U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 1999 Commission File Number 1-566 GREIF BROS. CORPORATION (Exact name of Registrant as specified in its charter) State of Delaware 31-4388903 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 425 Winter Road, Delaware, Ohio 43015 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 740-549-6000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class Class "A" Common Stock Class "B" Common Stock Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months 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 the Registrants knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the Registrant as of January 10, 2000 was $81,951,776. The number of shares outstanding of each of the Registrant's classes of common stock, as of January 10, 2000 was as follows: Class A Common Stock - 10,586,296 Class B Common Stock - 11,867,859 Listed hereunder are the documents, portions of which are incorporated by reference, and the parts of this Form 10-K into which such portions are incorporated: 1. The Registrant's Proxy Statement for use in connection with the Annual Meeting of Shareholders to be held on February 28, 2000, portions of which are incorporated by reference into Part III of this Form 10-K, which Proxy Statement will be filed within 120 days of October 31, 1999. PART I Item 1. Business Greif Bros. Corporation and its subsidiaries (the "Company") principally manufacture industrial shipping containers and containerboard and corrugated products which it sells to customers in many industries, primarily in the United States, Canada and Mexico, through direct sales contact with its customers. In addition, the Company owns timber properties which are harvested and regenerated in the United States and Canada. The Company operates over 80 locations in the United States, Canada and Mexico and, as such, is subject to federal, state, local and foreign regulations in effect at the various localities. Due to the variety of its products, the Company has many customers buying different types of its products and, due to the scope of the Company's sales, no one customer is considered principal in the total operation of the Company. Because the Company supplies a cross section of industries, such as chemicals, food products, petroleum products, pharmaceuticals and metal products, and must make spot deliveries on a day-to-day basis as its products are required by its customers, the Company does not operate on a backlog to any significant extent and maintains only limited levels of finished goods. Many customers place their orders weekly for delivery during the week. The Company's business is highly competitive in all respects (price, quality and service), and the Company experiences substantial competition in selling its products. Many of the Company's competitors are larger than the Company. While research and development projects are important to the Company's continued growth, the amount expended in any year is not material in relation to the results of operations of the Company. The Company's raw materials are principally pulpwood, waste paper for recycling, paper, steel and resins. In the current year, as in prior years, some of these materials have been in short supply, but to date these shortages have not had a significant effect on the Company's operations. The Company's business is not materially dependent upon patents, trademarks, licenses or franchises. The business of the Company is not seasonal to any significant extent and has not recently been significantly affected by inflation. The approximate number of persons employed during the year was 5,100. Item 1. Business (concluded) Acquisitions and Dispositions A description of significant acquisitions and dispositions is included in Note 2 to the Consolidated Financial Statements on pages 44-49 of this Form 10-K, which Note is part of the financial statements contained in Item 8 of this Form 10-K, and which Note is incorporated herein by reference. Industry Segments Financial information concerning the Company's industry segments as required by Item 101(b) is included in Note 11 to the Consolidated Financial Statements on pages 60-63 of this Form 10-K, which Note is part of the financial statements contained in Item 8 of this Form 10-K, and which Note is incorporated herein by reference. Item 2. Properties The following are the Company's principal locations and products manufactured at such facilities or the use of such facilities. The Company considers its operating properties to be in satisfactory condition and adequate to meet its present needs. However, the Company expects to make further additions, improvements and consolidations of its properties as the Company's business continues to expand. Location Products Manufactured/Use Industry Segment Alabama: Creola Fibre drums Industrial shipping containers Cullman Steel drums Industrial shipping containers Arkansas: Batesville (32) Fibre drums Industrial shipping containers California: Fontana Steel drums Industrial shipping containers LaPalma Fibre drums Industrial shipping containers Merced Steel drums Industrial shipping containers Morgan Hill Fibre drums Industrial shipping containers Stockton Corrugated honeycomb Containerboard & corrugated products Colorado: Denver (1) Warehouse Industrial shipping containers Connecticut: Windsor Locks (2) Fibre drums Industrial shipping containers Georgia: Dalton (3) Packaging services Industrial shipping containers Lavonia Intermediate bulk containers Industrial shipping containers Lithonia Fibre drums and laminator Industrial shipping containers Macon Corrugated honeycomb Containerboard & corrugated products Item 2. Properties (continued) Location Products Manufactured/Use Industry Segment Marietta (4) General office Industrial shipping containers Illinois: Blue Island (5) Warehouse Containerboard & corrugated products Centralia Corrugated containers and sheets Containerboard & corrugated products Chicago Steel drums Industrial shipping containers Lockport Plastic drums Industrial shipping containers Lombard (6) Research center Industrial shipping containers Naperville (7) Fibre drums Industrial shipping containers Oreana Corrugated containers Containerboard & corrugated products Posen Corrugated honeycomb Containerboard & corrugated products Quincy (32) Warehouse Containerboard & corrugated products Indiana: Ferdinand (8) Corrugated containers Containerboard & corrugated products Kansas: Kansas City (9) Fibre drums Industrial shipping containers Winfield Steel drums Industrial shipping containers Kenntucky: Erlanger (10) Corrugated containers Containerboard & corrugated products Louisville (32) Corrugated containers Containerboard & corrugated products Louisville (32) Warehouse Containerboard & corrugated products Mt. Sterling Plastic drums Industrial shipping containers Mt. Sterling (11) Warehouse Industrial shipping containers Item 2. Properties (continued) Location Products Manufactured/Use Industry Segment Winchester Corrugated containers Containerboard & corrugated products Winchester(12) Warehouse Containerboard & corrugated products Louisiana: St. Gabriel Steel drums and plastic