .................................. -- (1,052) --
--------- ---------- ---------
Net cash (used in) provided by financing
activities ..................................... (85,255) 140,996 (60,704)
--------- ---------- ---------
Cash and cash equivalents:
Net (decrease) increase ............................... (2,064) 17,662 (2,342)
Balance at beginning of year .......................... 20,073 2,411 4,753
--------- ---------- ---------
Balance at end of year ................................ $ 18,009 $ 20,073 $ 2,411
========= ========== =========
Interest paid .............................................. $ 85,825 $ 91,200 $ 84,037
Income taxes paid, net of refunds .......................... 8,308 13,352 9,511
|
See notes to consolidated financial statements.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 1. Summary of Significant Accounting Policies
Nature of Business. Silgan Holdings Inc., or Holdings, conducts its business through its wholly owned operating subsidiaries, Silgan Containers Corporation, or Containers, and Silgan Plastics Corporation, or Plastics. We are engaged in the manufacture and sale of steel and aluminum containers for human and pet food and custom designed plastic containers and closures for personal care, health care, pharmaceutical, household and industrial chemical, food, pet care, agricultural chemical, automotive and marine chemical products. Principally all of our businesses are based in the United States.
Basis of Presentation. The consolidated financial statements include the accounts of Holdings and its subsidiaries, all of which are wholly owned. All significant intercompany transactions have been eliminated. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.
The functional currency for our foreign operations is the Canadian dollar. Balance sheet accounts of our foreign subsidiaries are translated at exchange rates in effect at the balance sheet date, while revenue and expense accounts are translated at average rates prevailing during the year. Translation adjustments are reported as a component of accumulated other comprehensive income (loss).
Certain prior years' amounts have been reclassified to conform with the current year's presentation.
Cash and Cash Equivalents. Cash equivalents represent short-term, highly liquid investments which are readily convertible to cash and have maturities of three months or less at the time of purchase. The carrying values of these assets approximate their fair values. As a result of our cash management system, checks issued and presented to the banks for payment may create negative cash balances. Checks outstanding in excess of related cash balances totaling approximately $74.8 million at December 31, 2001 and $106.8 million at December 31, 2000 are included in trade accounts payable.
Inventories. Inventories are valued at the lower of cost or market (net realizable value) and the cost is principally determined on the last-in, first-out basis, or LIFO.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 1. Summary of Significant Accounting Policies (continued)
Property, Plant and Equipment, Net. Property, plant and equipment is stated at historical cost less accumulated depreciation. Major renewals and betterments that extend the life of an asset are capitalized and repairs and maintenance expenditures are charged to expense as incurred. Design and development costs for molds, dies and other tools that we do not own and that will be used to produce products that will be sold under long-term supply arrangements are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of depreciable assets. The principal estimated useful lives are 35 years for buildings and range between 3 to 18 years for machinery and equipment. Leasehold improvements are amortized over the shorter of the life of the related asset or the life of the lease.
Interest incurred on amounts borrowed in connection with the installation of major machinery and equipment acquisitions is capitalized. Capitalized interest of $1.6 million in 2001 and $2.4 million in 2000 was recorded as part of the cost of the assets to which it relates and is amortized over the assets' estimated useful life.
Goodwill. Excess purchase price over the fair value of net assets acquired (or goodwill) is amortized on a straight-line basis principally over 40 years. The amortization periods have been estimated given the nature of the technology, industry practice and long-term customer relationships of the businesses acquired. Goodwill is included in impairment reviews when events or circumstances exist that indicate its carrying amount may not be recoverable. Accumulated amortization of goodwill at December 31, 2001 and 2000 was $25.6 million and $20.7 million, respectively.
During July 2001, the Financial Accounting Standards Board, or the Board, issued Statement of Financial Accounting Standards, or SFAS, No. 141, "Business Combinations," which revises the accounting treatment for business combinations to require the use of purchase accounting and prohibit the use of the pooling-of-interests method for business combinations initiated after June 30, 2001. During July 2001, the Board also issued SFAS No. 142, "Goodwill and Other Intangible Assets," which revises the accounting for goodwill to eliminate amortization of goodwill on transactions consummated after June 30, 2001 and of all other goodwill as of January 1, 2002. Other intangible assets will continue to be amortized over their useful lives. SFAS No. 142 requires goodwill and other intangibles to be assessed for impairment each year and more frequently if circumstances indicate a possible impairment. During 2002, we will perform our first impairment test as of January 1, 2002. We estimate that net income and diluted earnings per share would have been approximately $44.8 million and $2.48, respectively, for the year ended December 31, 2001; $33.9 million and $1.88, respectively, for the year ended December 31, 2000; and $26.4 million and $1.45, respectively, for the year ended December 31, 1999, had the provisions of SFAS No. 142 been applied in those years. We do not anticipate having to record a charge to net income for the potential impairment of goodwill or other intangible assets as a result of the adoption of SFAS No. 142.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 1. Summary of Significant Accounting Policies (continued)
Impairment of Long-Lived Assets. We assess long-lived assets for impairment under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Under these rules, we assess long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be fully recoverable. An impairment exists if the estimate of future undiscounted cash flows generated by the assets is less than the carrying value of the assets. If an impairment is determined to exist, any related impairment loss is then measured by comparing the fair value of the assets to their carrying amount.
In October 2001, the Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121 and the accounting and reporting provisions of Accounting Principles Board Opinion, or APB, No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets and expands the scope of a discontinued operation to include a component of an entity. SFAS No. 144 is effective on January 1, 2002. We do not expect the adoption of SFAS No. 144 to have a significant impact on our 2002 financial statements.
Other Assets. Other assets consist principally of investments in equity affiliates, debt issuance costs which are being amortized on a straight-line basis over the terms of the related debt agreements (6 to 12 years) and other intangible assets which are being amortized over their expected useful lives using the straight-line method.
Hedging Instruments. We utilize certain derivative financial instruments to manage our interest rate and natural gas cost exposures. We do not engage in trading or other speculative uses of these financial instruments. For a financial instrument to qualify as a hedge, we must be exposed to interest rate or price risk, and the financial instrument must reduce the exposure and be designated as a hedge. Financial instruments qualifying for hedge accounting must maintain a high correlation between the hedging instrument and the item being hedged, both at inception and throughout the hedged period.
Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138. SFAS No. 133 requires all derivative instruments to be recorded in the consolidated balance sheets at their fair values. Changes in the fair value of derivatives will be recorded each period in earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The adoption of SFAS No. 133, as amended, did not have a significant impact on our financial position or results of operations.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 1. Summary of Significant Accounting Policies (continued)
Income Taxes. We account for income taxes using the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment of such change. Income taxes are calculated for Holdings and the acquired steel container manufacturing business of Campbell Soup Company, or CS Can, on a separate return basis. U.S. income taxes have not been provided on the accumulated earnings of our foreign subsidiaries since these earnings are expected to be permanently reinvested.
Revenue Recognition. Revenues are recognized when goods are shipped and the title and risk of loss pass to the customer. Shipping and handling fees and costs incurred in connection with products sold are recorded in cost of goods sold in our Consolidated Statements of Income.
Stock Based Compensation. We account for our employee stock option plan in accordance with APB No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation expense is recognized when the exercise price of employee stock options is less than or equal to the market price of the underlying stock on the date of grant.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 2. Acquisition
On October 1, 2000, we acquired all of the outstanding capital stock of RXI Holdings, Inc., or RXI Plastics, a manufacturer and seller of rigid plastic packaging, for $124.0 million in cash. We financed the purchase price through revolving loan borrowings under our U.S. bank credit agreement. The acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition, and RXI Plastics' results of operations have been included in our consolidated operating results from the date of acquisition.
During 2001, we completed the allocation of excess purchase price over the fair value of net assets acquired. As a result, we reduced goodwill by $4.3 million primarily to reflect the final valuation of property, plant and equipment and deferred income taxes. Goodwill of $45.5 million has been recorded and is being amortized over 40 years.
Note 3. Rationalization Charges and Acquisition Reserves
During the fourth quarter of 2001, we approved and announced to employees separate plans to exit our Northtown, Missouri and Kingsburg, California metal food container facilities and to cease operation of our composite container department at our Waukegan, Illinois metal food container facility. These plans included the termination of approximately 80 plant employees, the termination of an operating lease and other plant related exit costs including equipment dismantle costs. These decisions resulted in a fourth quarter pre-tax charge to earnings of $7.0 million. This charge consisted of $4.2 million for the non-cash write-down in carrying value of assets, $1.4 million for employee severance and benefits and $1.4 million for plant exit costs. Through December 31, 2001, a total of $0.1 million, excluding the non-cash write-down, has been expended relating to these plans. At December 31, 2001, this reserve had a balance of $2.7 million. Cash payments relating to these plans are expected through 2002.
During the first quarter of 2001, we approved and announced to employees a plan to exit our Fairfield, Ohio plastic container facility. The plan included the termination of approximately 150 plant employees and other related exit costs including equipment dismantle costs and contractual rent obligations. This decision resulted in a first quarter pre-tax charge to earnings of $3.5 million, which consisted of $2.6 million for plant exit costs and $0.9 million for employee severance and benefits. Through December 31, 2001, a total of $1.4 million has been expended relating to this plan. These expenditures consisted of $0.7 million related to employee severance and benefits and $0.7 million for plant exit costs. At December 31, 2001, this reserve had a balance of $2.1 million. Although we have closed the plant, the timing of cash payments is dependent upon the expiration of a lease obligation. Accordingly, cash payments related to closing this facility are expected primarily through 2002.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 3. Rationalization Charges and Acquisition Reserves (continued)
During the fourth quarter of 1999, we approved and announced to employees separate plans to exit our San Leandro and City of Industry, California metal food container facilities. These plans included the termination of approximately 130 plant employees, termination of two operating leases and other plant related exit costs including equipment dismantle costs and contractual rent obligations. These decisions resulted in a fourth quarter pre-tax charge to earnings of $11.9 million. This charge consisted of $7.3 million for the non-cash write-down in carrying value of assets, $2.2 million for employee severance and benefits and $2.4 million for plant exit costs. Through December 31, 2001, a total of $4.4 million, excluding the non-cash write-down, has been expended relating to these plans. These expenditures consisted of $2.2 million related to employee severance and benefits and $2.2 million for plant exit costs. During the fourth quarter of 2001, certain assets with carrying values that were previously written down as part of this rationalization charge were placed back in service. As a result, we recorded $1.2 million as a credit to rationalization charges, net in our Consolidated Statements of Income, and recorded those assets in our Consolidated Balance Sheets at their depreciated cost, which approximates fair value. At December 31, 2001, this reserve had a balance of $0.2 million. Although we have closed both plants, the timing of cash payments has been dependent upon the resolution of various matters with the lessor of one of the facilities. Accordingly, cash payments related to closing these facilities are expected through 2002.
During 1999, we initiated and concluded a study to evaluate the long-term utilization of all assets of our metal food container business. As a result, during the third quarter of 1999, we determined that certain adjustments were necessary to properly reflect the net realizable values of machinery and equipment which had become surplus or obsolete and recorded a non-cash pre-tax charge to earnings of $24.2 million to reduce the carrying value of those assets.
Acquisition reserves established in connection with our 1998 purchases of CS Can, Clearplass Containers, Inc., or Clearplass, and Winn Packaging Co., or Winn, were recorded pursuant to plans that we began to assess and formulate at the time of the acquisitions and which were finalized in 1999. As a result of these plans, we recorded acquisition reserves totaling $5.4 million, of which $0.5 million related to employee severance and benefits, $4.6 million related to plant exit costs necessary to comply with environmental requirements that existed at the time of the acquisition and to exit the acquired Albia, Iowa and Sheffield, Alabama plastic container manufacturing facilities and $0.3 million related to liabilities incurred in connection with these acquisitions. Through December 31, 2001, a total of $3.5 million has been expended relating to these plans, which consisted of $0.5 million related to employee severance and benefits, $2.9 million for plant exit costs and $0.1 million for the payment of acquisition related liabilities. The timing of cash payments relating to the CS Can activities has been primarily dependent upon obtaining necessary environmental permits and approvals in connection with a consent order with the U.S. Environmental Protection Agency to which we are subject as a result of our acquisition of CS Can. All actions under these plans were completed during the fourth quarter of 2001 at amounts less than previously estimated, and, accordingly, we reversed $1.9 million of acquisition reserves as a reduction to goodwill.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 3. Rationalization Charges and Acquisition Reserves (continued)
Acquisition reserves established in connection with our purchase of the Food Metal and Specialty Business of American National Can Company, or AN Can, in 1995 aggregating approximately $49.5 million were recorded pursuant to plans that we began to assess and formulate at the date of the acquisition and which were finalized in 1996. These reserves consisted of employee severance and benefits costs ($26.1 million) for the termination of approximately 500 plant, selling and administrative employees, plant exit costs ($6.6 million) related to the planned closure of the St. Louis, Missouri plant, the downsizing of the Hoopeston, Illinois and Savage, Minnesota facilities and the restructuring of the St. Paul, Minnesota plant and liabilities incurred in connection with the acquisition ($16.8 million). Through December 31, 2001, a total of $44.0 million has been expended related to these plans, which consisted of $24.6 million for employee severance and benefits, $4.6 million for plant exit costs and $14.8 million for payment of acquisition related liabilities. At December 31, 2001, this reserve had a balance of $5.5 million. Although we have completed our plan, cash payments are expected to continue for pension obligations totaling $1.5 million which are required to be paid pursuant to a labor agreement in place at the time of acquisition, the last in a series of $2.0 million annual contractual payments that began in 1996 and continue through 2002 to resolve a contract dispute that arose in connection with the acquisition and the resolution of various environmental liabilities, estimated at $2.0 million, that existed at the time of the acquisition.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 3. Rationalization Charges and Acquisition Reserves (continued)
Our continuing efforts to integrate and rationalize our operations are part of our strategy to maximize production efficiencies. Activity in our rationalization and acquisition reserves since December 31, 1999 is summarized as follows (dollars in thousands):
Employee Plant
Severance Exit Acquisition
and Benefits Costs Liabilities Total
------------ ----- ----------- -----
Balance at December 31, 1999
----------------------------
AN Can Acquisition .............................................. $ 2,555 $ 4,451 $ 6,704 $13,710
CS Can, Clearplass and Winn Acquisitions ........................ -- 3,711 252 3,963
San Leandro and City of Industry Plant Rationalizations ......... 1,792 2,332 -- 4,124
Other Acquisitions .............................................. -- 256 -- 256
------- ------- ------- -------
Balance at December 31, 1999 .................................... 4,347 10,750 6,956 22,053
2000 Activity
-------------
AN Can Acquisition .............................................. (191) (1,829) (2,704) (4,724)
CS Can, Clearplass and Winn Acquisitions ........................ -- (1,588) -- (1,588)
San Leandro and City of Industry Plant Rationalizations ......... (1,792) (1,726) -- (3,518)
Other Acquisitions .............................................. -- (48) -- (48)
------- ------- ------- -------
Total ........................................................... (1,983) (5,191) (2,704) (9,878)
Balance at December 31, 2000
----------------------------
AN Can Acquisition .............................................. 2,364 2,622 4,000 8,986
CS Can, Clearplass and Winn Acquisitions ........................ -- 2,123 252 2,375
San Leandro and City of Industry Plant Rationalizations ......... -- 606 -- 606
Other Acquisitions .............................................. -- 208 -- 208
------- ------- ------- -------
Balance at December 31, 2000 .................................... 2,364 5,559 4,252 12,175
2001 Activity
-------------
AN Can Acquisition .............................................. (873) (645) (2,000) (3,518)
CS Can, Clearplass and Winn Acquisitions ........................ -- (425) (80) (505)
CS Can, Clearplass and Winn Reversal to Goodwill ................ -- (1,698) (172) (1,870)
San Leandro and City of Industry Plant Rationalizations ......... -- (409) -- (409)
Fairfield Plant Rationalization Charge .......................... 874 2,616 -- 3,490
Fairfield Plant Rationalization ................................. (637) (749) -- (1,386)
Northtown, Kingsburg and Waukegan Plant
Rationalization Charges ....................................... 1,421 1,425 -- 2,846
Northtown, Kingsburg and Waukegan Plant Rationalizations ........ (88) (26) -- (114)
Other Acquisitions .............................................. -- (208) -- (208)
------- ------- ------- -------
Total ........................................................... 697 (119) (2,252) (1,674)
Balance at December 31, 2001
----------------------------
AN Can Acquisition .............................................. 1,491 1,977 2,000 5,468
CS Can, Clearplass and Winn Acquisitions ........................ -- -- -- --
San Leandro and City of Industry Plant Rationalizations ......... -- 197 -- 197
Fairfield Plant Rationalization ................................. 237 1,867 -- 2,104
Northtown, Kingsburg and Waukegan Plant Rationalizations ........ 1,333 1,399 -- 2,732
Other Acquisitions .............................................. -- -- -- --
------- ------- ------- -------
Balance at December 31, 2001 .................................... $ 3,061 $ 5,440 $ 2,000 $10,501
======= ======= ======= =======
|
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 3. Rationalization Charges and Acquisition Reserves (continued)
At December 31, 2001 and 2000, rationalization and acquisition reserves were included in our Consolidated Balance Sheets as follows:
2001 2000
---- ----
(Dollars in thousands)
Accrued liabilities ..... $ 8,492 $ 7,462
Other liabilities ....... 2,009 4,713
------- -------
$10,501 $12,175
======= =======
|
Note 4. Comprehensive Income (Loss)
Comprehensive income (loss) is reported in our Consolidated Statements of Stockholders' Equity (Deficiency). Amounts included in accumulated other comprehensive income (loss) at December 31 are as follows:
2001 2000
---- ----
(Dollars in thousands)
Foreign currency translation ........... $(1,916) $ (691)
Change in fair value of derivatives .... (3,267) -
Minimum pension liability .............. (2,863) (897)
------- -------
Accumulated other comprehensive
income (loss) ...................... $(8,046) $(1,588)
======= =======
|
The change in fair value of derivatives component of accumulated other
comprehensive income (loss) is comprised of a $0.1 million charge, net of tax,
for the cumulative effect of adopting SFAS No. 133 and an additional charge of
$3.2 million, net of both tax and net losses reclassified to earnings, for the
change in fair value of derivatives for the year ended December 31, 2001. The
amount reclassified to earnings from accumulated other comprehensive income
(loss) for the year ended December 31, 2001 was a net loss of $4.6 million.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 5. Inventories
The components of inventories at December 31 are as follows:
2001 2000
---- ----
(Dollars in thousands)
Raw materials ..................... $ 29,602 $ 43,873
Work-in-process ................... 45,510 51,191
Finished goods .................... 168,362 165,680
Spare parts and other ............. 12,128 11,698
-------- --------
255,602 272,442
Adjustment to value inventory
at cost on the LIFO method ..... 7,025 7,295
-------- --------
$262,627 $279,737
======== ========
|
The amount of inventory recorded on the first-in, first-out method at December 31, 2001 and 2000 was $22.3 million and $31.6 million, respectively.
Note 6. Property, Plant and Equipment, Net
Property, plant and equipment, net, at December 31 are as follows:
2001 2000
---- ----
(Dollars in thousands)
Land ............................... $ 7,869 $ 8,152
Buildings and improvements ......... 128,815 128,185
Machinery and equipment ............ 1,055,207 1,022,176
Construction in progress ........... 56,504 73,574
---------- ----------
1,248,395 1,232,087
Accumulated depreciation ........... (570,853) (522,574)
---------- ----------
Property, plant and
equipment, net ............... $ 677,542 $ 709,513
========== ==========
|
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 7. Other Assets
Other assets at December 31 are as follows:
2001 2000
---- ----
(Dollars in thousands)
Investments in equity affiliates (see Note 8) ... $14,342 $ 2,167
Debt issuance costs ............................. 13,727 13,738
Intangible pension asset ........................ 10,855 10,240
Other ........................................... 22,783 19,954
------- -------
61,707 46,099
Accumulated amortization ........................ (6,486) (4,817)
------- -------
$55,221 $41,282
======= =======
|
Note 8. Investments in Equity Affiliates
Effective July 1, 2001, we formed a joint venture company with Schmalbach-Lubeca AG that supplies an extensive range of metal and plastic closures to the food and beverage industries in North America. The new venture operates under the name White Cap LLC, or White Cap. We contributed $48.4 million of metal closure assets, including our manufacturing facilities in Evansville and Richmond, Indiana, and $7.1 million of metal closure liabilities to White Cap in return for a 35% interest in and $32.4 million of cash proceeds from the joint venture. Net sales of our metal closure business, which was contributed to the White Cap joint venture, totaled $46.3 million, $90.8 million and $101.6 million in 2001, 2000 and 1999, respectively.
We account for our investment in the White Cap joint venture using the equity method. During 2001, we recorded equity losses of the White Cap joint venture of $0.3 million and a gain on the assets contributed to the joint venture of $4.9 million.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 8. Investments in Equity Affiliates (continued)
In April 2000, we, together with Morgan Stanley Dean Witter Private Equity and Diamondcluster International Inc., agreed to invest in Packtion Corporation, or Packtion, an e-commerce joint venture aimed at integrating the packaging supply chain from design through manufacturing and procurement. The parties agreed to make the investments through Packaging Markets LLC, a limited liability company. The joint venture was expected to provide a comprehensive online marketplace for packaging goods and services and to combine content, tools and collaboration capabilities to streamline the product development process and enhance transaction opportunities for buyers and sellers of packaging. The products that Packtion was developing included a web-based software tool to enable product and package design, development and collaboration; an internet-based secure environment enabling the sharing of packaging related product information and the transaction of business electronically; and an informational source of packaging related knowledge, tools and expert services. Packtion had insignificant sales for internet consulting services and incurred net losses. We accounted for our investment in Packtion using the equity method.
In June and August 2000, we invested a total of $7.0 million in Packtion representing approximately a 45% interest in Packtion. For the year ended December 31, 2000, we recorded equity losses of Packtion aggregating $4.6 million. In addition, we recorded our share of Packtion's closing costs, $0.2 million, as a reduction to our investment. In the first quarter of 2001, in connection with an investment by The Proctor & Gamble Company and E. I. Du Pont de Nemours & Co. in Packtion, we invested an additional $3.1 million bringing our total investment to $10.1 million representing approximately a 25% interest in Packtion. In connection with this transaction, we also recorded a reduction to paid-in capital of $1.4 million due to the dilution of our investment. Packtion was dissolved on May 31, 2001, after its board of directors determined that there had been slower than anticipated market acceptance of its business. During 2001, we recorded equity losses of Packtion aggregating $3.8 million, which included our final losses and eliminated our investment.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 9. Long-Term Debt
Long-term debt at December 31 is as follows:
2001 2000
---- ----
(Dollars in thousands)
Bank Debt:
Bank Revolving Loans ..................... $333,025 $ 367,400
Bank A Term Loans ........................ 119,413 159,218
Bank B Term Loans ........................ 186,588 188,542
Canadian Bank Facility ................... 2,639 12,850
-------- ----------
Total bank debt ........................ 641,665 728,010
Subordinated Debt:
9% Senior Subordinated Debentures ........ 300,000 300,000
Other .................................... 3,104 3,465
-------- ----------
Total subordinated debt ................ 303,104 303,465
-------- ----------
Total Debt .................................. 944,769 1,031,475
Less current portion ..................... 57,999 44,948
-------- ----------
$886,770 $ 986,527
======== ==========
|
The aggregate annual maturities of long-term debt at December 31, 2001 are as follows (dollars in thousands):
2002 ............ $ 57,999
2003 ............ 401,090
2004 ............ 1,954
2005 ............ 180,726
2006 ............ --
Thereafter ...... 303,000
--------
$944,769
========
|
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 2000 and 1999
Note 9. Long-Term Debt (continued)
Our U.S. senior secured credit facility, or the Credit Agreement, initially provided us with $250.0 million of A Term Loans, $200.0 million of B Term Loans and up to $550.0 million of Revolving Loans. Pursuant to the Credit Agreement, we initially had the right at any time to request one or more lenders to increase their revolving loan commitments thereunder by up to an aggregate of $200.0 million. In October 2000, certain lenders agreed pursuant to our request to increase their revolving loan commitments under the Credit Agreement by an aggregate of $125.0 million. As a result, we currently have the right to request up to an additional $75.0 million of revolving loans from one or more lenders.
The A Term Loans and Revolving Loans mature on December 31, 2003 and the B Term Loans mature on June 30, 2005. Principal of the A Term Loans and B Term Loans is required to be repaid in scheduled annual installments and amounts repaid may not be reborrowed. Principal repayments of $39.8 million and $34.8 million of A Term Loans were made during 2001 and 2000, respectively. Principal repayments of $2.0 million of B Term Loans were made during both 2001 and 2000.
The Credit Agreement requires us to prepay the term loans with proceeds received from the incurrence of indebtedness, except proceeds used to refinance other existing indebtedness; with proceeds received from certain assets sales; and, under certain circumstances, with 50% of our excess cash flow, as defined. Generally, prepayments are allocated pro rata to the A Term Loans and B Term Loans and applied first to the scheduled amortization payments in the year of such prepayments and, to the extent in excess thereof, pro rata to the remaining installments of the term loans.
The Credit Agreement provides us with a commitment for a revolving credit facility of up to $670.5 million (after giving effect to the reduction of such facility by $4.5 million for the revolving loan facility under our Canadian bank facility) for working capital needs and other general corporate purposes, including acquisitions. Revolving Loans may be borrowed, repaid and reborrowed over the life of the Credit Agreement until their final maturity. At December 31, 2001, there were $333.0 million of Revolving Loans outstanding and, after taking into account outstanding letters of credit of $16.0 million, borrowings available under the revolving credit facility of the Credit Agreement were $321.5 million. Based on our ability and intention to continue to refinance for more than one year our outstanding Revolving Loan borrowings at December 31, 2001, such borrowings were reclassified as long-term debt. Seasonal Revolving Loan borrowings during the year will be classified as current obligations.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 9. Long-Term Debt (continued)
We may utilize up to a maximum of $30.0 million of our revolving credit facility under the Credit Agreement for letters of credit as long as the aggregate amount of borrowings of Revolving Loans and letters of credit do not exceed the amount of the commitment under such revolving credit facility. The Credit Agreement provides for the payment of a commitment fee ranging from 0.15% to 0.375% (0.25% at December 31, 2001) per annum on the daily average unused portion of commitments available under the revolving credit facility of the Credit Agreement and at December 31, 2001 a 1.375% per annum fee on outstanding letters of credit. In connection with the $125.0 million increase to the revolving loan commitments under the Credit Agreement, we pay a 1.5% per annum facility fee on the incremental commitment.
Credit Agreement borrowings may be designated as Base Rate or Eurodollar Rate borrowings. The Base Rate is the higher of 1/2 of 1.0% in excess of the Adjusted Certificate of Deposit Rate, as defined in the Credit Agreement, 1/2 of 1.0% in excess of the Federal Funds Rate, or Bankers Trust Company's prime lending rate. Currently, Base Rate borrowings bear interest at the Base Rate plus a margin of 0.125% in the case of A Term Loans and Revolving Loans and at the Base Rate plus a margin of 0.625% in the case of B Term Loans. Eurodollar Rate borrowings currently bear interest at the Eurodollar Rate plus a margin of 1.125% in the case of A Term Loans and Revolving Loans and a margin of 1.625% in the case of B Term Loans. In accordance with the Credit Agreement, the interest rate margin on Base Rate and Eurodollar Rate borrowings will be reset quarterly based upon the Company's Leverage Ratio, as defined in the Credit Agreement. As of December 31, 2001, the interest rate for Base Rate borrowings was 4.9% and the interest rate for Eurodollar Rate borrowings ranged between 3.1% and 5.9%. For 2001, 2000 and 1999, the weighted average annual interest rate paid on all term loans was 6.0%, 7.8%, and 6.7%, respectively. We have entered into interest rate swap agreements with an aggregate notional amount of $275.0 million to convert interest rate exposure from variable to fixed interest rates on A Term Loans and B Term Loans. See Note 10 which includes a discussion of the interest rate swap agreements.
Because we sell metal containers used in fruit and vegetable pack processing, we have seasonal sales. As is common in the industry, we must access working capital to build inventory and then carry accounts receivable for some customers beyond the end of the summer and fall packing season. Seasonal accounts are generally settled by year end. Due to our seasonal requirements, we incur short-term indebtedness to finance our working capital requirements. For 2001, 2000 and 1999, the average amount of borrowings, including seasonal borrowings, under our U.S. revolving credit facility was $497.0 million, $339.5 million and $308.1 million, respectively; the weighted average annual interest rate paid on such borrowings was 5.3%, 7.5%, and 6.4%, respectively; and, after taking into account outstanding letters of credit, the highest amount of such borrowings was $584.3 million, $529.9 million and $404.4 million, respectively.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 9. Long-Term Debt (continued)
The indebtedness under the Credit Agreement is guaranteed by Holdings and certain of its U.S. subsidiaries and is secured by a security interest in substantially all of their real and personal property. The stock of certain of our U.S. subsidiaries has been pledged to the lenders under the Credit Agreement. At December 31, 2001, we had assets of a U.S. subsidiary of $136.5 million which were restricted and could not be transferred to Holdings or any other subsidiary of Holdings.
The Credit Agreement contains various covenants which limit, among other things, our ability and the ability of our subsidiaries to grant liens, sell assets and use the proceeds from certain asset sales, make certain payments (including dividends) on our capital stock, incur indebtedness or provide guarantees, make loans or investments, enter into transactions with affiliates, make capital expenditures, engage in any business other than the packaging business, and, with respect to our subsidiaries, issue stock. In addition, we are required to meet specified financial covenants including Interest Coverage and Leverage Ratios, each as defined in the Credit Agreement. We are currently in compliance with all covenants under the Credit Agreement.
Through a wholly owned Canadian subsidiary, we have a Canadian bank facility, or the Canadian Bank Facility, with various Canadian banks. The Canadian Bank Facility initially provided our Canadian subsidiaries with Cdn. $26.5 million (U.S. $18.5 million) of term loans, and provides such subsidiaries with up to Cdn. $6.5 million (U.S. $4.5 million) of revolving loans. Principal of the term loans is required to be repaid in annual installments until maturity on December 31, 2003. At December 31, 2001, term loans of Cdn. $4.2 million (U.S. $2.6 million) were outstanding under the Canadian Bank Facility. During 2001 and 2000, we repaid Cdn. $12.8 million (U.S. $8.2 million) and Cdn. $3.7 million (U.S. $2.5 million), respectively, of term loans in accordance with terms of the Canadian Bank Facility.
The revolving loans may be borrowed, repaid and reborrowed until maturity on December 31, 2003. There were no revolving loans outstanding under the Canadian Bank Facility at December 31, 2001, and there were Cdn. $2.3 million (U.S. $1.6 million) of revolving loans outstanding at December 31, 2000 under the Canadian Bank Facility.
Revolving loan and term loan borrowings may be designated as Canadian Prime Rate or Bankers Acceptance borrowings. Currently, Canadian Prime Rate borrowings bear interest at the Canadian Prime Rate, as defined in the Canadian Bank Facility, plus no margin. Bankers Acceptance borrowings bear interest at the rate for bankers acceptances plus a margin of 1.0%. Similar to the Credit Agreement, the interest rate margin on both Canadian Prime Rate and Bankers Acceptance borrowings will be reset quarterly based upon our consolidated Leverage Ratio. As of December 31, 2001, the interest rate for Bankers Acceptance borrowings was 3.1%.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 9. Long-Term Debt (continued)
The indebtedness under the Canadian Bank Facility is guaranteed by Holdings and certain of its subsidiaries and is secured by a security interest in substantially all of the real and personal property of our Canadian subsidiaries and all of the stock of our Canadian subsidiaries. The Canadian Bank Facility contains covenants which are generally no more restrictive than and are generally similar to the covenants in the Credit Agreement.
The $300.0 million aggregate principal amount of 9.0% Senior Subordinated Debentures, or the 9% Debentures, due June 1, 2009 are general unsecured obligations of Holdings, subordinate in right of payment to obligations under the Credit Agreement and the Canadian Bank Facility and effectively subordinate to all obligations of the subsidiaries of Holdings. Interest on the 9% Debentures is payable semi-annually in cash on the first day of each June and December.