drums Industrial shipping containers Massachusetts: Mansfield Fibre drums Industrial shipping containers Worcester Plywood reels Industrial shipping containers Michigan: Canton Warehouse Containerboard & corrugated products Roseville Corrugated containers Containerboard & corrugated products Taylor Fibre drums Industrial shipping containers Minnesota: Minneapolis Fibre drums Industrial shipping containers Rosemount Multiwall bags Industrial shipping containers St. Paul Tight cooperage Industrial shipping containers Mississippi: Durant Plastic products Industrial shipping containers Jackson(13) General office Timber Missouri: Wright City(14) Fibre drums Industrial shipping containers Nebraska: Omaha Multiwall bags Industrial shipping containers Item 2. Properties (continued) Location Products Manufactured/Use Industry Segment New Jersey: Englishtown(15) Fibre drums Industrial shipping containers Rahway Fibre drums and plastic drums Industrial shipping containers Spotswood Fibre drums Industrial shipping containers Teterboro Fibre drums Industrial shipping containers New York: Syracuse Fibre drums Industrial shipping containers Tonawanda Fibre drums Industrial shipping containers North Carolina: Bladenboro Steel drums Industrial shipping containers Charlotte(16) Fibre drums Industrial shipping containers Ohio: Caldwell Steel drums Industrial shipping containers Cleveland Corrugated containers Containerboard & corrugated products Columbus(17) General office Industrial shipping containers Columbus(18) General office Delaware Principal office Delaware(19) Research center Industrial shipping containers Fostoria Corrugated containers Containerboard & corrugated products Massillon Containerboard Containerboard & corrugated products Tiffin Corrugated containers Containerboard & corrugated products Van Wert Fibre drum Industrial shipping containers Zanesville Corrugated containers and sheets Containerboard & corrugated products Item 2. Properties (continued) Location Products Manufactured/Use Industry Segment Pennsylvania: Aston Fibre drums Industrial shipping containers Hazelton Corrugated honeycomb Containerboard & corrugated products Hazelton(32) Warehouse Containerboard & corrugated products Kelton Sales office Containerboard & corrugated products Reno(21) Corrugated containers Containerboard & corrugated products Stroudsburg Drum hardware Industrial shipping containers Washington Corrugated containers and sheets Containerboard & corrugated products Wayne(22) Sales office Industrial shipping containers West Hazelton(23) Plastic drums Industrial shipping containers Tennessee: Kingsport Fibre drums Industrial shipping containers Texas: Angleton Steel drums Industrial shipping containers Haltom City Fibre drums Industrial shipping containers Houston(24) Fibre drums Industrial shipping containers Houston(25) Plastic drums Industrial shipping containers Houston(26) Sales office Industrial shipping containers LaPorte Steel drums Industrial shipping containers Waco Corrugated honeycomb Containerboard & corrugated products Virginia: Riverville Containerboard Containerboard & corrugated products Item 2. Properties (continued) Location Products Manufactured/Use Industry Segment Washington: Vancouver(27) Corrugated honeycomb Containerboard & corrugated products Vancouver(28) Warehouse Containerboard & corrugated products West Virginia: Culloden(29) Fibre drums Industrial shipping containers Huntington(30) Corrugated containers and sheets Containerboard & corrugated products Huntington(31) Warehouse Containerboard & corrugated products Wisconsin: Sheboygan Fibre drums Industrial shipping containers Canada Alberta: Lloydminster Steel drums, fibre drums Industrial shipping and plastic drums containers Ontario: Belleville Plastic products Industrial shipping containers Milton Fibre drums Industrial shipping containers Niagara Falls General office Industrial shipping containers Oakville Steel drums Industrial shipping containers Stoney Creek Drum hardware Industrial shipping containers Stoney Creek Steel drums Industrial shipping containers Stoney Creek Research center and drum hardware Industrial shipping containers Quebec: La Salle Fibre drums Industrial shipping containers Maple Grove Pallets Industrial shipping containers Item 2. Properties (concluded) Location Products Manufactured/Use Industry Segment Mexico Estado de Mexico: Naucalpan de Juarez Fibre drums Industrial shipping containers Note: All properties are held in fee except as noted below: Exceptions: (1) Lease expires December 15, 2001 (2) Lease expires December 31, 2005 (3) Lease expires September 30, 2002 (4) Lease expires April 14, 2001 (5) Lease expires April 30, 2001 (6) Lease expires July 31, 2007 (7) Lease expires June 30, 2003 (8) Lease expires April 30, 2000 (9) Lease expires March 31, 2004 (10) Lease expires October 6, 2003 (11) Lease expires June 30, 2000 (12) Lease expires January 31, 2001 (13) Lease expires August 31, 2001 (14) Lease expires August 31, 2005 (15) Lease expires February 28, 2003 (16) Lease expires September 30, 2003 (17) Lease expires November 30, 2000 (18) Lease expires August 31, 2001 (19) Lease expires June 30, 2001 (20) Lease expires July 31, 2000 (21) Lease expires December 31, 2001 (22) Lease expires July 31, 2003 (23) Lease expires April 30, 2006 (24) Lease expires September 30, 2006 (25) Lease expires September 30, 2002 (26) Lease expires June 30, 2001 (27) Lease expires January 31, 2002 (28) Lease expires February 28, 2002 (29) Lease expires January 31, 2002 (30) Lease expires October 7, 2001 (31) Lease expires March 31, 2000 (32) Lease operates month to month The Company also owns in fee a substantial number of scattered timber tracts comprising approximately 319,000 acres in the states of Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi and Virginia and the provinces of Ontario and Quebec in Canada. Item 3. Legal Proceedings The Company has no pending material legal proceedings. From time to time, various legal proceedings arise at Federal, State or Local levels involving environmental sites to which the Company has shipped, directly or indirectly, small amounts of toxic waste, such as paint solvents, etc. The Company, to date, has been classified as a "de minimis" participant and, as such, has not been subject, in any instance, to material sanctions or sanctions greater than $100,000. In addition, from time to time, but less frequently, the Company has been cited for violations of environmental regulations. Except for the following situation, none of these violations involve or are expected to involve sanctions of $100,000 or more. Currently, the only exposure known to the Company which may exceed $100,000 relates to a pollution situation at its Strother Field plant in Winfield, Kansas. A record of decision issued by the U.S. Environmental Protection Agency (EPA) has set forth estimated remedial costs which could expose the Company to approximately $3,000,000 in expense under certain assumptions. If the Company ultimately is required to incur this expense, a significant portion would be paid over 10 years. The Kansas site involves groundwater pollution and certain soil pollution that was found to exist on the Company's property. The estimated costs of the remedy currently preferred by the EPA for the soil pollution on the Company's land represents approximately $2,000,000 of the estimated $3,000,000 in expense. The final remedies have not been selected. In an effort to minimize its exposure for soil pollution, the Company has undertaken further engineering borings and analysis to attempt to identify a more definitive soil area which would require remediation. However, there can be no assurance that the Company will be successful in minimizing such exposure, and there can be no assurance that the total expense incurred by the Company in remediating this site will not exceed $3,000,000. A reserve for $2,000,000 was recorded by the Company during 1995 since it was considered the most likely amount of loss. To date, approximately $500,000 has been charged against this reserve. The remaining reserve is considered adequate. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. Executive Officers of the Company The following information relates to Executive Officers of the Company (elected annually): Year first became Name Age Positions and Offices Executive Officer Michael J. Gasser 48 Chairman of the Board 1988 of Directors and Chief Executive Officer, Chairman of the Executive, Nominating and Stock Repurchase Committees William B. Sparks, Jr. 58 Director, President 1995 and Chief Operating Officer, member of the Executive Committee Charles R. Chandler 64 Director, Vice 1996 Chairman, President of Soterra LLC (subsidiary company), member of the Executive Committee John S. Lilak 52 Executive Vice 1999 President, Containerboard & Corrugated Products Joseph W. Reed 62 Chief Financial 1997 Officer and Secretary Michael L. Roane 44 Vice President, Human 1998 Resources John P. Berg 79 President Emeritus 1972 Michael J. Barilla 49 Vice President, 1999 Business Information Services Executive Officers of the Company (continued) Year first became Name Age Positions and Offices Executive Officer Michael M. Bixby 56 Vice President, 1980 Strategic Accounts, Industrial Shipping Containers Ronald L. Brown 52 Vice President, Sales 1996 and Marketing, Industrial Shipping Containers Wayne R. Carlberg 56 Vice President, 1998 Marketing, Industrial Shipping Containers John K. Dieker 36 Corporate Controller 1996 Elco Drost 54 President of Greif 1996 Containers Inc. (subsidiary company) Russell A Fazio 56 Vice President, Field 1998 Sales, Industrial Shipping Containers Michael A. Giles 49 Vice President, 1996 Manufacturing, Containerboard Mill Operations, Containerboard & Corrugated Products C.J. Guilbeau 52 Vice President and 1986 Associate Director of Manufacturing, Industrial Shipping Containers Sharon R. Maxwell 50 Assistant Secretary 1997 Philip R. Metzger 52 Treasurer 1995 Bruce J. Miller 44 Vice President, Sales 1998 and Marketing, Specialty Operations, Containerboard & Corrugated Products Executive Officers of the Company (continued) Year first became Name Age Positions and Offices Executive Officer Mark J. Mooney 42 Vice President, 1997 Packaging Services, Industrial Shipping Containers William R. Mordecai 47 Vice President, Sales 1997 and Marketing, Containerboard and Paper, Containerboard & Corrugated Products William R. Shew 69 Special Assistant to 1996 the Vice Chairman Kent P. Snead 54 Corporate Director of 1997 Strategic Projects Karl Svendsen 58 Vice President, 1998 Manufacturing, Industrial Shipping Containers Peter G. Watson 42 Vice President, 1999 Service Solutions, and General Manager, Sheet Plant Operations, Containerboard & Corrugated Products Carl G. Wright 40 Vice President, 1999 Manufacturing, and General Manager, Corrugator Operations, Containerboard & Corrugated Products Executive Officers of the Company (continued) Except as indicated below, each Executive Officer has served in his or her present capacity for at least five years. Mr. William B. Sparks, Jr. was elected President and Chief Operating Officer during 1995. Prior to that time, and for more than five years, he served as Chief Executive Officer of Down River International, Inc., a former subsidiary of the Company. Mr. Charles R. Chandler was elected Vice Chairman during 1996. In addition, he was elected President of Soterra LLC during 1999. Prior to that time, and for more than five years, he served as President and Chief Operating Officer of Virginia Fibre Corporation, a former subsidiary of the Company. Mr. John S. Lilak was elected Executive Vice President, Containerboard & Corrugated Products, during 1999. During 1997 to 1999, Mr. Lilak served as General Sales and Marketing Manager, Kraft Paper and Board Division, for Union Camp Corporation. Prior to that time, and for more than five years, he served as Group General Manager, Container Division, of Union Camp. Mr. Joseph W. Reed was elected Chief Financial Officer and Secretary in 1997. Prior to that time, and for more than five years, he served as Senior Vice President, Finance and Administration - CFO of Pharmacia, Inc. Mr. Michael L. Roane was elected Vice President, Human Resources, in 1998. Prior to that time, and for more than five years, Mr. Roane served as Vice President, Human Resources, for Owens and Minor, Inc. Mr. John P. Berg was elected President Emeritus in 1996. Prior to that time, he served as President of the Company and General Manager of one of its divisions for more than five years. Mr. Michael J. Barilla was elected Vice President, Business Information Services, during 1999. During 1997 to 1999, Mr. Barilla served as a Senior Consultant for IBM Corporation. During 1995 to 1997, he served as Chief Financial Officer and prior to that time, and for more than five years, he served as Senior Vice President of Operations and Administration of Medex, Inc. Mr. Michael M. Bixby became Vice President, Strategic Accounts, Industrial Shipping Containers, during 1998. During the past five years, he has been a Vice President of the Company. Mr. Ronald L. Brown became Vice President, Sales and Marketing, Industrial Shipping Containers, during 1997. Prior to that time, and for more than five years, he served as President and Chief Operating Officer for Down River International (former subsidiary company). Executive Officers of the Company (continued) Mr. Wayne R. Carlberg was elected Vice President, Marketing, Industrial Shipping Containers, during 1998. Prior to that time, and for more than five years, he held the position of Sales Manager for the Industrial Container Division of Sonoco Products Company, which was acquired on March 31, 1998. Mr. John K. Dieker was elected Corporate Controller in 1995. Prior to that time, and for more than five years, he served as Assistant Corporate Controller. During 1996, Mr. Elco Drost was elected President of Greif Containers Inc. (subsidiary company) and continues to serve in this capacity. Prior to that time, and for more than five years, he served as Vice President for the subsidiary company. Mr. Russell A. Fazio was elected Vice President, Field Sales, Industrial Shipping Containers, during 1998. Prior to that time, and for more than five years, he held the position of Manager, Strategic Account