The 9% Debentures are redeemable, at the option of Holdings, in whole or in part, at any time after June 1, 2002 at the following redemption prices (expressed in percentages of principal amount) plus accrued and unpaid interest thereon to the redemption date if redeemed during the twelve month period beginning June 1 of the years set forth below:
Year Redemption Price ---- ---------------- 2002 .......... 104.500% 2003 .......... 103.375% 2004 .......... 102.250% 2005 .......... 101.125% Thereafter .... 100.000% |
Upon the occurrence of a Change of Control (as defined in the Indenture relating to the 9% Debentures), Holdings is required to make an offer to purchase the 9% Debentures at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of purchase.
The Indenture relating to the 9% Debentures contains covenants which are generally less restrictive than those under the Credit Agreement and Canadian Bank Facility.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 9. Long-Term Debt (continued)
In December 2000, we redeemed all $56.2 million principal amount of our outstanding 13 1/4% Subordinated Debentures due 2006, or the 13 1/4% Debentures. The redemption price was 109.938% of the principal amount, or approximately $61.8 million, plus accrued and unpaid interest to the redemption date. As permitted under the Credit Agreement and the other documents governing our indebtedness, we funded the redemption with lower cost revolving loans under our Credit Agreement. As a result, in the fourth quarter of 2000, we recorded an extraordinary loss of $6.9 million, $4.2 million after-tax, or $0.23 per diluted share, for the premium paid in connection with this redemption and for the write-off of unamortized financing costs related to the 13 1/4% Debentures.
Note 10. Financial Instruments
The financial instruments recorded in our Consolidated Balance Sheets include
cash and cash equivalents, accounts receivable, accounts payable, debt
obligations and swap agreements. Due to their short-term maturity, the carrying
amounts of cash and cash equivalents, accounts receivable and accounts payable
approximate their fair market value. The following table summarizes the carrying
amounts and estimated fair values of our other financial instruments at December
31 (bracketed amount represents an unrecognized asset):
2001 2000
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Dollars in thousands)
Bank debt ......................... $641,665 $641,665 $728,010 $728,010
Subordinated debt.................. 300,000 305,250 300,000 269,700
Interest rate swap agreements...... 5,037 5,037 -- 723
Natural gas swap agreements........ 1,768 1,768 -- (711)
|
Methods and assumptions used in estimating fair values are as follows:
Bank debt: The carrying amounts of our variable rate bank revolving loans and term loans approximate their fair values.
Subordinated debt: The fair value of our 9% Debentures is estimated based on quoted market prices.
Interest Rate and Natural Gas Swap Agreements: The fair value of the interest rate and natural gas swap agreements reflects the estimated amounts that we would pay or receive at December 31, 2001 and 2000 in order to terminate the contracts based on the present value of expected cash flows derived from market rates and prices.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 10. Financial Instruments (continued)
We utilize certain derivative financial instruments to manage our interest rate and energy cost exposures. We limit our use of derivative financial instruments to interest rate and natural gas swap agreements. We do not utilize derivative financial instruments for speculative purposes.
Our interest rate and natural gas swap agreements are accounted for as cash flow hedges. To the extent these swap agreements are effective pursuant to SFAS No. 133 in offsetting the variability of the hedged cash flows, changes in their fair values are recorded in accumulated other comprehensive income (loss), a component of stockholders' equity (deficiency), and reclassified into earnings in future periods when earnings are also affected by the variability of the hedged cash flows. To the extent these swap agreements are not effective as hedges, changes in their fair values are recorded in net income. During 2001, ineffectiveness for our hedges reduced net income by $0.2 million and was recorded in interest and other debt expense in our Consolidated Statements of Income.
The adoption of SFAS No. 133 on January 1, 2001 resulted in recording a net liability of $0.1 million on the balance sheet to reflect the fair value of outstanding swap agreements and a transition adjustment of $0.1 million ($0.1 million net of tax) to reflect the cumulative effect of adoption in accumulated other comprehensive income (loss). The fair value of the outstanding swap agreements in effect at December 31, 2001 was a net liability of $6.8 million and was recorded in the Consolidated Balance Sheets as follows: $6.7 million in other liabilities, $1.1 million in accrued interest payable and $1.0 million in other assets. As a result, we recorded an additional charge to accumulated other comprehensive income (loss) of $3.2 million, net of both taxes and net losses reclassified to earnings. We estimate that we will reclassify $4.6 million, net of tax, of the amount recorded in accumulated other comprehensive income (loss) as a charge to earnings during the next twelve months. The actual amount that will be reclassified to earnings will vary from this amount as a result of changes in market conditions.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 10. Financial Instruments (continued)
We have entered into interest rate swap agreements with major banks to manage our exposure to interest rate fluctuations. The interest rate swap agreements effectively convert interest rate exposure from variable rates to fixed rates of interest. At December 31, 2001 and 2000, the aggregate notional principal amounts of these agreements were $275 million and $150 million, respectively. These agreements are with financial institutions which are expected to fully perform under the terms thereof. Under these agreements, we pay fixed rates of interest ranging from 3.8% to 6.4% and receive floating rates of interest based on three month LIBOR. These agreements mature in 2002 ($100 million notional principal amount), 2003 ($125 million notional principal amount) and 2004 ($50 million notional principal amount). The difference between amounts to be paid or received on interest rate swap agreements is recorded as interest expense. Net payments of $2.0 million, net receipts of $0.6 million and net payments of $1.1 million were made under our interest rate swap agreements for the years ended December 31, 2001, 2000 and 1999, respectively.
We have entered into natural gas swap agreements with major trading companies to manage our exposure to fluctuations in natural gas prices. At December 31, 2001 and December 31, 2000, the aggregate notional principal amount of these agreements was 1,560,000 MMBtu and 170,000 MMBtu of natural gas, respectively. These agreements are with institutions that are expected to fully perform under the terms thereof. Under these agreements, we pay fixed natural gas prices ranging from $2.73 to $5.73 per MMBtu and receive a NYMEX-based natural gas price. These agreements mature at various times through March 2003. Realized gains and losses on these natural gas swap agreements are deferred as a component of inventories and are recognized when related costs are recorded to cost of goods sold. Payments under these natural gas swap agreements were $1.3 million during 2001, and payments and receipts under these agreements were essentially equal in 2000. We did not enter into any natural gas swap agreements in 1999. During 2001 and 2000, natural gas swap agreements for aggregate notional amounts of 780,000 MMBtu and 98,000 MMBtu of natural gas expired, respectively.
We derive a significant portion of our revenue from multi-year supply agreements with many of our customers. Aggregate revenues from our three largest customers accounted for approximately 33.5%, 33.6% and 33.8% of our net sales in 2001, 2000 and 1999, respectively. The receivable balances from these customers collectively represented 30.5% and 31.2% of our trade accounts receivable at December 31, 2001 and 2000, respectively. As is common in the packaging industry, we provide extended payment terms for some of our customers due to the seasonality of the vegetable and fruit pack processing business. Exposure to losses is dependent on each customer's financial position. We perform ongoing credit evaluations of our customers' financial condition, and our receivables are generally not collateralized. We maintain an allowance for doubtful accounts which we believe is adequate to cover potential credit losses based on customer credit evaluations, collection history and other information.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 11. Commitments and Contingencies
We have a number of noncancelable operating leases for office and plant facilities, equipment and automobiles that expire at various dates through 2020. Certain operating leases have renewal options as well as various purchase options. Minimum future rental payments under these leases are as set forth below for each of the following years (dollars in thousands):
2002 .......... $18,550
2003 .......... 15,769
2004 .......... 11,061
2005 .......... 9,656
2006 .......... 8,824
Thereafter .... 30,882
-------
$94,742
=======
Rent expense was approximately $22.8 million in 2001, $19.0 million in 2000 and
$18.9 million in 1999.
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We are a party to routine legal proceedings arising in the ordinary course of our business. We are not a party to, and none of our properties are subject to, any pending legal proceedings which could have a material adverse effect on our business or financial condition.
Note 12. Retirement Benefits
We sponsor a number of defined benefit pension and defined contribution plans which cover substantially all employees, other than union employees covered by multi-employer defined benefit pension plans under collective bargaining agreements. Pension benefits are provided based on either a career average, final pay or years of service formula. With respect to certain hourly employees, pension benefits are provided based on stated amounts for each year of service. It is our policy to fund accrued pension and defined contribution costs in compliance with ERISA requirements. Assets of the plans consist primarily of equity and bond funds.
We have unfunded defined benefit health care and life insurance plans that provide postretirement benefits to certain employees. The plans are contributory, with retiree contributions adjusted annually, and contain cost sharing features including deductibles and coinsurance. Retiree health benefits are paid as covered expenses are incurred.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 12. Retirement Benefits (continued)
The changes in benefit obligations and plan assets as well as the funded status of our retirement plans at December 31 are as follows:
Pension Benefits Postretirement Benefits
---------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands)
Change in Benefit Obligation
Obligation at beginning of year .................... $128,840 $110,423 $ 49,682 $ 43,054
Service cost .................................... 7,653 6,986 1,778 1,228
Interest cost ................................... 9,472 8,671 3,640 3,220
Actuarial losses ................................ 2,438 1,911 2,494 1,445
Plan amendments ................................. 785 592 -- --
Benefits paid ................................... (5,004) (4,247) (2,475) (2,230)
Participants' contributions ..................... -- -- 218 292
Acquisition ..................................... 1,519 4,193 1,211 2,673
Curtailments or settlements ..................... (8,215) -- (5,874) --
Special termination benefits .................... -- 311 -- --
-------- -------- -------- --------
Obligation at end of year .......................... 137,488 128,840 50,674 49,682
Change in Plan Assets
Fair value of plan assets at beginning of year ..... 97,770 85,244 -- --
Actual return on plan assets .................... 508 2,391 -- --
Employer contributions .......................... 15,585 15,296 2,257 1,938
Participants' contributions ..................... -- -- 218 292
Benefits paid ................................... (5,004) (4,247) (2,475) (2,230)
Curtailments or settlements ..................... (7,927) -- -- --
Expenses ........................................ (972) (914) -- --
-------- -------- -------- --------
Fair value of plan assets at end of year ........... 99,960 97,770 -- --
Funded Status
Funded Status ...................................... (37,528) (31,070) (50,674) (49,682)
Unrecognized actuarial loss (gain) .............. 9,116 (2,180) 5,710 3,239
Unrecognized prior service cost ................. 15,803 15,593 109 124
-------- -------- -------- --------
Net amount recognized .............................. $(12,609) $(17,657) $(44,855) $(46,319)
======== ======== ======== ========
Amounts recognized in the Consolidated Balance
Sheets
Prepaid benefit cost ............................ $ 4,005 $ 289 $ -- $ --
Accrued benefit liability ....................... (32,217) (29,083) (44,855) (46,319)
Intangible asset ................................ 10,855 10,240 -- --
Accumulated other comprehensive loss ............ 4,748 897 -- --
-------- -------- -------- --------
Net amount recognized .............................. $(12,609) $(17,657) $(44,855) $(46,319)
======== ======== ======== ========
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SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 12. Retirement Benefits (continued)
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for our pension plans with accumulated benefit obligations in excess of plan assets were $137.5 million, $119.5 million and $100.0 million, respectively, at December 31, 2001 and $94.6 million, $84.5 million and $70.2 million, respectively, at December 31, 2000.
The components of the net periodic benefit cost for each of the years ended December 31 are as follows:
Pension Benefits Postretirement Benefits
--------------------------------- -------------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
(Dollars in thousands)
Service cost ..................................... $ 7,653 $ 6,986 $ 6,710 $1,778 $1,228 $1,031
Interest cost .................................... 9,472 8,671 7,616 3,640 3,220 2,944
Expected return on plan assets ................... (8,754) (7,925) (6,722) -- -- --
Amortization of prior service cost ............... 2,108 1,745 1,531 15 15 15
Amortization of actuarial (gains) losses ......... (93) (143) (29) 23 20 62
Losses due to settlement or curtailment .......... 151 311 -- -- -- --
------- ------- ------- ------ ------ ------
Net periodic benefit cost ........................ $10,537 $ 9,645 $ 9,106 $5,456 $4,483 $4,052
======= ======= ======= ====== ====== ======
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Our principal pension and postretirement benefit plans used the following weighted average actuarial assumptions at December 31:
2001 2000
---- ----
Discount rate ...................... 7.25% 7.50%
Expected return on plan assets ..... 9.00% 9.00%
Rate of compensation increase ...... 3.60% 3.75%
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SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 12. Retirement Benefits (continued)
The assumed health care cost trend rates used to determine the accumulated postretirement benefit obligation in 2001 ranged from 9.0% to 10.0% for pre-age 65 retirees and 8.0% to 9.0% for post-age 65 retirees, declining gradually to an ultimate rate of 5.5% in 2009. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one percentage point change in the assumed health care cost trend rates would have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
(Dollars in thousands)
Effect on postretirement benefit cost......... $ 512 $ (424)
Effect on postretirement benefit obligation... 2,950 (2,563)
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We participate in several multi-employer pension plans which provide defined benefits to certain of our union employees. Amounts contributed to these plans and charged to pension cost in 2001, 2000 and 1999 were $4.6 million, $4.7 million and $4.8 million, respectively.
We also sponsor defined contribution pension and profit sharing plans covering substantially all employees. Our contributions to these plans are based upon employee contributions and operating profitability. Contributions charged to expense for these plans were $6.4 million in 2001, $5.1 million in 2000 and $5.9 million in 1999.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 13. Income Taxes
The components of the provision for income taxes are as follows:
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Current:
Federal .............. $11,618 $ 7,859 $ 5,879
State ................ 1,372 816 1,143
Foreign .............. 3,380 2,656 2,654
------- ------- -------
16,370 11,331 9,676
Deferred:
Federal .............. 12,378 10,372 5,952
State ................ 2,182 953 (1,490)
Foreign .............. (708) 424 167
------- ------- -------
13,852 11,749 4,629
------- ------- -------
$30,222 $23,080 $14,305
======= ======= =======
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The provision for income taxes is included in our Consolidated Statements of Income as follows:
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Income before equity in losses of
affiliates and extraordinary item ..... $30,222 $25,790 $14,305
Extraordinary item ....................... -- (2,710) --
------- ------- -------
$30,222 $23,080 $14,305
======= ======= =======
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SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 13. Income Taxes (continued)
The provision for income taxes varied from income taxes computed at the statutory U.S. federal income tax rate as a result of the following:
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Income taxes computed at the statutory
U.S. federal income tax rate ............ $26,644 $20,649 $13,382
State and foreign taxes,
net of federal tax benefit .............. 1,955 1,109 (357)
Amortization of goodwill .................. 1,309 1,009 906
Other ..................................... 314 313 374
------- ------- -------
$30,222 $23,080 $14,305
======= ======= =======
Effective tax rate........................ 39.7% 39.1% 37.4%
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Deferred income taxes reflect the net tax effect of temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Significant components of our deferred tax assets and liabilities at December 31 are as follows:
2001 2000
---- ----
(Dollars in thousands)
Deferred tax assets:
Pension and postretirement liabilities ........ $ 24,694 $ 20,026
Rationalization and other accrued
liabilities ................................. 24,971 22,732
Net operating loss carryforwards .............. 39,128 55,356
AMT and other credit carryforwards ............ 25,405 14,635
Other ......................................... 5,729 3,986
--------- ---------
Total deferred tax assets .................. 119,927 116,735
Deferred tax liabilities:
Property, plant and equipment ................. (115,060) (107,995)
Other ......................................... (10,843) (9,106)
--------- ---------
Total deferred tax liabilities ............. (125,903) (117,101)
--------- ---------
Net deferred tax liability ...................... $ (5,976) $ (366)
========= =========
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SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 13. Income Taxes (continued)
We file a consolidated U.S. federal income tax return that includes all domestic subsidiaries except CS Can, which files a separate consolidated U.S. federal income tax return. At December 31, 2001, we had net operating loss carryforwards of approximately $39.7 million that are available to offset future consolidated taxable income (excluding CS Can) and that expire in 2011 and 2012. At December 31, 2001, CS Can had net operating loss carryforwards of approximately $62.9 million that are available to offset its future taxable income and that expire from 2018 through 2021. We believe that it is more likely than not that these net operating loss carryforwards will be available to reduce future income tax liabilities based upon estimated future taxable income, the reversal of temporary differences in future periods and the utilization of tax planning strategies. We also have $23.4 million of alternative minimum tax credits and CS Can has $0.4 million of alternative minimum tax credits which are available indefinitely to reduce future income tax payments.
Pre-tax income of foreign subsidiaries was $10.7 million in 2001, $8.9 million in 2000 and $8.1 million in 1999. At December 31, 2001, approximately $22.7 million of accumulated earnings of foreign subsidiaries are expected to be permanently reinvested. Accordingly, applicable U.S. federal income taxes have not been provided. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable to estimate.
Note 14. Stock Option Plan
We have established a stock option plan, or the Plan, for key employees pursuant to which options to purchase shares of our Common Stock may be granted.
The Plan authorizes grants of non-qualified or incentive stock options to purchase shares of our Common Stock. A maximum of 3,533,417 shares may be issued for stock options under the Plan. As of December 31, 2001, there were options for 695,914 shares of our Common Stock available for future issuance under the Plan. The exercise price of the stock options granted under the Plan is the fair market value of the Common Stock on the grant date. The stock options granted under the Plan generally vest ratably over a five year period beginning one year after the grant date and have a term of ten years.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 2000 and 1999
Note 14. Stock Option Plan (continued)
The following is a summary of stock option activity for years ended December 31, 2001, 2000 and 1999:
Weighted Average
Options Exercise Price
------- ----------------
Options outstanding at December 31, 1998 ..... 934,523 $ 8.64
=========
Granted ................................... 115,000 $17.61
Exercised ................................. (192,255) 2.67
---------
Options outstanding at December 31, 1999 ..... 857,268 11.17
=========
Granted ................................... 823,900 $13.62
Exercised ................................. (256,203) 2.00
Canceled .................................. (236,500) 21.88
---------
Options outstanding at December 31, 2000 ..... 1,188,465 12.71
=========
Granted ................................... 100,000 $20.76
Exercised ................................. (150,773) 6.82
---------
Options outstanding at December 31, 2001 ..... 1,137,692 14.20
=========
|
At December 31, 2001, 2000 and 1999, the remaining contractual life of options outstanding was 7.0 years, 7.5 years and 4.8 years, respectively, and there were 402,372, 360,065 and 581,488 options exercisable with weighted average exercise prices of $12.26, $8.12 and $5.16, respectively.
The following is a summary of stock options outstanding and exercisable at December 31, 2001 by range of exercise price:
Range of Remaining Weighted Weighted
Exercise Number Contractual Average Average
Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
------ ----------- ------------ -------------- ----------- --------------
$ 0.56 - $ 9.81 241,119 4.1 $ 2.53 180,319 $ 1.89
11.63 - 22.13 811,573 8.0 15.55 170,053 17.01
25.15 - 36.75 85,000 6.5 31.14 52,000 32.65
--------- -------
1,137,692 402,372
========= =======
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SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 14. Stock Option Plan (continued)
We apply APB No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for the Plan. Accordingly, no compensation expense has been recognized. Had compensation expense been determined based on the fair value of such awards at the grant date, in accordance with the methodology prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," our net income and basic and diluted earnings per share would have been as follows (dollars in thousands, except per share amounts):
2001 2000 1999
---- ---- ----
Net income:
As reported ................ $41,765 $31,308 $23,930
Pro forma .................. 40,428 29,865 23,291
Basic earnings per share:
As reported ................ $2.35 $1.77 $1.35
Pro forma .................. 2.27 1.69 1.32
Diluted earnings per share:
As reported ................ $2.31 $1.74 $1.32
Pro forma .................. 2.24 1.66 1.28
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The weighted average fair value of options granted was $14.01, $9.28 and $10.10 for 2001, 2000 and 1999, respectively.
The fair value was calculated using the Black-Scholes option-pricing model based on the following weighted average assumptions for grants made in 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
Risk-free interest rate......... 4.5% 6.6% 5.2%
Expected volatility............. 60.3% 60.6% 50.4%
Dividend yield.................. -- -- --
Expected option life (years).... 8 8 8
Note 15. Capital Stock
|
Our authorized capital stock consists of 100,000,000 shares of Common Stock, par value $.01 per share, and 10,000,000 shares of preferred stock, par value $.01 per share.
Our Board of Directors previously authorized the repurchase of up to $70.0 million of our Common Stock from time to time in the open market, through privately negotiated transactions or through block purchases. Our repurchases of Common Stock are recorded as treasury stock and result in a charge to stockholders' equity (deficiency). Through December 31, 2001, we repurchased 2,708,975 shares of our Common Stock for $61.0 million, which were initially funded from Revolving Loan borrowings under our Credit Agreement that were repaid with operating cash flows.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 16. Earnings Per Share
The components of the calculation of earnings per share are as follows (dollars and shares in thousands):
2001 2000 1999
---- ---- ----
Income before extraordinary item .............. $41,765 $35,524 $23,930
Extraordinary item ............................ -- 4,216 --
------- ------- -------
Net income .................................. $41,765 $31,308 $23,930
======= ======= =======
Weighted average number of shares used in:
Basic earnings per share .................... 17,777 17,652 17,706
Assumed exercise of employee stock options... 304 351 492
------ ------ ------
Diluted earnings per share .................. 18,081 18,003 18,198
====== ====== ======
|
Options to purchase 172,826 to 842,289 shares of Common Stock at prices ranging from $11.63 to $36.75 per share for 2001, 743,575 to 997,900 shares of Common Stock at prices ranging from $9.31 to $36.75 per share for 2000 and 215,000 to 330,000 shares of Common Stock at prices ranging from $17.00 to $36.75 per share for 1999 were outstanding but were excluded from the computation of diluted earnings per share because the exercise prices for such options were greater than the average market price of the Common Stock and, therefore, the effect would be antidilutive.
Note 17. Related Party Transactions
Pursuant to various management services agreements, or the Management Agreements, entered into between each of Holdings, Containers and Plastics and S&H Inc., or S&H, a company wholly owned by Mr. Silver, the Chairman and Co-Chief Executive Officer of Holdings, and Mr. Horrigan, the President and Co-Chief Executive Officer of Holdings, S&H provides Holdings and its subsidiaries with general management, supervision and administrative services.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 17. Related Party Transactions (continued)
In 2001 and 2000, in consideration for its services, S&H receives a fee in an amount equal to 90.909% of 4.95% of our consolidated EBDIT (as defined in the Management Agreements) until our consolidated EBDIT has reached the Scheduled Amount set forth in the Management Agreements, plus reimbursement for all related out-of-pocket expenses. In 1999, in consideration for its services, S&H received a fee of 4.95% of our consolidated EBDIT until our consolidated EBDIT reached the Scheduled Amount as set forth in the Management Agreements, and 3.3% of our consolidated EBDIT after our consolidated EBDIT exceeded the Scheduled Amount up to the Maximum Amount as set forth in the Management Agreements, plus reimbursement for all out-of-pocket expenses. We paid $5.1 million and $4.9 million to S&H under the Management Agreements in 2001 and 2000, respectively. In 1999, we paid $5.5 million to S&H under the Management Agreements, of which S&H paid $0.5 million to Morgan Stanley Dean Witter & Co., or MS & Co., for financial advisory services. These payments to S&H were allocated, based upon EBDIT, as a charge to operating income of each of our business segments. Under the terms of the Management Agreements, we have agreed, subject to certain exceptions, to indemnify S&H and any of its affiliates, officers, directors, employees, subcontractors, consultants or controlling persons against any loss or damage they may sustain arising in connection with the Management Agreements.
During each of 2001, 2000 and 1999, The Morgan Stanley Leveraged Equity Fund II, L.P., an affiliate of MS & Co., held a significant amount of our Common Stock. For financial advisory services provided by MS & Co. to Holdings and its subsidiaries, MS & Co. was paid $0.5 million in each of 2001 and 2000 by us and $0.5 million in 1999 by S&H.
In 2001, we entered into swap agreements with Morgan Stanley Capital Group, Inc., or MSCG, an affiliate of MS & Co., for an aggregate notional principal amount of 1,000,000 MMBtu of natural gas. During 2001, an aggregate notional principal amount of 100,000 MMBtu of these natural gas swap agreements were settled under which we paid an insignificant amount to MSCG.
Landstar System, Inc., or Landstar, provided transportation services to our subsidiaries in the amount of $0.7 million, $0.9 million and $1.3 million in 2001, 2000 and 1999, respectively. Mr. Crowe, a director of Holdings, is the Chairman of the Board, President and Chief Executive Officer of Landstar.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 18. Business Segment Information
We are engaged in the packaging industry and report our results primarily in two business segments: metal food containers and plastic containers. The metal food containers segment manufactures steel and aluminum containers for human and pet food and paperboard containers. The plastic containers segment manufactures custom designed plastic containers for personal care, health care, pharmaceutical, household and industrial chemical, food, pet care, agricultural chemical, automotive and marine chemical products, as well as plastic bowls and cans, plastic closures, caps, sifters and fitments and thermoformed plastic tubs for personal care, food, pet care and household products. These segments are strategic business operations that offer different products. Each are managed separately because each business produces a packaging product requiring different technology, production and marketing strategies. Each segment operates primarily in the United States. There are no inter-segment sales.
Historically, we also reported the results of our specialty packaging business as a separate business segment, which included our metal closures, Omni plastic container, Polystar easy-open plastic end and paperboard container businesses. As a result of the White Cap joint venture on July 1, 2001, we no longer report the results of our remaining specialty packaging businesses, which had net sales of $34.3 million, $33.1 million and $36.5 million in 2001, 2000 and 1999, respectively, as a separate business segment. The results of the Omni plastic container and Polystar easy-open plastic end businesses are reported with our plastic containers business, and the results of the paperboard container business are reported with our metal food containers business. The results of our metal closures business, which was contributed to the White Cap joint venture, are reported separately. Our metal closures business manufactured steel caps and closures and aluminum roll-on closures. Prior year amounts have been restated to conform with the current presentation.
The accounting policies of the reportable segments are the same as those described in Note 1. We evaluate the performance of our business segments based upon earnings before extraordinary items, equity in losses of affiliates, interest, income taxes, depreciation and amortization, as adjusted to add back rationalization charges, net and subtract the gain on assets contributed to affiliate, or Adjusted EBITDA. We believe Adjusted EBITDA provides important information in enabling us to assess our ability to service and incur debt. Adjusted EBITDA is not intended to be a measure of profitability in isolation or as a substitute for net income or other operating income data prepared in accordance with accounting principles generally accepted in the United States.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 18. Business Segment Information (continued)
Information for each of the past three years for our business segments is as follows:
Metal Food Plastic Metal
Containers(1) Containers(2) Closures Corporate Total
------------- ------------- -------- --------- -----
(Dollars in thousands)
2001
----
Net sales ........................ $1,401,146 $493,598 $ 46,250 $ -- $1,940,994
Adjusted EBITDA .................. 169,301 87,346 5,743 (5,114) 257,276
Depreciation and amortization .... 55,097 37,864 2,475 95 95,531
Segment profit (loss) ............ 114,204 49,482 3,268 (5,209) 161,745
Segment assets ................... 856,336 454,104 -- -- 1,310,440
Capital expenditures ............. 54,869 37,340 761 72 93,042
2000
----
Net sales ........................ $1,387,705 $398,953 $ 90,839 $ -- $1,877,497
Adjusted EBITDA .................. 173,301 67,777 8,592 (3,598) 246,072
Depreciation and amortization .... 53,063 30,887 4,917 103 88,970
Segment profit (loss) ............ 120,238 36,890 3,675 (3,701) 157,102
Segment assets ................... 860,546 466,663 54,166 -- 1,381,375
Capital expenditures ............. 58,617 28,292 2,298 20 89,227
1999
----
Net sales ........................ $1,440,005 $350,492 $101,581 $ -- $1,892,078
Adjusted EBITDA .................. 172,667 68,875 8,649 (3,776) 246,415
Depreciation and amortization .... 52,035 28,919 4,915 105 85,974
Segment profit (loss) ............ 120,632 39,956 3,734 (3,881) 160,441
Segment assets ................... 787,533 321,429 61,341 -- 1,170,303
Capital expenditures ............. 56,798 26,633 3,977 13 87,421
--------------
(1) Excludes rationalization charges, net, of $5.8 million and $36.1 million
recorded in 2001 and 1999, respectively.
(2) Excludes a rationalization charge, net, of $3.5 million recorded in 2001.
|
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 18. Business Segment Information (continued)
Total segment profit is reconciled to income before income taxes and equity in losses of affiliates as follows:
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Total segment profit .......................... $161,745 $157,102 $160,441
Rationalization charges, net .................. 9,334 -- 36,149
Gain on assets contributed to affiliate ....... 4,908 -- --
Interest and other debt expense ............... 81,192 91,178 86,057
-------- -------- --------
Income before income taxes
and equity in losses of affiliates ....... $ 76,127 $ 65,924 $ 38,235
======== ======== ========
|
Total segment assets are reconciled to total assets as follows:
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Total segment assets ............. $1,310,440 $1,381,375 $1,170,303
Deferred tax asset ............... -- -- 14,593
Other assets ..................... 1,380 2,449 389
---------- ---------- ----------
Total assets .................. $1,311,820 $1,383,824 $1,185,285
========== ========== ==========
|
Financial information relating to our operations by geographic area is as follows:
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Net sales:
United States ................ $1,882,114 $1,823,349 $1,845,180
Canada ....................... 58,880 54,148 46,898
---------- ---------- ----------
Total net sales ............ $1,940,994 $1,877,497 $1,892,078
========== ========== ==========
Long-lived assets:
United States ................ $ 796,632 $ 838,180 $ 729,628
Canada ....................... 22,375 24,371 23,438
---------- ---------- ----------
Total long-lived assets .... $ 819,007 $ 862,551 $ 753,066
========== ========== ==========
|
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 18. Business Segment Information (continued)
Net sales are attributed to the country from which the product was manufactured and shipped.
Our sales to Nestle Food Company accounted for 11.2%, 12.2% and 12.0% of our consolidated net sales during 2001, 2000 and 1999, respectively. Our sales to Del Monte Corporation accounted for 10.1%, 10.7%, and 10.9% of our consolidated net sales during 2001, 2000 and 1999, respectively. Our sales to Campbell Soup Company accounted for 12.2%, 10.7% and 10.9% of our consolidated net sales during 2001, 2000 and 1999, respectively.
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 19. Quarterly Results of Operations (Unaudited)
The following table presents our quarterly results of operations for the years ended December 31, 2001 and 2000 (dollars in thousands, except per share data):
First Second Third Fourth
----- ------ ----- ------
2001 (1)
----
Net sales .............................. $443,514 $445,417 $590,791 $461,272
Gross profit ........................... 50,930 57,192 78,978 53,186
Net income ............................. 2,225 7,447 27,279 4,814
Basic net income per share (2) ......... $0.13 $0.42 $1.53 $0.27
Diluted net income per share (2) ....... 0.12 0.41 1.50 0.26
2000 (3)
----
Net sales .............................. $418,505 $430,206 $571,369 $457,417
Gross profit ........................... 48,718 52,643 74,508 53,381
Income before extraordinary item ....... 5,291 6,244 18,485 5,504
Net income ............................. 5,291 6,244 18,485 1,288
Basic earnings per share: (2)
Income before extraordinary item .... $0.30 $0.35 $1.04 $0.31
Net income .......................... 0.30 0.35 1.04 0.07
Diluted earnings per share: (2)
Income before extraordinary item .... $0.29 $0.35 $1.03 $0.30
Net income .......................... 0.29 0.35 1.03 0.07
--------------
|
(1) Net income for the first quarter of 2001 includes a pre-tax charge of $3.5 million incurred in connection with our rationalization of a plastic container facility. Net income for the third quarter of 2001 includes a pre-tax gain on assets contributed to affiliate of $5.3 million recorded in connection with the formation of the White Cap joint venture. Net income for the fourth quarter of 2001 includes a pre-tax charge of $5.8 million, net incurred in connection with our rationalization of certain metal food container facilities and a reduction of $0.4 million to the pre-tax gain on assets contributed to affiliate.