Programs, for the Industrial Container Division of Sonoco Products Company, which was acquired on March 31, 1998. Mr. Michael A. Giles became Vice President, Manufacturing, Containerboard Mill Operations, Containerboard & Corrugated Products, in 1997. He was Executive Vice President of Virginia Fibre Corporation (now Greif Bros. Corporation of Virginia, subsidiary company) in 1996. From 1995 to 1996, he served as Vice President of Manufacturing and, prior to that time, Vice President of Finance and Treasurer at the subsidiary company for more than five years. Mr. C.J. Guilbeau became Vice President and Associate Director of Manufacturing, Industrial Shipping Containers, during 1997. During the past five years, he has served as Vice President of the Company. Ms. Sharon R. Maxwell was elected Assistant Secretary during 1997. Prior to that time, and for more than five years, she served as administrative assistant to the Chairman. Mr. Philip R. Metzger was elected Treasurer in 1995. Prior to that time, and for more than the past five years, he served as Assistant Treasurer and Assistant Controller. Mr. Bruce J. Miller was elected Vice President, Sales and Marketing, Specialty Operations, Containerboard & Corrugated Products, during 1998. In 1997 and early 1998, Mr. Miller served as Director, Vendor Management Programs, for the Industrial Shipping Containers segment. Prior to that time, and for more than five years, he served as a Vice President of Down River International, Inc. (former subsidiary company). Executive Officers of the Company (concluded) Mr. Mark J. Mooney became Vice President, Packaging Services, Industrial Shipping Containers, during 1998. Prior to that time, Mr. Mooney served as Vice President, National Sales, and prior to 1996, and for more than the past five years, he served as the Operations Director, Multiwall Bags, at one of its divisions. Mr. William R. Mordecai became Vice President, Sales and Marketing, Containerboard and Paper, Containerboard & Corrugated Products, during 1997. During 1996 to 1997, Mr. Mordecai served as Director, Containerboard Marketing, for Virginia Fibre Corporation (former subsidiary company). Prior to that time, and for more than five years, he served as President of Pimlico Paper Corporation. Mr. William R. Shew became Special Assistant to the Vice Chairman during 1997. Prior to that time, and for more than the past five years, he served as President of Greif Board Corporation (former subsidiary company). Mr. Kent P. Snead became Corporate Director of Strategic Projects during 1997. Prior to that time, and for more than the past five years, he served as the Engineering Manager for Virginia Fibre Corporation (former subsidiary company). Mr. Karl Svendsen was elected Vice President, Manufacturing, Industrial Shipping Containers, during 1998. Prior to that time, he served as Vice President, Operating Resources, for the Industrial Container Division of Sonoco Products Company, acquired on March 30, 1998, for more than five years. Mr. Peter G. Watson was elected Vice President, Service Solutions, and General Manager, Sheet Plant Operations, Containerboard & Corrugated Products, during 1999. During 1996 to 1999, Mr. Watson served as Vice President and General Manager of Concept Packaging Group. Prior to that time, and for more than five years, he served as General Manager for Union Camp Corporation. Mr. Carl G. Wright was elected Vice President, Manufacturing, and General Manager, Corrugator Operations, Containerboard & Corrugated Products, during 1999. During 1996 to 1999, Mr. Wright served as a Regional Manager within the Containerboard & Corrugated Products segment. Prior to that time, and for more than five years, he served as a General Manager within the business segment. PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters The Class A and Class B Common Stock are traded on the NASDAQ Stock Market under the symbols GBCOA and GBCOB, respectively. The financial information regarding the Company's two classes of common stock is included in Note 12 to the Consolidated Financial Statements on pages 64-65 of this Form 10-K, which Note is part of the financial statements contained in Item 8 of this Form 10-K, and which Note is incorporated herein by reference. The Company paid five dividends of varying amounts during its fiscal year computed on the basis described in Note 5 to the Consolidated Financial Statements on page 52 of this Form 10-K, which Note is part of the financial statements contained in Item 8 of this Form 10-K, and which Note is incorporated herein by reference. The annual dividends paid for the last three fiscal years are as follows: 1999 fiscal year dividends per share - Class A $0.50; Class B $0.74 1998 fiscal year dividends per share - Class A $0.48; Class B $0.71 1997 fiscal year dividends per share - Class A $0.60; Class B $0.89 Item 6. Selected Financial Data The 5-year selected financial data is as follows (Dollars in thousands, except per share amounts): Years Ended October 31, 1999 1998 1997 1996 1995 (As Restated)(As Restated)(As Restated)(As Restated) Net sales $818,827 $814,432 $660,782 $644,744 $725,861 Net income $ 51,373 $ 37,441 $ 22,526 $ 48,524 $ 65,268 Total assets $910,986 $878,420 $594,217 $551,420 $500,179 Long-term obligations $258,000 $235,000 $ 52,152 $ 25,203 $ 14,365 Dividends per share: Class A Common Stock $ 0.50 $ 0.48 $ 0.60 $ 0.48 $ 0.40 Class B Common Stock $ 0.74 $ 0.71 $ 0.89 $ 0.71 $ 0.59 Basic earnings per share: Class A Common Stock $ 1.78 $ 1.30 $ 0.78 $ 1.68 $ 2.13 Class B Common Stock $ 2.67 $ 1.94 $ 1.17 $ 2.52 $ 3.18 Diluted earnings per share: Class A Common Stock $ 1.78 $ 1.29 $ 0.78 $ 1.68 $ 2.13 Class B Common Stock $ 2.67 $ 1.94 $ 1.17 $ 2.52 $ 3.18 The 1999 and 1998 amounts include the results of operations and assets of the industrial containers business acquired from Sonoco Products Company on March 30, 1998. The increase in long-term obligations in 1998 is a result of this acquisition. The results of operations include the effects of pretax restructuring charges of $27.5 million and $5.3 million for 1998 and 1997, respectively. Item 6. Selected Financial Data (concluded) Prior year amounts have been restated to reflect the equity method of accounting for the Company's investment in non-voting stock of Ohio Packaging Corporation (see Note 2 to the Consolidated Financial Statements, which Note is part of the financial statements contained in Item 8 of this Form 10-K). Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations FINANCIAL DATA Presented below are certain comparative data illustrative of the following discussion of the Company's results of operations, financial condition and changes in financial condition (Dollars in thousands): 1999 1998 1997 Net sales: Industrial shipping containers $492,925 $444,130 $333,005 Containerboard & corrugated products 301,770 357,001 315,979 Timber 24,132 13,301 11,798 Total $818,827 $814,432 $660,782 Income before income taxes and equity in earnings of affiliates: Industrial shipping containers $ 41,563 $ 34,273 $ 24,171 Containerboard & corrugated products 34,023 50,861 8,598 Timber 25,951 18,982 10,744 Total segment 101,537 104,116 43,513 Corporate and other (34,179) (21,068) (8,723) Restructuring costs -- (27,461) (5,285) Income before income taxes and equity in earnings of affiliates 67,358 55,587 29,505 Income taxes (26,740) (22,483) (11,419) Equity in earnings of affiliates 10,755 4,337 4,440 Net income $ 51,373 $ 37,441 $ 22,526 Current ratio 3.0:1 2.6:1 2.9:1 Cash flows from operations $ 71,766 $ 76,862 $ 40,115 Capital expenditures $ 49,253 $ 38,093 $ 36,193 Acquisitions $ 58,826 $182,895 $ 41,724 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) RESULTS OF OPERATIONS Net income increased 37.2% to $51.4 million for 1999 versus $37.4 million, as restated, the prior year. Diluted earnings per share were $1.78 and $2.67 for the Class A and Class B Common Stock, respectively, compared with $1.29 and $1.94 for the Class A and Class B Common Stock, respectively, as restated, last year. The prior year amounts have been restated to reflect the equity method of accounting for the Company's investment in non-voting stock of Ohio Packaging that was contributed to the CorrChoice joint venture on November 1, 1998 (see Note 2 to the Consolidated Financial Statements). The increase in net income was due primarily to a $27.5 million restructuring charge in 1998, resulting from a plan to consolidate eighteen of the Company's existing industrial shipping and corrugated container plants. Net sales for 1999 rose to $818.8 million from $814.4 million in the prior year. The increase was primarily due to a full year of net sales resulting from the acquisition of the industrial containers business from Sonoco in March 1998 compared with seven months from the prior year, as well as the intermediate bulk container and Great Lakes and Trend Pak acquisitions in 1999. During 1999, Timber was established as a core business of the Company and timber sales, which were higher in 1999 than in 1998, were reclassified to net sales. The sale of timber properties continues to be classified in other income. These increases were partially offset because the 1999 results do not include net sales for Michigan Packaging, a previously wholly-owned subsidiary of the Company, which became part of the CorrChoice joint venture at the beginning of 1999. Historically, revenues or earnings may or may not be indicative of future operations because of various economic factors. As explained below, the Company is subject to general economic conditions of its customers and the industry in which it operates. The Company's Industrial Shipping Containers segment, where packages manufactured by the Company are purchased by other manufacturers and suppliers, is substantially subject to general economic conditions of its customers and the industry in which it operates. Similarly, the Company's Containerboard & Corrugated Products segment is subject to general economic conditions and the effect of the operating rates of the containerboard industry, including pricing pressures from its competitors. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Net Sales Net sales increased $4.4 million or 0.5% in 1999 as compared to 1998. The Industrial Shipping Containers segment had an increase in net sales of $48.8 million or 11.0% due primarily to the inclusion of a full year of net sales versus seven months of net sales related to the industrial containers business acquired from Sonoco on March 30, 1998. The increase was partially offset by a decline in general market conditions and lost sales volume due to plant closings and consolidation efforts. The Containerboard & Corrugated Products segment had a decrease in net sales of $55.2 million or 15.5% due primarily to the change in the method of reporting net sales related to Michigan Packaging in the current year. The stock of Michigan Packaging was contributed to the CorrChoice joint venture on November 1, 1998. CorrChoice is accounted for using the equity method of accounting (see Note 2 to the Consolidated Financial Statements). Accordingly, in 1999 the net sales related to Michigan Packaging are not included in consolidated net sales. In the prior year, Michigan Packaging had net sales of $109.2 million. This reduction was partially offset by the inclusion of $17.5 million in net sales related to the Great Lakes and Trend Pak acquisitions as well as the Company's net sales to CorrChoice. The Timber segment had an increase in net sales of $10.8 million or 81.4% in 1999 as compared to 1998. The increase is primarily due to fourth quarter sales resulting from a timber marketing agreement with Bennett & Peters, Inc., forestry consultants and appraisers, in May 1999 to implement a timber marketing strategy focused on active harvesting and regeneration of the Company's 278,000 acres of timber properties in the United States. Their responsibilities include implementation of plans to achieve sustainable long-term yields on the Company's timberlands. Sales of timber are recorded as net sales, while sales of timberlands are included in other income. Net sales increased $153.7 million or 23.3% in 1998 as compared to 1997. The net sales of the Industrial Shipping Containers segment increased by $111.1 million or 33.4% in 1998 as compared to 1997. This increase was primarily the result of the acquisition of the industrial containers business from Sonoco which contributed $123.5 million of net sales during 1998. The net sales of the Containerboard & Corrugated Products segment increased by $41.0 million or 13.0% in 1998 as compared to 1997. This increase was primarily the result of the improved sales prices of the segment's products. The higher sales prices were caused by the overall improvement of the containerboard market. In addition, the purchase of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Independent Container, Inc. and Centralia Container, Inc. in May 1997 and June 1997, respectively, contributed $24.0 million in additional net sales as a result of higher sales volume. In August 1997, the Company disposed of its wood components plants in Kentucky, California, Washington and Oregon with prior year net sales of $37.0 million. The net sales of the Timber segment increase by $1.5 million or 12.7% in 1998 compared to 1997. Other Income Other income increased $2.1 million in 1999 as compared to 1998 due primarily to $6.2 million of additional gains on the sale of properties, plants and equipment. The increase was offset by $3.9 million less gains on the sale of timber properties in the current year. Other income increased $1.9 million in 1998 from 1997 due primarily to $7.3 million of additional gains on the sale of timber properties. In 1997, there were $3.7 million of gains on the sale of an injection molding facility and wood components plants. Cost of Products Sold Cost of products sold, as a percentage of net sales, decreased in 1999 compared to 1998 primarily due to the inclusion of timber sales in net sales. As discussed above, timber sales increased in 1999 as compared to 1998. The timber sales of the Company have very low costs associated with them. In addition, the cost of products sold, as a percentage of net sales, decreased slightly for the Industrial Shipping Containers and Containerboard & Corrugated Products segments. Cost of products sold, as a percentage of sales, decreased in 1998 as compared to 1997. This decrease was caused by higher sales prices per unit in the Containerboard & Corrugated Products segment without a corresponding increase in the cost of products sold. In addition, the inclusion of the industrial containers business acquired from Sonoco contributed to this decrease. Selling, General and Administrative Expenses The $22.7 million increase in selling, general and administrative expenses ("SG&A") in 1999 versus 1998 is primarily due to additional SG&A related to the industrial containers business acquired from Sonoco on March 30, 1998 as well as certain increased expenses in support of Company initiatives. In addition, contributing to higher costs were $3.0 million of additional amortization expense related to recent acquisitions, $1.1 million in commitment fees related to the Company's revolving credit facility and $2.9 million of Year 2000 remediation expenses. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The $15.3 million increase in SG&A in 1998 versus 1997 was due primarily to additional expenses related to the industrial containers business acquired from Sonoco, prior year acquisitions and amortization of goodwill. Restructuring Costs During the third quarter of 1998, the Company recognized a restructuring charge of $27.5 million resulting from a plan to consolidate eighteen of the Company's existing industrial shipping and corrugated container plants (see Note 3 to the Consolidated Financial Statements). Interest Expense The $3.9 million increase in interest expense, which is included in Corporate and Other, is due to a higher average debt balance of $255.6 million during 1999 as compared to $182.1 million during 1998. The higher level of debt is the result of funds borrowed for the acquisition of the industrial containers business and the intermediate bulk containers business from Sonoco on March 30, 1998 and January 11, 1999, respectively. In addition, the purchase of Great Lakes and Trend Pak on April 5, 1999 increased the Company's outstanding debt. In 1998, interest expense increased $9.3 million from the prior year due to increased debt relating to the acquisition of the industrial containers business from Sonoco. Income Before Income Taxes and Equity in Earnings of Affiliates Income before income taxes and equity in earnings of affiliates increased $11.8 million or 21.2% in 1999 as compared to 1998 due to an increase in net sales in the Industrial Shipping Containers and Timber segments without a corresponding increase in costs. In addition, there was a $27.5 million restructuring charge in 1998. Finally, there were $6.2 million of additional net gains on the sale of properties, plants and equipment. These increases were offset by the inclusion of Michigan Packaging's income before income taxes, which amounted to $10.2 million in 1998, in CorrChoice during 1999. The amounts were further offset by a reduction in gains on the sale of timber properties of $3.9 million and $3.9 million of additional interest expense. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Income before income taxes and equity in earnings of affiliates increased $26.1 million or 88.4% in 1998 as compared to 1997 primarily due to more favorable gross profit margins experienced by the Containerboard & Corrugated Products segment than in 1997. In addition, the industrial containers business acquired from Sonoco contributed $12.9 million and there were $7.3 million of additional gains on the sale of timber properties. These increases were significantly offset by a $27.5 million restructuring charge in 1998 as compared to a $5.3 million restructuring charge in 1997 and $9.3 million of additional interest expense. Income Taxes The Company anticipates that it will be able to fully realize its recognized deferred tax assets based upon its projected taxable income. Equity in Earnings of Affiliates In 1999, the equity in earnings of affiliates represents the Company's share of CorrChoice's net income and Abzac-Greif's net income. Due to the restatement of prior years, the amount during 1998 and 1997 represents the Company's share of Ohio Packaging's net income. Ohio Packaging and Michigan Packaging were combined into the CorrChoice joint venture on November 1, 1998. Therefore, the amounts reflected in the periods presented are not comparable due to the different entities and ownership interests of the Company (see Note 2 to the Consolidated Financial Statements). LIQUIDITY AND CAPITAL RESOURCES As indicated in the Consolidated Financial Statements and in the financial data set forth above, the Company is dedicated to maintaining a strong financial position. It is management's belief that this dedication is extremely important during all economic times. The Company's financial strength is important to continue to achieve the following goals: a. To protect the assets of the Company and the intrinsic value of shareholders' equity in periods of adverse economic conditions. b. To respond to any large and presently unanticipated cash demands that might result from future adverse events. c. To be able to benefit from new developments, new products and new opportunities in order to achieve the best results for our shareholders. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) d. To continue to pay competitive compensation, including the ever- increasing costs of employee benefits, to Company employees who produce the results for the Company's shareholders. e. To replace and improve plants and equipment. When plants and production machinery must be replaced, either because of condition or to obtain the cost-reducing potential of technological improvements required to remain a low-cost producer in the highly competitive environment in which the Company operates, the cost of new plants and machinery are often significantly higher than the historical cost of the items being replaced. Investments in Business Expansion During 1999, the Company invested $49 million in capital additions and $59 million for its acquisitions. During the last three years, the Company has invested $407 million in capital additions and acquisitions. These investments are an indication of the Company's commitment to being the high-quality, low-cost producer and desirable long-term supplier to all of its customers. Management believes that the present financial strength of the Company will be sufficient to achieve these goals. On November 1, 1998, the Company entered into a joint venture agreement to form CorrChoice (see Note 2 to the Consolidated Financial Statements). The Company was not required to commit any additional capital resources to fund this joint venture. The joint venture has been, and is expected to continue to be, self-supporting. On January 11, 1999, the Company acquired the intermediate bulk containers business from Sonoco for approximately $38 million in cash borrowed against the Company's revolving credit facility (see Note 2 to the Consolidated Financial Statements). The intermediate bulk containers business includes one location in Lavonia, Georgia. On April 5, 1999, the Company acquired Great Lakes and Trend Pak for approximately $21 million in cash borrowed against the Company's revolving credit facility (see Note 2 to the Consolidated Financial Statements). Great Lakes manufactures corrugated containers in Toledo, Ohio. Trend Pak adds foam and other packaging materials to corrugated containers manufactured by Great Lakes. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) In June 1999, a wholly-owned Canadian subsidiary of the Company exchanged its spiral core manufacturing assets for a 49% interest in Abzac's fibre drum business (which is known as "Abzac-Greif") (see Note 2 to the Consolidated Financial Statements). Abzac-Greif has operations in Abzac, Lyon and Anvin, France, and markets and sells fibre drums in Belgium as well as France. On March 30, 1998, the Company acquired all of the outstanding shares of the industrial containers business from Sonoco for approximately $183 million in cash borrowed against the Company's revolving credit facility (see Note 2 to the Consolidated Financial Statements). The industrial containers business included twelve fibre drum plants and five plastic drum plants along with facilities for research and development, packaging services and distribution. During 1997, the Company purchased three corrugated container companies: Aero Box Company, Independent Container, Inc. and Centralia Container, Inc. In addition, the Company purchased two steel drum operations. Balance Sheet Changes The increase of $10.8 million in accounts receivable is due to the delay in agricultural sales in the Industrial Shipping Containers segment this year from the third quarter to the fourth quarter. In addition, accounts receivable from Michigan Packaging contributed to the increase. The decrease of $14.1 million in inventory in 1999 reflects the contribution of Michigan Packaging to the CorrChoice joint venture during 1999 as well as the closing of plants as a result of the 1998 restructuring plan. The increase in net assets held for sale is due primarily to locations closed as a result of the 1998 restructuring plan. The amounts of goodwill increased as a result of the intermediate bulk containers acquisition on January 11, 1999 and the Great Lakes and Trend Pak acquisitions on April 5, 1999. Goodwill has been reduced primarily resulting from the termination of certain postretirement benefits that had been assumed as part of the industrial containers business acquired from Sonoco as well as ongoing amortization. The investment in affiliates balance represents the Company's investment in the CorrChoice joint venture and the Abzac-Greif venture. At October 31, 1998, the balance represents the amount of the Company's investment in non-voting stock of Ohio Packaging restated to reflect the equity method of accounting. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The decrease in fixed assets is due primarily to the contribution of Michigan Packaging to the CorrChoice joint venture during the first quarter of 1999. These amounts were partially offset by additional amounts from the intermediate bulk containers business, Great Lakes and Trend Pak acquisitions during 1999. The reduction in the restructuring reserves is due primarily to the payments of severance and other costs of closing the plants included in the 1998 restructuring reserves. Borrowing Arrangements During 1998, the Company entered into a credit agreement which provides for a revolving credit facility of up to $325 million. The Company has borrowed money under the credit facility to fund various acquisitions and repay the other long-term obligations of the Company. The credit agreement contains certain covenants including maintaining a certain leverage ratio, sufficient coverage of interest expense and a minimum net worth. In addition, the Company is limited with respect to additional debt. Finally, there are certain non-financial covenants including sales of assets, financial reporting, mergers and acquisitions, investments, change in control and Employee Retirement Income Security Act compliance. The Company believes it is in compliance with these covenants. The increase in long-term obligations is due to the acquisition of the intermediate bulk containers business from Sonoco on January 11, 1999 and Great Lakes and Trend Pak on April 5, 1999. The increase is partially offset by prepayments on the long-term obligations. Other Liquidity Matters During 1997, the Company embarked on a program to implement a new management information system. The purpose of the new management information system is to focus on using information technology to link operations in order to become a low-cost producer and more effectively service the Company's customers. The ultimate cost of this project is dependent upon management's final determination of the locations, timing and extent of integration of the new management information system. As of October 31, 1999, the Company has spent approximately $20 million towards this project. In addition to the new management information system, as described above, the Company has approved future purchases of approximately $50 million. These purchases are primarily to replace and improve equipment. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Borrowing and self-financing have been the primary sources for past capital expenditures and acquisitions. The Company anticipates financing future capital expenditures in a like manner and believes that it will have adequate funds available for planned expenditures. In February 1999, the Board of Directors of the Company authorized a one million share stock repurchase program. During 1999, the Company had repurchased 396,173 shares, including 268,276 Class A common shares and 127,897 Class B common shares. The total cost of the shares repurchased was $11 million. EFFECTS OF INFLATION The effects of inflation did not have a material impact on the Company's operations during 1999, 1998 or 1997. YEAR 2000 MATTERS Historically, certain information technology ("IT") systems of the Company have used two digits rather than four digits to define that applicable year, which could result in recognizing a date using "00" as the year 1900 rather than the year 2000. IT systems include computer software and hardware in the mainframe, midrange and desktop environments as well as telecommunications. Additionally, the impact of the problem extends to non-IT systems, such as automated plant systems and instrumentation. The Year 2000 issues could potentially result in major failures or misclassifications. The Company has developed a compliance plan, which includes the formation of a steering committee and a timetable for identifying, evaluating, resolving and testing its Year 2000 issues. The steering committee includes members of the Company's senior management and internal audit department to ensure that the issues are being adequately addressed and completed in a timely manner. The Company maintains IT systems to handle a variety of administrative and financial applications. The Company has completed its assessment, remediation or replacement, and testing of its IT systems. For non-IT systems, the