(2) Earnings per share amounts are computed independently for each of the periods presented. Accordingly, the sum of the quarterly earnings per share amounts may not equal the total for the year.
(3) Net income for the fourth quarter of 2000 includes an extraordinary loss of $4.2 million after-tax ($0.24 per basic share and $0.23 per diluted share) for the premium paid in connection with the redemption of the 13 1/4% Debentures and for the write-off of related unamortized financing costs.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SILGAN HOLDINGS INC.
For the years ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
Additions
---------
Balance at Charged to Charged Balance
beginning costs and to other at end of
Description of period expenses accounts Deductions period
----------- ---------- ---------- -------- ---------- ---------
For the year ended December 31, 2001:
Allowance for doubtful
accounts receivable ......................... $3,001 $1,697 $(10) $(1,239)(1) $3,449
====== ====== === ======= ======
For the year ended December 31, 2000:
Allowance for doubtful
accounts receivable ......................... $2,991 $ 165 $305 $ (460)(1) $3,001
====== ====== ==== ======= ======
For the year ended December 31, 1999:
Allowance for doubtful
accounts receivable ......................... $3,325 $ (684) $500 $ (150)(1) $2,991
====== ====== ==== ======= ======
|
(1) Uncollectible accounts written off, net of recoveries.
INDEX TO EXHIBITS
Exhibit No. Exhibit
----------- -------
10.1 Amended and Restated Stockholders Agreement, dated as of November 6,
2001, among R. Philip Silver, D. Greg Horrigan and Silgan Holdings.
10.2 Letter agreement dated November 6, 2001 between Silgan Holdings and
The Morgan Stanley Leveraged Equity Fund II, L.P.
10.17 Equity Underwriting Agreement, dated November 6, 2001, among Silgan
Holdings, The Morgan Stanley Leveraged Equity Fund II, L.P., and
Deutsche Banc Alex. Brown Inc. and Morgan Stanley & Co. Incorporated
as representatives of the several underwriters listed on Schedule I
thereto.
12 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends for the years ended December 31, 2001,
2000, 1999, 1998 and 1997.
23 Consent of Ernst & Young LLP.
|
This Amended and Restated Stockholders Agreement (this "Agreement") is made and entered into as of the 6th day of November, 2001 by and among R. PHILIP SILVER ("Silver"), D. GREG HORRIGAN ("Horrigan") and SILGAN HOLDINGS INC., a Delaware corporation (the "Company").
WHEREAS, Silver and Horrigan are parties to that certain Stockholders Agreement dated as of February 14, 1997 (the "Principals Stockholders Agreement"), by and among Silver, Horrigan and The Morgan Stanley Leveraged Equity Fund II, L.P., a Delaware limited partnership ("MS Equity"); and
WHEREAS, the parties hereto, including the Company, with the acknowledgment and consent of MS Equity, believing it to be in their respective best interests, desire to amend and restate the Principals Stockholders Agreement by entering into this Agreement with respect to certain matters involving the Company.
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows.
ARTICLE I
As used in this Agreement, the following terms shall have the meanings set forth below:
"Affiliate" shall have the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934 as in effect on the date of this Agreement.
"Common Stock" shall mean shares of the Company's common stock, par value $.01 per share.
"Disability" shall mean the inability of either Silver or Horrigan to manage his own affairs within the meaning of Section 45a-650(c) under the Connecticut General Statutes (as the same may be amended or replaced by any successor statute from time to time).
"Estate" shall mean any and all assets left by a decedent and any executor, administrator or legal representative charged with the administration of such assets.
"Family Transferees" shall mean the spouse, children or grandchildren of, or any trust for the benefit of the spouse, children or grandchildren of, Silver or Horrigan.
"Group" shall mean, collectively, Silver and Horrigan and their respective Affiliates and related Family Transferees and Estates (Silver and his Affiliates, Family Transferees and Estate deemed to be collectively one member of the Group and Horrigan and his Affiliates, Family Transferees and Estate deemed to be collectively one member of the Group).
(a) Until such time that the Group holds less than one-half of the
number of shares of Common Stock held by it in the aggregate on February 14,
1997 (as adjusted, if necessary, to take into account any stock dividend, stock
split, combination of shares, subdivision or recapitalization of the capital
stock of the Company), the Group shall have the right to nominate for election
(i) two (2) individuals as members of the Board of Directors of the
Company, and upon such nomination by the Group such nominees shall stand for election to the Company's Board of Directors in accordance with the Company's certificate of incorporation; provided, however, that at least one (1) of such nominees shall be Silver or Horrigan, and (ii) all other directors of the Company other than the individuals nominated pursuant to Section 2.1(a)(i) above and the individual, if any, to be nominated by MS Equity pursuant to the letter agreement dated of even date herewith between MS Equity and the Company, and upon such nomination by the Group such additional nominees shall stand for election to the Company's Board of Directors in accordance with the Company's certificate of incorporation.
(b) From and after the time that the Group holds less than one-half of the number of shares of Common Stock held by it on February 14, 1997 (as adjusted, if necessary, to take into account any stock dividend, stock split, combination of shares, subdivision or recapitalization of the capital stock of the Company) and until such time that the Group beneficially owns less than five percent (5%) of the outstanding Common Stock (determined in accordance with Rule 13d-3 of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934 as in effect on the date of this Agreement), the Group shall have the right to nominate for election a total of one (1) individual as a member of the Board of Directors of the Company, and upon such nomination by the Group such nominee shall stand for election to the Company's Board of Directors in accordance with the Company's certificate of incorporation; provided,
(c) In the event that (i) either Silver or Horrigan (not including any
of their Affiliates, Family Transferees or Estates) notifies the Board of
Directors of the Company that the Group cannot agree on an individual for any of
the nominees for election to the Company's Board of Directors pursuant to
Section 2.1(a) or 2.1(b) above or (ii) at least 45 days prior to any
annual meeting of stockholders of the Company, the Group fails to nominate for election at such meeting the requisite number of individuals to stand for election to the Company's Board of Directors at such meeting, then the Board of Directors shall have the right in lieu of the Group to nominate for election to the Company's Board of Directors in accordance with the Company's certificate of incorporation such number of individuals that Silver and Horrigan could not agree on as nominees as contemplated in clause (i) of this paragraph (c) or that the Group so failed to nominate as contemplated in clause (ii) of this paragraph (c).
ARTICLE III
3.1 Effectiveness; Term. This Agreement shall become effective only upon the consummation no later than December 31, 2001 of a secondary public offering of at least 4,100,000 shares of Common Stock owned by MS Equity and shall have no force or effect until such time. This Agreement shall continue in effect until either the death or Disability of both of Silver and Horrigan, at which time this Agreement shall terminate and be of no further force or effect.
3.2 Due Authorization; Binding Agreement. Each of the parties to this Agreement represents that this Agreement has been duly authorized, executed and delivered by such party and constitutes the legal, valid and binding obligation of such party enforceable against it in accordance with its terms. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective Estates, heirs, executors, legal representatives, successors and permitted assigns.
3.3 Equitable Relief for Breach of Agreement. Without limiting the remedies available to any of the parties hereto, each of the parties hereto stipulates and agrees that
damages at law will be an insufficient remedy in the event that any party violates the terms of this Agreement, and each of the parties hereto further agrees that each of the other parties hereto may apply for and have injunctive or other equitable relief in any court of competent jurisdiction to restrain the breach or threatened breach of, or otherwise specifically to enforce, the terms of this Agreement.
3.4 Actions by the Company. The Company hereby agrees to take, or cause to be taken, all reasonable actions and to do, or cause to be done, all reasonable things necessary to give effect to the rights of the Group hereunder.
3.5 Entire Agreement; Amendments. This Agreement contains the entire understanding of the parties hereto with respect to the subject matter hereof and supersedes and replaces in its entirety the Principals Stockholders Agreement. None of the parties to the Principals Stockholders Agreement, including MS Equity, shall have any further rights or obligations thereunder. This Agreement may not be amended, modified or revoked in whole or in part and no provision hereof may be waived, except in all such cases by a written instrument executed by the parties hereto.
3.6 Waiver. No waivers of any breach or other term or condition of this Agreement extended by any party hereto to any other party shall be construed as a waiver of any rights or remedies with respect to any subsequent breach or with respect to any other term or condition.
3.7 Headings. The headings and subheadings in this Agreement are inserted for convenience of reference only and are not to be considered in construction of the provisions hereof.
3.8 Unenforceable Provisions. The provisions of this Agreement shall be applied and interpreted in a manner consistent with each other so as to carry out the purposes and intent of the parties hereto, but if for any reason any provision hereof is determined to be unenforceable or invalid, such provision or such part thereof as may be unenforceable or invalid shall be deemed automatically amended to the extent necessary to make such provision or such part thereof valid and enforceable, and the remaining provisions shall remain in full force and effect.
3.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original, but all of which, taken together, shall constitute one and the same agreement.
3.10 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to any principles of conflicts of law; provided that any determination of Disability under this Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the date first written above.
SILGAN HOLDINGS INC.
By: /s/ Frank W. Hogan, III
-----------------------------------------
Name: Frank W. Hogan, III
Title: Vice President, General Counsel
and Secretary
/s/ R. Philip Silver
-----------------------------------------
R. Philip Silver
/s/ D. Greg Horrigan
-----------------------------------------
D. Greg Horrigan
|
Acknowledged and consented to as of this 6th day of November, 2001
THE MORGAN STANLEY LEVERAGED EQUITY FUND II, L.P.
By: Morgan Stanley Leveraged Equity Fund II, Inc. (General Partner)
By: /s/ Leigh J. Abramson ---------------------------------------- Name: Leigh J. Abramson Title: Vice President |
November 6, 2001
Silgan Holdings Inc.
4 Landmark Square
Stamford, CT 06901
Gentlemen:
The parties hereto agree as follows:
1. Director Nominees. The Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF") shall be entitled to designate one director nominee to the board of directors (the "Board") of Silgan Holdings Inc. (the "Company") as a Class I director for so long as the MSLEF Group shall beneficially own at least five percent (5%) of the outstanding common stock, par value $.01 per share, of the Company (the "Common Stock") (determined in accordance with Rule 13d-3 of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934 as in effect on the date hereof) and upon such nomination by MSLEF such nominee shall stand for election to the Board in accordance with the certificate of incorporation of the Company; provided, that such nominee shall be (i) either an employee of Morgan Stanley & Co. Incorporated whose primary responsibility is managing investments for MSLEF (or a successor or related partnership) or (ii) a person reasonably acceptable to the Company not engaged in (as a director, officer, employee, agent or consultant or as a holder of more than five percent (5%) of the equity securities of) a business competitive with that of the Company. For purposes of this Agreement, Leigh J. Abramson shall be deemed to be the initial MSLEF director nominee who is currently serving as a Class I director on the Board. As used herein, "MSLEF Group" means MSLEF and its affiliates (excluding the limited partners of MSLEF (other than Morgan Stanley Dean Witter & Co. and its affiliates) who acquire shares of Common Stock from MSLEF in a distribution by MSLEF of all or substantially all of the shares of Common Stock then owned by MSLEF to the partners of MSLEF).
2. Vacancies. If the MSLEF director nominee shall be elected to the Board and if there shall subsequently exist or occur any vacancy on the Board as a result of death, disability, retirement, resignation, removal (with or without cause) or otherwise of such MSLEF director nominee, MSLEF may designate another individual nominee to be considered for appointment by the Board in accordance with the certificate of incorporation of the Company to fill such vacancy and serve as such director for the remaining term of the elected nominee; provided, that such right to designate a replacement director nominee shall be subject to the restrictions provided in Section 1 above regarding the minimum required beneficial ownership by the MSLEF Group and the identity of the nominee.
3. Actions by the Company. The Company hereby agrees to take, or cause to be taken, all reasonable actions and to do, or cause to be done, all reasonable things necessary to give effect to the rights of MSLEF hereunder.
4. Termination. This Agreement shall terminate when the MSLEF Group beneficially owns less than five percent (5%) of the outstanding Common Stock (determined in accordance with Rule 13d-3 of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934 as in effect on the date hereof).
5. Other Matters. This Agreement may be assigned by MSLEF to one of the members of the MSLEF Group in connection with the acquisition of Common Stock by such member. MSLEF shall promptly notify the Company after any such assignment. This Agreement constitutes the entire agreement of the parties hereto as to the subject matter hereof.
6. Effectiveness. This Agreement shall become effective only upon the consummation no later than December 31, 2001 of a secondary public offering of at least 4,100,000 shares of Common Stock of the Company by MSLEF. In the event such offering is not consummated by such time, this Agreement shall be void and of no effect.
If this letter agreement reflects your understanding of the matters referred to herein, please sign in the space indicated below, whereupon this shall become our binding agreement to be governed by the internal laws of the State of New York.
Very truly yours,
THE MORGAN STANLEY LEVERAGED EQUITY FUND II, L.P.
By: Morgan Stanley Leveraged Equity Fund II, Inc.,
as General Partner
By: /s/Leigh J. Abramson
---------------------------------------------
Name: Leigh J. Abramson
Title: Vice President
|
Agreed and Acknowledged
as of the date first above written:
SILGAN HOLDINGS INC.
By: /s/ R. Philip Silver
----------------------------------
Name: R. Philip Silver
Title: Chairman of the Board and
Co-Chief Executive Officer
|
EXECUTION COPY
4,100,000 Shares
SILGAN HOLDINGS INC.
Common Stock
($.01 Par Value)
November 6, 2001
Deutsche Banc Alex. Brown Inc.
Morgan Stanley & Co. Incorporated
As Representatives of the
Several Underwriters
c/o Deutsche Banc Alex. Brown Inc.
One South Street
Baltimore, Maryland 21202
and
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Ladies and Gentlemen:
The Morgan Stanley Leveraged Equity Fund II, L.P., a Delaware limited partnership (the "Selling Shareholder") proposes to sell to the several underwriters named in Schedule I hereto (the "Underwriters") for whom you are acting as representatives (the "Representatives") an aggregate of 4,100,000 shares of Common Stock, $0.01 par value (the "Firm Shares"), of Silgan Holdings Inc., a Delaware corporation (the "Company"). The respective amounts of the Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto. The Selling Shareholder also proposes to sell at the Underwriters' option an aggregate of up to 492,000 additional shares of the Company's Common Stock (the "Option Shares") as set forth below.
As the Representatives, you have advised the Company and the Selling Shareholder (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares if you elect to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows:
(a) The Company represents and warrants to each of the Underwriters as follows:
(i) A registration statement on Form S-3 (File No. 333-65396) with
respect to the Shares has been prepared by the Company and has been filed with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules
and Regulations") of the Commission thereunder and is effective. The Company and
the transactions contemplated by this Agreement meet the requirements and comply
with the conditions for the use of Form S-3. Copies of such registration
statement, including any amendments thereto, the preliminary prospectuses
(meeting the requirements of the Rules and Regulations in all material respects)
contained therein and the exhibits, financial statements and schedules, as
finally amended and revised, have heretofore been delivered by the Company to
you. Such registration statement, together with any registration statement
increasing the size of the offering filed by the Company pursuant to Rule 462
(b) of the Act, is herein referred to as the "Registration Statement," which
shall be deemed to include all information omitted therefrom in reliance upon
Rule 430A and contained in the Prospectus referred to below, has become
effective under the Act and no post-effective amendment to the Registration
Statement has been filed as of the date of this Agreement. "Prospectus" means
the form of prospectus first filed with the Commission pursuant to Rule 424(b).
Each preliminary prospectus included in the Registration Statement prior to the
time it becomes effective is herein referred to as a "Preliminary Prospectus."
Any reference herein to the Registration Statement, any Preliminary Prospectus
or to the Prospectus or to any amendment or supplement to any of the foregoing
documents shall be deemed to refer to and include any documents incorporated by
reference therein pursuant to Item 12 of Form S-3 under the Act as of the date
of such Registration Statement, Preliminary Prospectus or Prospectus, as the
case may be, and, in the case of any reference herein to any Prospectus, also
shall be deemed to include any documents incorporated by reference therein, and
any supplements or amendments thereto, filed with the Commission after the date
of filing of the Prospectus under Rules 424(b) or 430A, and prior to the
termination of the offering of the Shares by the Underwriters.
(ii) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement.
Each of the subsidiaries of the Company as listed in Exhibit A hereto
(collectively, the "Subsidiaries") has been duly organized and is validly
existing as a corporation or limited liability company in good standing under
the laws of the jurisdiction of its organization, with corporate or limited
liability company power and authority to own or lease its properties and conduct
its business as described in the Registration Statement. The Subsidiaries are
the only subsidiaries, direct or indirect, of the Company that are "significant
subsidiaries" as defined in Rule 1-02(w) of Regulation S-X. The Company and each
of the Subsidiaries are duly qualified to transact business and are in good
standing in all jurisdictions in which the conduct of their business or
ownership or leasing of property requires such qualification except as could not
be reasonably be expected to have a material adverse effect on the Company and
its Subsidiaries taken as a whole. The outstanding shares of capital stock of
each of the Subsidiaries have been duly authorized and validly issued, are fully
paid and non-assessable and are owned by the Company or another Subsidiary free
and clear of all liens, encumbrances and equities and claims, other than the
pledges of such capital stock existing on the date hereof made in connection
with the (a) the Credit Agreement, dated as of July 29, 1997, as amended, among
the Company, Silgan Containers Corporation, Silgan Plastics Corporation, certain
other subsidiaries of any of them, various banks, Bankers Trust Company, as
Administrative Agent and as a Co-Arranger, Bank of America National Trust &
Savings Association, as Syndication Agent and as a Co-Arranger, Goldman Sachs
Credit Partners L.P., as Co-Documentation Agent and as a Co-Arranger, and Morgan
Stanley Senior Funding, Inc., as Co-Documentation Agent and as Co-Arranger (the
"Credit Agreement"); (b) the Credit Agreement dated as of December 19, 1997 by
and among Silgan Plastics Canada Inc., as Borrower, the financial institutions
listed on the signature pages thereto, as lenders, BT Bank of Canada as
Administrative Agent and BT Bank of Canada, Bank of America Canada and Canadian
Imperial Bank of Commerce as Co-Arrangers (the "Canadian Credit Agreement"); and
(c) the Pledge and Rights Agreement dated as June 1, 1998, by and among Campbell
Soup Company, Silgan Containers Corporation, Silgan Corporation and Silgan Can
Company (the "Campbell Pledge Agreement"). Other than as described in the
Prospectus, no options, warrants or other rights to purchase, agreements or
other obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in the Subsidiaries are
outstanding.
(iii) The outstanding shares of Common Stock of the Company, including all shares to be sold by the Selling Shareholder, have been duly authorized and validly issued and are fully paid and non-assessable; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue and sale thereof. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock.
(iv) The Company has an authorized capitalization as set forth under the caption "Capitalization" in the Prospectus. All of the Shares conform in all material respects to the description thereof contained in the Registration Statement.
(v) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Shares. The Registration Statement contains all documents required to be filed thereto as exhibits by, and the Registration Statement conforms in all material respects to, and the Prospectus and any amendments or supplements thereto will
conform in all material respects to, the requirements of the Act and the Rules
and Regulations. The documents incorporated, or to be incorporated, by reference
in the Prospectus, at the time filed with the Commission complied or will
comply, in all material respects to the requirements of the Securities Exchange
Act of 1934 ("Exchange Act") or the Act, as applicable, and the rules and
regulations of the Commission thereunder. The Registration Statement and any
amendment thereto as of the applicable effective date do not contain, and will
not contain, any untrue statement of a material fact and do not omit, and will
not omit, to state any material fact required to be stated therein or necessary
to make the statements therein not misleading. Each Preliminary Prospectus filed
as part of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the Act, complied when so
filed in all material respects with the Act and the Rules and Regulations as of
the applicable effective date. The Prospectus and any amendments and supplements
thereto do not contain, and will not contain, any untrue statement of material
fact; and do not omit, and will not omit, to state any material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading. Notwithstanding
the foregoing, all of the representations and warranties set forth in this
Section 1(a)(v) do not apply to statements or omissions in any Preliminary
Prospectus, Prospectus, Registration Statement, or any amendments, or
supplements thereto, based upon information relating to any Selling Shareholder
or Underwriters furnished to the Company in writing by the Underwriters through
you or by the Selling Shareholder expressly for use therein.
(vi) The consolidated financial statements of the Company and the Subsidiaries, together with related notes, as set forth or incorporated by reference in the Registration Statement (other than the condensed consolidated financial statements of the Company and the Subsidiaries incorporated by reference in the Registration Statement from the Current Report on Form 8-K of the Company filed with the Commission on October 24, 2001 (the "October 24, 2001 8-K")) present fairly in all material respects the consolidated financial position and the results of operations and cash flows of the Company and the Subsidiaries, at the indicated dates and for the indicated periods, in conformity with accounting principles generally accepted in the United States. Such financial statements have been prepared in accordance with accounting principles generally accepted in the United States, consistently applied throughout the periods involved, except as disclosed therein, and all adjustments necessary for a fair presentation in all material respects of results for such periods have been made. The condensed consolidated financial statements of the Company and the Subsidiaries incorporated by reference in the Registration Statement from the October 24, 2001 8-K present fairly in all material respects the information presented therein and were compiled on a basis consistent with the book and records of the Company. The summary financial data included or incorporated by reference in the Registration Statement has been compiled on a basis consistent with the financial statements presented therein, except as otherwise indicated, and the books and records of the Company. The statistical data included or incorporated by reference in the Registration Statement has been compiled on a basis consistent with the books and records of the Company.
(vii) Ernst & Young LLP, who have certified certain of the financial statements filed with the Commission as part of, or incorporated by reference in, the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations.
(viii) Other than as described in the Prospectus, there is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of the Subsidiaries or any of their properties before any court or administrative agency or otherwise which if determined adversely to the Company or any of its Subsidiaries might result in any material adverse change in the earnings, business, properties, assets, operations, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole or prevent the consummation of the transactions contemplated hereby, except as set forth in the Registration Statement.
(ix) Other than as described in the Prospectus, the Company and the
Subsidiaries have good and marketable title to all of the properties and assets
reflected in the consolidated financial statements hereinabove described or
described in the Registration Statement, subject to no lien, mortgage, pledge,
charge or encumbrance of any kind except (1) those reflected in such financial
statements or described in the Registration Statement, (2) those given in
connection with (a) the Credit Agreement; (b) the Canadian Credit Agreement; or
(c) the Campbell Pledge Agreement or (3) those which do not interfere in any
material respect with the use made and proposed to be made of such property by
the Company and its Subsidiaries. The Company and the Subsidiaries occupy their
leased properties under valid and binding leases with such exceptions as are not
material.
(x) The Company and the Subsidiaries have filed all material Federal, State, local and foreign tax returns which have been required to be filed and have paid all taxes indicated by such returns.
(xi) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the earnings, business, properties, assets, operations, condition (financial or otherwise), or prospects of the Company and its Subsidiaries taken as a whole, whether or not occurring in the ordinary course of business. The Company and the Subsidiaries have no material contingent obligations which are not disclosed in the Company's financial statements which are included in the Registration Statement.
(xii) Neither the Company nor any of the Subsidiaries is or with the giving of notice or lapse of time or both, will be, in violation of or in default under (i) its Certificate of Incorporation or By-Laws (ii) any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and, solely with respect to this clause (ii), which violation or default could reasonably be expected to have a material adverse effect on the earnings, business, properties, assets, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries taken as a whole. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or any of their respective properties is bound, or of the Certificate of Incorporation or By-Laws of the Company or any law, order, rule or regulation, judgment, order, writ or decree applicable to the Company or any
Subsidiary of any court or of any government, regulatory body or administrative agency or other governmental body having jurisdiction over the Company or any Subsidiary.
(xiii) The execution and delivery of, and the performance by the Company of its obligations under, this Agreement has been duly and validly authorized by all necessary corporate action on the part of the Company, and this Agreement has been duly executed and delivered by the Company.
(xiv) The execution and delivery by the Company of this Agreement, and the consummation by the Company of the transactions herein contemplated will not require any consent, approval, authorization, or other order of any court, regulatory body, administrative agency or other governmental body (except as may be required under the Act, the securities laws or Blue Sky laws of the various states in connection with the offer and sale of the Shares or by the National Association of Securities Dealers, Inc. (the "NASD") or as have been obtained).
(xv) The Company and each of the Subsidiaries hold all material licenses, certificates and permits from governmental authorities which are necessary to the conduct of their businesses, except where the failure to hold any such license, certificate or permit would not have a material adverse effect on the business of the Company and its Subsidiaries taken as a whole; the Company and the Subsidiaries each own or possess the right to use or has duly licensed from third parties all patents, patent rights, trademarks, trade names, service marks, service names, copyrights, license rights, know-how (including trade secrets and other unpatented and unpatentable proprietary or confidential information, systems or procedures) and other intellectual property rights ("Intellectual Property") necessary to carry on their business in all material respects.
(xvi) Neither the Company, nor to the Company's knowledge, any of its affiliates, has taken or may take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares (assuming that MSLEF and its affiliates are not considered "affiliates" of the Company for purposes of this Section 1(a)(xvi)). The Company acknowledges that the Underwriters may engage in passive market making transactions in the Shares on the Nasdaq National Market in accordance with Regulation M under the Exchange Act.
(xvii) Neither the Company nor any Subsidiary is or, after giving effect to the offering and sale of the Shares contemplated hereunder, will be an "investment company" within the meaning of such term under the Investment Company Act of 1940, (as amended, the "1940 Act") and the rules and regulations of the Commission thereunder assuming MSLEF is not an "investment company" and is not "controlled" by an "investment company".
(xviii) The Company and each of its Subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with U.S. generally accepted
accounting principles; and (iii) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(xix) The Company and each of its Subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is customary for companies engaged in similar businesses.
(xx) Except as disclosed in the Registration Statement, the Company and its subsidiaries (1) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (2) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (3) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals could not, singly or in the aggregate, be reasonably expected to have a material adverse effect on the Company and its Subsidiaries, taken as a whole.
(xxi) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which could, singly or in the aggregate, reasonably be expected to have a material adverse effect on the Company and its Subsidiaries taken as a whole.
(b) The Selling Shareholder represents and warrants as follows:
(i) In addition to any other representations and warranties made by operation of law, upon payment for the Securities to be sold by the Selling Shareholder at the Closing Date and the Option Closing Date, as the case may be (as such dates are hereinafter defined), to each of the several Underwriters as provided in this Agreement and the crediting of such Securities on the records of the Depository Trust Company to the securities account or accounts of such Underwriter maintained with The Depository Trust Company or such other securities intermediary, (a) The Depository Trust Company shall be a protected purchaser of the Shares (within the meaning of Section 8-303 of the New York Uniform Commercial Code ("NYUCC")) and (b) assuming that each Underwriter is a purchaser in good faith and acquires its interest in the Securities it has purchased from the Selling Shareholder without notice of any adverse claim (within the meaning of Section 8-105 of the NYUCC), such Underwriter will have acquired a valid security entitlement to such Securities, free and clear of all liens, encumbrances, equities or adverse claims.
(ii) The Selling Shareholder has full right, power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution and delivery of this Agreement and the consummation by the Selling Shareholder of the transactions herein contemplated and the fulfillment by the Selling Shareholder of the terms hereof will not require any consent, approval, authorization, or other order of any court, regulatory body, administrative agency or other governmental body (except as may be required under the Act or the securities laws or Blue Sky laws of the various states in connection with the offer and sale of the Shares or as have been obtained) and will not result in a breach of any of the terms and provisions of, or constitute a default
under, organizational documents of the Selling Shareholder or any indenture, mortgage, deed of trust or other agreement or instrument to which the Selling Shareholder is a party, or of any judgment, order, rule or regulation applicable to the Selling Shareholder of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction over the Selling Shareholder.
(iii) The Selling Shareholder has not taken and will not take, directly or indirectly (other than any action taken by Morgan Stanley & Co. Incorporated in connection with the performance of its obligations as an Underwriter hereunder), any action designed to, or which has constituted, or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of the Common Stock of the Company and, other than as permitted by the Act, the Selling Shareholder will not distribute any prospectus or other offering material in connection with the offering of the Shares.
(iv) (1) The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
(2) the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder and (3) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in Sections 1(b)(iv)(1)
and 1(b)(iv)(3) only apply to statements or omissions in the Registration
Statement or the Prospectus and the representations and warranties set forth in
Section 1(b)(iv)(2) only apply to compliance with the Securities Act and the
applicable rules and regulations thereunder, in each case based upon information
relating to the Selling Shareholder furnished to the Company in writing by the
Selling Shareholder expressly for use therein.
(a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Selling Shareholder agrees to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of $18.00 per share, the number of Firm Shares set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. The obligations of the Company and of the Selling Shareholder shall be several and not joint.
(b) The certificates evidencing the Firm Shares and Option Shares shall be delivered to the Transfer Agent no later than two days prior to the Closing Date or Option Closing Date, as the case may be, for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with the transfer of the shares to the Underwriters and duly paid by the Selling Shareholder against payment of the purchase price therefor. The Selling Shareholder specifically agrees that the Firm Shares and any Option Shares represented by the certificates are subject to the interests of the Underwriters hereunder, that the arrangements made by the Selling Shareholder for delivery to the Transfer Agent of such Certificates are to that extent irrevocable,
and that the obligations of the Selling Shareholder hereunder shall not be terminable by any act or deed of the Selling Shareholder (or by any other person, firm or corporation including the Company, the Transfer Agent or the Underwriters) or by operation of law (including the dissolution of the Selling Shareholder) or by the occurrence of any other event or events. If any such event should occur prior to the delivery to the Underwriters of the Firm Shares or the Option Shares hereunder, certificates for the Firm Shares or the Options Shares, as the case may be, shall be delivered by the Transfer Agent in accordance with the terms and conditions of this Agreement as if such event has not occurred.
(c) Payment for the Firm Shares to be sold hereunder is to be made in Federal (same day) funds to the account designated by the Selling Shareholder, against delivery of certificates therefor to the Representatives for the several accounts of the Underwriters through the facilities of The Depository Trust Company, New York, New York. Such payment and delivery are to be made through the facilities of The Depository Trust Company at 10:00 a.m., New York time, on the third business day after the date of this Agreement or at such other time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and not permitted by law or executive order to be closed.)
(d) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Selling Shareholder hereby grants an option to the several Underwriters to purchase the Option Shares at the price per share as set forth in the first paragraph of this Section 2. The maximum number of Option Shares to be sold by the Selling Shareholder is 492,000. The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) only once thereafter within 30 days after the date of this Agreement, by you, as Representatives of the several Underwriters, to the Selling Shareholder setting forth the number of Option Shares as to which the several Underwriters are exercising the option and the time and date at which such certificates are to be delivered. The time and date at which certificates for Option Shares are to be delivered shall be determined by the Representatives but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The number of Option Shares to be purchased by each Underwriter shall be in the same proportion to the total number of Option Shares being purchased as the number of Firm Shares being purchased by such Underwriter bears to the total number of Firm Shares, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Shares granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters. You, as Representatives of the several Underwriters, may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company and the Selling Shareholder. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in Federal (same day) funds to the account designated by the Selling Shareholder against delivery of certificates therefor to the Representatives for the several accounts of the Underwriters through the facilities of The Depository Trust Company, New York, New York.
It is understood that the several Underwriters are to make a public offering of the Firm Shares as soon as the Representatives deem it advisable to do so. The Firm Shares are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives for the Underwriters in the offering and sale of the Shares in accordance with a Master Agreement Among Underwriters entered into by you and the several other Underwriters.
(a) The Company covenants and agrees with the several Underwriters that:
(i) If, at the time this agreement is executed, it is necessary for the Registration Statement or any post-effective amendment to the Registration Statement to become effective, the Company will use its best efforts to cause the Registration Statement or such post-effective amendment to become effective and the Company (A) will use its best efforts, if the procedure in Rule 430A of the Rules and Regulations is followed, to prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, and (B) will not file any amendment to the Registration Statement or supplement to the Prospectus and, if required in connection with or necessitated by such amendment or supplement, will not file any document incorporated by reference therein of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance in all material respects with the Rules and Regulations.
(ii) The Company will advise the Representatives promptly (A) when the the Registration Statement or any post-effective amendment thereto shall have become effective, (B) of receipt of any comments from the Commission, (C) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, and (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to obtain as soon as possible the lifting of any such stop order, if issued.
(iii) The Company will take such action as the Representatives may reasonably request to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file
such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request in order to complete the distribution of the Shares.
(iv) The Company will deliver to, or upon the order of, the Representatives, from time to time, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver to, or upon the order of, the Representatives during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Company will deliver to the Representatives at or before the Closing Date, two signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested), including documents incorporated by reference therein, and of all amendments thereto, as the Representatives may reasonably request.
(v) The Company will comply with the Act and the Rules and Regulations, and the Exchange Act and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with applicable law, the Company promptly will either (i) prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus or (ii) prepare and file with the Commission an appropriate filing under the Exchange Act which shall be incorporated by reference in the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus, as amended and supplemented, will comply with applicable law.
(vi) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earning statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earnings statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available.
(vii) The Company has furnished to you, on or prior to the date of this agreement, a letter or letters, substantially in the form previously agreed upon (the "Company Lockup Agreement"), pursuant to which the Company shall agree, subject to limited exceptions, not to (1) directly or indirectly offer, pledge, sell, contract to sell, (including any short sale), sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any other security convertible into or exerciseable or exchangeable for Common Stock, or (2) enter into any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from the Common Stock, or register for the offer or sale of any of the foregoing, for a period of 90 days after the date of this Agreement, directly or indirectly, otherwise than hereunder or with the prior written consent of Deutsche Banc Alex. Brown and Morgan Stanley & Co. Incorporated.
(viii) The Company has caused Messrs. R. Philip Silver and D. Greg Horrigan to furnish to you, on or prior to the date of this agreement, a letter or letters, substantially in the form previously agreed upon (the "Principal Lockup Agreements" and, together with the Company Lockup Agreement, the "Primary Lockup Agreements"), pursuant to which each such person shall agree, subject to limited exceptions, not to (1) directly or indirectly offer, pledge, sell, contract to sell, (including any short sale), sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock (including, without limitation, shares of Common Stock of the Company which may be deemed to be beneficially owned by such person on the date hereof in accordance with the rules and regulations of the Securities and Exchange Commission and shares of Common Stock which may be issued upon exercise of a stock option or warrant) or any other security convertible into or exerciseable or exchangeable for Common Stock, or (2) enter into any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from the Common Stock, or include any of the foregoing in a registration statement filed for the registration for the offer or sale of any of the foregoing, for a period of 90 days after the date of this Agreement, directly or indirectly, except with the prior written consent of Deutsche Banc Alex. Brown and Morgan Stanley & Co. Incorporated.
(ix) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock.
(x) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company.
(b) The Selling Shareholder covenants and agrees with the several Underwriters that:
(i) The Selling Shareholder will furnish to you, on or prior to the
date of this Agreement, a letter or letters, substantially in the form
previously agreed upon (the "Selling Shareholder Lockup Agreement"), pursuant to
which the Selling Shareholder shall agree, subject to limited exceptions, not to
(1) directly or indirectly offer, pledge, sell, contract to sell, (including any
short sale), sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase, lend or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock (including, without limitation, shares of Common Stock which may
be issued upon exercise of a stock option or warrant) or any other security convertible into or exerciseable or exchangeable for Common Stock, or (2) enter into any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from the Common Stock, or include any of the foregoing in a registration statement filed for the registration for the offer or sale of any of the foregoing, for a period of 90 days after the date of this Agreement, directly or indirectly, except with the prior written consent of Deutsche Banc Alex. Brown and Morgan Stanley & Co. Incorporated.
(ii) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983 with respect to the transactions herein contemplated, the Selling Shareholder agrees to deliver to you prior to or at the Closing Date a properly completed and executed United States Treasury Department Form W-8 or W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof).
(iii) The Selling Shareholder will not take, directly or indirectly (other than any action taken by Morgan Stanley & Co. Incorporated in connection with the performance of its obligations as an Underwriter hereunder), any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company.
Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Company will pay all costs, expenses and fees incident to the performance of the obligations of the Company and the Selling Shareholder under this Agreement, including, without limiting the generality of the foregoing, the following: (i) accounting fees of the Company; (ii) the fees and disbursements of counsel for the Company and one counsel for the Selling Shareholder in connection with the preparation and filing of the Registration Statement, any Preliminary Prospectus, the Prospectus and amendments and supplements to any of the foregoing; (iii) the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Blue Sky Survey or Legal Investment memorandum and any supplements or amendments thereto; (iv) the filing fees of the Commission; (v) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters; (vi) the cost of printing or producing any Blue Sky or Legal Investment memorandum in connection with the offer and sale of the Shares under state securities laws and all expenses in connection with the qualification of the Shares for offer and sale under state securities laws as provided in Section 4(iii) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky or Legal Investment memorandum; (vii) all filing fees and the reasonable fees and disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering of the Shares by the National Association of Securities Dealers, Inc.; (viii) the cost of printing certificates representing the Shares; (ix) the costs and charges of any transfer agent, registrar or depositary; (x) the costs and expenses of the Company
relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Shares, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior written approval of the Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and (xi) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. Any transfer taxes imposed on the sale of the Shares to the several Underwriters will be paid by the Selling Shareholder. The Company shall not, however, be required to pay for any of the Underwriters expenses (other than those related to qualification under NASD regulation and State securities or Blue Sky laws as stated above) except that, if this Agreement shall not be consummated because the conditions in Section 6 hereof are not satisfied, or because this Agreement is terminated by the Representatives pursuant to Section 11 hereof, or by reason of any failure, refusal or inability on the part of the Company or any Selling Shareholder to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on their part to be performed, unless such failure, refusal or inability is due primarily to the default or omission of any Underwriter, the Company shall reimburse the several Underwriters for reasonable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Company and the Selling Shareholder shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares.
The provisions of this Section 5 shall not supersede or otherwise affect any agreement that the Company and the Selling Shareholder may otherwise have for the allocation of such expenses among themselves.
The several obligations of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company and the Selling Shareholder contained herein, and to the performance by the Company and the Selling Shareholder of their covenants and obligations hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Act shall have been made within the applicable time period prescribed by, and in compliance with, the Rules and Regulations, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representatives and complied with to their reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company or the Selling Shareholder, shall be threatened by the Commission and no injunction, restraining order or order of any nature by
a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Pillsbury Winthrop LLP, counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) substantially in the form of Exhibit B hereto.
(c) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Frank W. Hogan, Esq., general counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) substantially in the form of Exhibit C hereto.
(d) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Davis Polk & Wardwell, counsel for the Selling Shareholder, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) substantially in the form of Exhibit D hereto.
(e) The Representatives shall have received from White & Case LLP, counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, with respect to the Registration Statement and the Prospectus and such other related matters as you may reasonably request.
(f) You shall have received, on each of the date hereof, the Closing Date and, if applicable, the Option Closing Date, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to you, of Ernst & Young LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and Prospectus.
(g) The Representatives shall have received on the Closing Date and, if applicable, the Option Closing Date, as the case may be, a certificate or certificates of an executive officer of the Company which represents that, as of the Closing Date or the Option Closing Date, as the case may be:
(i) No stop order suspending the effectiveness of the Registration Statement has been issued, and, to his knowledge, no proceedings for such purpose have been taken or are contemplated or threatened by the Commission;
(ii) The representations and warranties of the Company contained in
Section 1 hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be; and
(iii) The Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied under the Underwriting Agreement at or prior to the date hereof.
(h) The Representatives shall have received on the Closing Date and, if applicable, the Option Closing Date, as the case may be, a certificate or certificates of an authorized officer of the Selling Shareholder which represents that, as of the Closing Date or the Option Closing Date, as the case may be:
(i) The representations and warranties of the Selling Shareholder contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be; and
(ii) The Selling Shareholder has complied with all agreements and satisfied all conditions on its part to be performed or satisfied under the Underwriting Agreement at or prior to the date hereof.
(i) The Representatives shall have received on the Closing Date and, if applicable, the Option Closing Date, as the case may be, a certificate or certificates of the corporate secretary of the Company, attaching a certified copy of the Company's Certificate of Incorporation, By laws, resolutions relating to the filing of the Registration Statement and the transactions contemplated by this Agreement, and containing specimen signatures of each officer authorized and duly appointed to sign documents and who has executed or will execute such documents, in connection with the transactions contemplated by this Agreement.
(j) The Company shall have obtained and delivered to the Underwriters executed copies of the Primary Lockup Agreements described in Sections 4(a)(vii) and 4(a)(viii) in form and substance reasonably satisfactory to you, and such Primary Lockup Agreements shall be in full force and effect.
(k) The Selling Shareholder shall have obtained and delivered to the Underwriters executed copies of the Selling Shareholder Lockup Agreement described in Section 4(b)(i) in form and substance reasonably satisfactory to you, and such Selling Shareholder Lockup Agreement shall be in full force and effect.
(l) There shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any of the Company's securities by any "nationally recognized statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act.
(m) There shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its Subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement) that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus.
(n) The Shares are quoted on the Nasdaq National Market, and such quotation has not been terminated by the National Association of Securities Dealers.
(o) The Company and the Selling Shareholder shall have furnished to the Representatives such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Representatives may reasonably have requested.
The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects reasonably satisfactory to the Representatives and to White & Case LLP, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the Company and the Selling Shareholder of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be.
In such event, the Selling Shareholder, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof).
The obligations of the Selling Shareholder to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened.
(a) The Company agrees:
(1) to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in the light of the circumstances in which they were made) not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, based upon information relating to any Underwriter or the Selling Shareholder furnished to the Company in writing by the Underwriters through the Representatives or by the Selling Shareholder specifically for use in the preparation thereof; and
(2) to reimburse each Underwriter and each such controlling person upon demand for any legal or other out-of-pocket expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Shares, whether or not such Underwriter or controlling person is a party to any action or proceeding. In the event that it is finally judicially determined that the Underwriters were not entitled to receive payments for legal and other expenses pursuant to this subparagraph, the Underwriters will promptly return all sums that had been advanced pursuant hereto.
(b) The Selling Shareholder agrees to indemnify the Underwriters and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any losses, claims, damages or liabilities to which such Underwriter, the Company or controlling person may become subject under the Act or otherwise to the same extent as indemnity is provided by the Company pursuant to Section 8(a) above; provided, however, that the Selling Shareholder shall be liable in each case to the extent, but only to the extent, that the untrue statement or alleged untrue statement or omission or alleged omission upon which indemnification is based was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto based upon information relating to the Selling Shareholder furnished to the Company in writing by the Selling Shareholder expressly for use therein. In no event, however, shall the liability of any Selling Shareholder for indemnification under this Section 8(b) exceed the proceeds received by the Selling Shareholder from the Underwriters in the offering. This indemnity obligation will be in addition to any liability which the Selling Shareholder may otherwise have.
(c) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who has signed
the Registration Statement, the Selling Shareholder, and each person, if any,
who controls the Company or a Selling Shareholder within the meaning of either
Section 15 of the Act or Section 20 of the Exchange Act, against any losses,
claims, damages or liabilities to which the Company or any such director,
officer, Selling Shareholder or controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein (in the case of the Prospectus, in the light of the
circumstances under which they were made) not misleading; and will
reimburse upon demand for any legal or other out-of-pocket expenses reasonably incurred by the Company or any such director, officer, Selling Shareholder or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Shares, whether or not such person or controlling person is a party to any action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, based upon information relating to any Underwriter furnished to the Company in writing through the Representatives specifically for use in the preparation thereof. In the event that it is finally judicially determined that the Company or any such director, officer, Selling Shareholder or controlling person was not entitled to receive payments for legal and other expenses pursuant to this subparagraph, the Company or any such director, officer, Selling Shareholder or controlling person will promptly return all sums that had been advanced pursuant hereto. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have.
(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a), (b) or (c) shall be available to any party who shall fail to give notice
as provided in this Section 8(d) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
materially prejudiced by the failure to give such notice, but the failure to
give such notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of the provisions of Section 8(a), (b) or (c). In case
any such proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party and
shall pay as incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel at its own expense. Notwithstanding the foregoing, the
indemnifying party shall pay as incurred (or within 30 days of presentation) the
fees and expenses of the counsel retained by the indemnified party in the event
(i) the indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel, (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them or
(iii) the indemnifying party shall have failed to assume the defense and employ
counsel acceptable to the indemnified party within a reasonable period of time
after notice of commencement of the action. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties. Such
firm shall be designated in writing by you in the case of parties indemnified
pursuant to Section 8(a) or (b) and by the Company and the
Selling Shareholder in the case of parties indemnified pursuant to Section 8(c). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the third and fifth sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding.
(e) To the extent the indemnification provided for in this Section 8
is unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company and the
Selling Shareholder on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law then each indemnifying
party shall contribute to such amount paid or payable by such indemnified party
in such proportion as is appropriate to reflect not only such relative benefits
but also the relative fault of the Company and the Selling Shareholder on the
one hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Shareholder on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Selling Shareholder bear to the
total underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Selling Shareholder on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. In no event,
however, shall the liability of any Selling Shareholder for contribution under
this Section 8(e) (i) exceed the proceeds received by the Selling Shareholder
from the Underwriters in the offering or (ii) be for any statement, omission or
information other than as based upon
information relating to the Selling Shareholder furnished to the Company in writing by the Selling Shareholder expressly for use in the Registration Statement or Prospectus.
The Company, the Selling Shareholder and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this Section 8(e)
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
8(e). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) referred to above in this Section 8(e) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (e), (i) no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission and (ii) no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation, and (iii) no Selling Shareholder shall be required
to contribute any amount in excess of the proceeds received by the Selling
Shareholder from the Underwriters in the offering. The Underwriters' obligations
in this Section 8(e) to contribute are several in proportion to their respective
underwriting obligations and not joint. The remedies provided for in this
Section 8 are not exclusive and shall not limit any rights or remedies which may
otherwise be available to any indemnified party at law or in equity.
(f) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join it as an additional defendant in any such proceeding in which such other contributing party is a party.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or any person controlling any Underwriter, or to the Company, its
directors or officers, or any person controlling the Company, shall be entitled
to the benefits of the indemnity, contribution and reimbursement agreements
contained in this Section 8.
(h) The provisions of this Section 8 shall not supersede or otherwise affect any agreement that the Company and the Selling Shareholder may otherwise have for the allocation of indemnification and contribution among themselves. For avoidance of doubt, the Company and the Selling Shareholder agree as between themselves that the provisions of the Stockholders Agreement dated as of December 21, 1993, as amended, between themselves and the other parties thereto, including without limitation Sections 2.8 and 2.9 thereof, apply with respect to the offering and Registration Statement and Prospectus contemplated by this Agreement.
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the Shares
which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company or a Selling
Shareholder), you, as Representatives of the Underwriters, shall use your
reasonable efforts to procure within 36 hours thereafter one or more of the
other Underwriters, or any others, to purchase from the Selling Shareholder such
amounts as may be agreed upon and upon the terms set forth herein, the Shares
which the defaulting Underwriter or Underwriters failed to purchase. If during
such 36 hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Shares agreed to be purchased by
the defaulting Underwriter or Underwriters, then (a) if the aggregate number of
Shares with respect to which such default shall occur does not exceed 10% of the
Shares to be purchased on the Closing Date or the Option Closing Date, as the
case may be, the other Underwriters shall be obligated, severally, in proportion
to the respective numbers of Shares which they are obligated to purchase
hereunder, to purchase the Shares which such defaulting Underwriter or
Underwriters failed to purchase, or (b) if the aggregate number of Shares with
respect to which such default shall occur exceeds 10% of the Shares to be
purchased on the Closing Date or the Option Closing Date, as the case may be,
the Selling Shareholder or you as the Representatives of the Underwriters will
have the right, by written notice given within the next 36-hour period to the
parties to this Agreement, to terminate this Agreement without liability on the
part of the non-defaulting Underwriters or of the Company or of any Selling
Shareholder except to the extent provided in Sections 5 and 8 hereof. In the
event of a default by any Underwriter or Underwriters, as set forth in this
Section 9, the Closing Date or Option Closing Date, as the case may be, may be
postponed for such period, not exceeding seven days, as you, as Representatives,
may determine in order that the required changes in the Registration Statement
or in the Prospectus or in any other documents or arrangements may be effected.
The term "Underwriter" includes any person substituted for a defaulting
Underwriter. Any action taken under this Section 9 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied or telegraphed and confirmed as follows: if to the Underwriters, to:
Deutsche Banc Alex. Brown Inc.
One South Street
Baltimore, Maryland 21202
Attention: Syndicate Manager,
with copies to:
Deutsche Banc Alex. Brown Inc.
31 West 52nd Street
New York, New York 10019
Attention: General Counsel; and
White & Case LLP
1155 Avenue of the Americas
New York, New York 10036
Attention: Priscilla Almodovar;
if to the Company, to:
Silgan Holdings Inc.
4 Landmark Square
Stamford, Connecticut 06901
Attention: Frank W. Hogan,
with a copy to:
Pillsbury Winthrop LLP
695 East Main Street
Stamford, Connecticut 60901
Attention: Robert J. Rawn, Esq.
if to the Selling Shareolders, to:
Morgan Stanley Private Equity
1221 Avenue of the Americas
33rd Floor
New York, New York 10036
Attention:
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Carole Schiffman
This Agreement may be terminated by you by notice to the Company and the Selling Shareholder:
(a) at any time prior to the Closing Date or any Option Closing Date
(if different from the Closing Date and then only as to Option Shares) if any of
the following has occurred: (i) since the respective dates as of which
information is given in the Registration Statement and the Prospectus, any
material adverse change or any development involving a prospective material
adverse change in or affecting the earnings, business, properties, assets,
operations, condition (financial or otherwise) or prospects of the Company and
its Subsidiaries taken as a whole, whether or not arising in the ordinary course
of business, (ii) any outbreak or escalation of hostilities or declaration of
war or national emergency or other national or international calamity or crisis
or change in economic or political conditions if the effect of such outbreak,
escalation, declaration, emergency, calamity, crisis or change on the financial
markets of the United States would, in your judgment, make it impracticable or
inadvisable to market the Shares or to enforce contracts for the sale of the
Shares, (iii) suspension of trading in securities generally on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National Market or
limitation on prices (other than limitations on hours or numbers of days of
trading) for securities on either such Exchange, (iv) the enactment,
publication, decree or other promulgation of any statute, regulation, rule or
order of any court or other governmental authority which in your opinion
materially and adversely affects or may materially and adversely affect the
business or operations of the Company, (v) the declaration of a banking
moratorium by United States or New York State authorities, (vi) any downgrading,
or placement on any watch list for possible downgrading, in the rating of any of
the Company's debt securities by any "nationally recognized statistical rating
organization" (as defined for purposes of Rule 436(g) under the Exchange Act),
(vii) the suspension of trading of the Company's common stock by the Nasdaq
National Market, the Commission, or any other governmental authority, or (viii)
the taking of any action by any governmental body or agency in respect of its
monetary or fiscal affairs which in your opinion has a material adverse effect
on the securities markets in the United States; or
(b) as provided in Sections 6 and 9 of this Agreement.
This Agreement has been and is made solely for the benefit of the Underwriters, the Company and the Selling Shareholder and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign merely because of such purchase.
(a) The Company, the Selling Shareholder and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in any Prospectus or the Registration Statement consists of the information set forth in the last sentence of the ninth paragraph, in the first sentence of the sixteenth paragraph and in the third,
tenth, twelfth, thirteenth and seventeenth paragraphs under the caption "Plan of Distribution" in the Prospectus.
(b) The Company, the Selling Shareholder and the Underwriters acknowledge and agree that the only information furnished or to be furnished by the Selling Shareholder to the Company for inclusion in any Prospectus or Registration Statement consists of the information referring to the Selling Shareholder under the caption "Principal Stockholders and Selling Stockholder" in the Prospectus.
The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York.
The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement.
If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Selling Shareholder, the Company and the several Underwriters in accordance with its terms.
Any person executing and delivering this Agreement as Attorney-in-Fact for a Selling Shareholder represents by so doing that he has been duly appointed as Attorney-in-Fact by the Selling Shareholder pursuant to a validly existing and binding Power of Attorney which authorizes such Attorney-in-Fact to take such action.
Very truly yours,
SILGAN HOLDINGS INC.
By /s/ D. Greg Horrigan
-------------------------------------------------
Name: D. Greg Horrigan
Title: President and Co-Chief Executive Officer
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THE MORGAN STANLEY LEVERAGED
EQUITY FUND II, L.P.
By: Morgan Stanley Leveraged Equity
Fund II, Inc., as general partner
By /s/ Leigh J. Abramson
-------------------------------------------------
Name: Leigh J. Abramson
Title: Vice President
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The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
DEUTSCHE BANC ALEX. BROWN INC.
MORGAN STANLEY & CO. INCORPORATED
As Representatives of the several
Underwriters listed on Schedule I
By: Deutsche Banc Alex. Brown Inc.
By: /s/ David S. Bailey
-----------------------------------
Authorized Officer
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By: Morgan Stanley & Co. Incorporated
By: /s/ Todd J. Singer
-----------------------------------
Authorized Officer
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Number of Firm Shares Number of Firm Shares
Underwriter to be Purchased to be Purchased
--------------------------- ---------------
Deutsche Banc Alex. Brown Inc. 1,640,000
Morgan Stanley & Co. Incorporated 1,640,000
Salomon Smith Barney Inc. 820,000
---------
Total 4,100,000
---------
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LIST OF SUBSIDIARIES
--------------------
Name of Subsidiary Jurisdiction of Organization Percent
------------------ ---------------------------- -------
Owned
-------
Silgan Containers Corporation Delaware 100%
Silgan Containers Manufacturing Corporation Delaware 100%
Silgan LLC Delaware 100%
Silgan Corporation Delaware 100%
Silgan Can Company Delaware 100%
Silgan Plastics Corporation Delaware 100%
RXI Plastics, Inc. Delaware 100%
827599 Ontario Inc. Ontario, Canada 100%
Silgan Plastics Canada Inc. Ontario, Canada 100%
828745 Ontario Inc. Ontario, Canada 100%
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(i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; each of Silgan Containers Corporation, Silgan Containers Manufacturing Corporation, Silgan LLC, Silgan Corporation, Silgan Can Company, Silgan Plastics Corporation and RXI Plastics, Inc., each, a Delaware corporation (collectively, the "U.S. Subsidiaries") has been duly organized and is validly existing as a corporation or limited liability company in good standing under the laws of the jurisdiction of its organization, with corporate or limited liability company power and authority to own or lease its properties and conduct its business as described in the Registration Statement; and the outstanding shares of capital stock of each of the U.S. Subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable and are owned by the Company or a U.S. Subsidiary; and the outstanding shares of capital stock of each of the U.S. Subsidiaries is owned free and clear of all liens, encumbrances and equities and claims, and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into any shares of capital stock or of ownership interests in the U.S. Subsidiaries are outstanding, other than the pledges of such capital stock existing on the date hereof made in connection with the (a) the Credit Agreement, dated as of July 29, 1997, as amended, among the Company, Silgan Containers Corporation, Silgan Plastics Corporation, certain other subsidiaries of any of them, various banks, Bankers Trust Company, as Administrative Agent and as a Co-Arranger, Bank of America National Trust & Savings Association, as Syndication Agent and as a Co-Arranger, Goldman Sachs Credit Partners L.P., as Co-Documentation Agent and as a Co-Arranger, and Morgan Stanley Senior Funding, Inc., as Co-Documentation Agent and as Co-Arranger (the "Credit Agreement"); (b) the Credit Agreement dated as of December 19, 1997 by and among Silgan Plastics Canada Inc., as Borrower, the financial institutions listed on the signature pages thereto, as lenders, BT Bank of Canada as Administrative Agent and BT Bank of Canada, Bank of America Canada and Canadian Imperial Bank of Commerce as Co-Arrangers (the "Canadian Credit Agreement"); and (c) the Pledge and Rights Agreement dated as June 1, 1998, by and among Campbell Soup Company, Silgan Containers Corporation, Silgan Corporation and Silgan Can Company (the "Campbell Pledge Agreement").
(ii) The Company has an authorized capitalization as set forth under the caption "Capitalization" in the Prospectus; the outstanding shares of the Company's Common Stock, including the Shares to be sold by the Selling Shareholder, have been duly authorized and validly issued and are fully paid and non-assessable; all of the Shares conform to the description thereof contained in the Prospectus; and, to such counsel's knowledge, no preemptive rights of stockholders exist with respect to any of the Shares or the sale thereof.
(iii) Except as described in the Prospectus, to such counsel's knowledge, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and, to such counsel's knowledge,
EXHIBIT B
except as described in the Prospectus, no holder of any securities of the Company or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any Common Shares or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the Act and, to the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. Any filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required under Rule 424(b).
(v) The Registration Statement, the Prospectus and each amendment or supplement thereto (in each case excluding the documents incorporated by reference therein) comply as to form in all material respects with the requirements of the Act and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules included or incorporated by reference therein). Each document incorporated by reference in the Registration Statement, the Prospectus or any further amendment or supplement thereto made by the Company prior to the Closing Date, when it became effective or was filed with the Commission, as the case may be, appeared on its face to comply as to form in all material respects with the requirements of the Exchange Act and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules included or incorporated by reference therein).
(vi) The statements (A) under the captions "Description of Capital Stock", "Shares Eligible for Future Sale" (solely to the extent such statements constitute a summary of Rule 144) and "Plan of Distribution" (solely to the extent such statements relate to the Underwriting Agreement) in the Prospectus and (B) in the Registration Statement in Item 15, insofar as such statements constitute a summary of documents referred to therein or matters of law, are accurate in all material respects.
(vii) Such counsel knows of no material legal or governmental proceedings pending against the Company or any of the U.S. Subsidiaries which, if determined adversely to the Company or any of its U.S. Subsidiaries would individually or in the aggregate, have a material adverse effect on the current or future consolidated financial position, stockholders' equity or results of operations of the Company except as set forth in the Prospectus.
(viii) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Certificate of Incorporation or By-Laws of the Company, or any indenture, mortgage, deed of trust or other agreement or instrument filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, to which the Company or any of the U.S. Subsidiaries is a party or by which the Company or
EXHIBIT B
any of the U.S. Subsidiaries may be bound or any judgment, order or decree, known to such counsel, of any governmental body, agency or court having jurisdiction over the Company or any U.S. Subsidiary.
(ix) This Agreement has been duly authorized, executed and delivered by the Company.
(x) The Company is not, and will not become, as a result of the sale of the Shares in the offering contemplated by this Agreement, required to register as an investment company under the 1940 Act, assuming that The Morgan Stanley Leveraged Equity Fund II, L.P. is not an "investment company" and is not "controlled" by an "investment company."
In addition to the matters set forth above, such opinion shall also include a statement to the effect that, except for the opinion in paragraph (vi) above, nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement (including the documents incorporated by reference therein), at the time it became effective under the Act (including the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 430A under the Act) contained an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto (including the documents incorporated by reference therein) as of its date and as of the Closing Date (or the Option Closing Date, as applicable) contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (except that such counsel need express no view as to financial statements and schedules and other financial data therein). With respect to such statement, Pillsbury Winthrop LLP may state that their belief is based upon the procedures set forth therein, but is without independent check and verification.
The Company and each of the U.S. Subsidiaries are duly qualified to transact business in the respective jurisdictions set forth on Annex A hereto.
(i) The Agreement has been duly executed and delivered by or on behalf of the Selling Stockholder, the Selling Stockholder has full right, power and authority under its Limited Partnership Agreement to sell, assign, transfer and deliver the Shares to be sold by the Selling Shareholder under the Agreement and the sale of the Shares to be sold by the Selling Stockholder under the Agreement and the compliance by the Selling Stockholder with all of the provisions of this Agreement and the consummation of the transactions therein contemplated will not conflict with or result in a breach or violation of any terms or provisions of, or constitute a default under, any New York or federal statute or regulation that in such counsel's experience is normally applicable to Delaware limited partnerships in relation to transactions of the type contemplated by the Agreement (except that no opinion need be expressed in respect of the Investment Company Act of 1940, as amended, or the Investment Advisors Act of 1940, as amended), nor will such action result in any violation of the provisions of the Limited Partnership Agreement of the Selling Stockholder.
(ii) No consent, approval, authorization or order of any New York or federal court or governmental agency or body is required in connection with the sale of the Shares by the Selling Stockholder thereunder, except such as may be required under the Securities Act of 1933, as amended, and under state securities or Blue Sky laws in connection with the purchase and distribution of such Shares by the Underwriters.
(iii) Upon payment for the Shares to be sold by the Selling Stockholder to each of the several Underwriters as provided in the Underwriting Agreement, the delivery of the Shares to Cede & Co. ("Cede") or such other nominee as may be designated by the Depository Trust Company ("DTC"), the registration of the Shares in the name of Cede or such other nominee and the crediting of the Shares on the records of DTC to security accounts in the name of such Underwriter (assuming that neither DTC nor such Underwriter has notice of any adverse claim (as such phrase is defined in Section 8-105 of the Uniform Commercial Code as in effect in the State of New York (the "UCC")) to the Shares or any security entitlement in respect thereof), (A) DTC shall be a "protected purchaser" of the Shares within the meaning of Section 8-303 of the UCC, (B) under Section 8-501 of the UCC, such Underwriter will acquire a security entitlement in respect of the Shares and (C) no action based on any "adverse claim" (as defined in Section 8-102 of the UCC) to such security entitlement may be asserted against such Underwriter; it being understood that for purposes of this opinion, we have assumed that when such payment, delivery and crediting occur, (x) the Shares will have been registered in the name of Cede or such other nominee as may be designated by DTC, in each case on the Company's share registry in accordance with its certificate of incorporation, bylaws and applicable law, (y) DTC will be a "securities intermediary" within the meaning of Section 8-102 of the UCC and (z) appropriate entries to the securities account or accounts in the name of such Underwriter on the records of DTC will have been made pursuant to the UCC.
In rendering such opinion, such counsel may state that (1) the foregoing opinion is limited to the laws of the State of New York, the Delaware limited partnership statute and the federal laws of the United States, (2) they express no opinion with respect to the Investment Company Act of 1940, as amended, or the Investment Advisors Act of 1940, as amended, and (3)
EXHIBIT D
in rendering the opinion in subparagraph (iii) such counsel may rely upon a certificate of the Selling Stockholder in respect of matters of fact as to ownership of, and liens, encumbrances, equities or claims on the Shares sold by the Selling Stockholder.
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
The following table sets forth Silgan Holdings Inc.'s computation of its ratio of earnings to combined fixed charges and preferred stock dividends for the periods indicated.
Years Ended December 31,
------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Earnings before fixed charges:
Income before income taxes ................ $ 76,127 $ 65,924 $ 38,235 $ 72,808 $ 43,866
Interest and other debt expense ........... 81,192 91,178 86,057 81,456 80,693
Interest portion of rental expense ........ 1,146 1,330 1,132 1,140 1,086
-------- -------- -------- -------- --------
Earnings before fixed charges .................. $158,465 $158,432 $125,424 $155,404 $125,645
======== ======== ======== ======== ========
Combined fixed charges and
preferred stock dividends:
Interest and other debt expense ........... $ 81,192 $ 91,178 $ 86,057 $ 81,456 $ 80,693
Interest portion of rental expense ........ 1,146 1,330 1,132 1,140 1,086
Capitalized interest ...................... 1,571 2,367 -- -- --
Preferred stock dividends ................. -- -- -- -- 3,224
-------- -------- -------- -------- --------
Total combined fixed charges and
preferred stock dividends .............. $ 83,909 $ 94,875 $ 87,189 $ 82,596 $ 85,003
======== ======== ======== ======== ========
Ratio of earnings to combined fixed
charges and preferred stock dividends........ 1.89 1.67 1.44 1.88 1.48
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EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-40151) pertaining to the Fourth Amended and Restated 1989 Stock Option Plan of Silgan Holdings Inc. of our report dated January 29, 2002, with respect to the consolidated financial statements and schedule of Silgan Holdings Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2001.
/S/ ERNST & YOUNG LLP
Stamford, Connecticut
March 28, 2002
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