machinery and equipment has been assessed, remediated or replaced, tested and deemed Year 2000 compliant. As a necessary part of the compliance plan, contingency plans have been developed. The Company relies on third party suppliers for certain raw materials, utilities and other key services. Under the compliance plan, the Company has initiated efforts to reduce risks of disruption in its operations by sending surveys to all of the Company's key suppliers. The Company has received over 90% of the responses to these inquiries. Even though not all of the responses to these inquiries have been received, the Company Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) performed a risk assessment for all of the suppliers. Due to the nature of the Company's operations and numerous suppliers, the Company does not believe that any significant disruptions will occur in its operations. However, contingency plans have been developed to address issues related to the Company's third party suppliers not being Year 2000 compliant. Year 2000 interruptions on customers' operations could potentially result in reduced sales, increased inventory or receivable levels and reduction in cash flows. However, the Company believes that its customer base is broad enough to minimize the effect of such occurrences. Nevertheless, surveys have been sent to all of the key customers of the Company regarding their Year 2000 compliance and contingency plans have been developed to address issues related to the Company's customers being Year 2000 compliant. The Company has spent approximately $8 million for its Year 2000 remediation efforts. This amount has been primarily expended during 1999. Internal and external costs for system maintenance and modification have been expensed as incurred (approximately $3 million) while spending for new hardware, software or equipment have been capitalized and depreciated over the assets' useful lives (approximately $5 million). The Company's Year 2000 expenditures are being funded out of its cash flows from operations. The Company has completed its Year 2000 compliance plan and continues to monitor the status of its Year 2000 program. To date, there have been no major failures or misclassifications which resulted from Year 2000 issues. Also, no significant disruptions in the Company's operations have occurred as a result of its customers or suppliers not being Year 2000 compliant. RECENT ACCOUNTING STANDARDS The recent accounting standards are described in Note 1 to the Consolidated Financial Statements. FORWARD-LOOKING STATEMENTS; CERTAIN FACTORS AFFECTING FUTURE RESULTS Statements contained in this Form 10-K or any other reports or documents prepared by the Company or made by management of the Company may be "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause the Company's operating results to differ materially from those projected. The following factors, among others, in some cases have affected and in the future could affect the Company's actual financial performance. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Changes in General Economic Conditions. The Company's customers generally consist of other manufacturers and suppliers who purchase the Company's industrial shipping containers and containerboard for their own containment and shipping purposes. Because the Company supplies a cross section of industries, such as chemicals, food products, petroleum products, pharmaceuticals and metal products, demand for the Company's industrial shipping containers and containerboard and related corrugated products has historically corresponded to changes in general economic conditions of the United States, Canada and Mexico. Accordingly, the Company's financial performance is substantially dependent upon the general economic conditions existing in the United States, Canada and Mexico. Competition. The Company's business of manufacturing and selling industrial shipping containers and containerboard is highly competitive. The most important competitive factors are price, quality and service. Many of the Company's competitors are substantially larger and have significantly greater financial resources. Excess Capacity in Containerboard Segment. Industry demand for containerboard products has declined in recent years causing excess capacity in this segment of the Company's business. These excess capacity levels and competitive pricing pressures in the containerboard market have negatively impacted the Company's financial performance in recent years. Raw Material Shortages. The Company's raw materials are principally pulpwood, waste paper for recycling, paper, steel and resins. Some of these materials have been, and in the future may be, in short supply. Shortages in raw materials could adversely affect the Company's operations. Environmental and Health and Safety Matters; Product Liability Claims. The Company must comply with extensive rules and regulations regarding federal, state and local environmental matters, such as air and water quality and waste disposal. The Company must also comply with extensive rules and regulations regarding safety and health matters. The failure to materially comply with such rules and regulations could adversely affect the Company's operations. Furthermore, litigation or claims against the Company with respect to such matters could adversely affect the Company's financial performance. The Company may also become subject to product liability claims which could adversely affect the Company. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (concluded) Risks Associated with Acquisitions. During the past several years the Company has invested, and for the foreseeable future the Company anticipates investing, a substantial amount of capital in acquisitions. Acquisitions involve numerous risks, including the failure to retain key employees and contracts and the inability to integrate businesses without material disruption. In addition, other companies in the Company,s industries have similar acquisition strategies. There can be no assurance that any future acquisitions will be successfully integrated into the Company's operations, that competition for acquisitions will not intensify or that the Company will be able to complete such acquisitions on acceptable terms and conditions. In addition, the costs of unsuccessful acquisition efforts may adversely affect the Company's financial performance. Timber and Timberland Sales. The Company has a significant inventory of standing timber and timberlands. The frequency and volume of sales of timber and timberland will have an effect on the Company's financial performance. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk The Company is subject to interest rate risk related to its financial instruments which include borrowings under its $325 million revolving credit facility and interest rate swap agreements with an aggregate notional amount of $150 million. The Company does not enter into financial instruments for trading or speculative purposes. The interest rate swap agreements have been entered into to manage the Company's exposure to its variable rate borrowing. Item 7A. Quantitative and Qualitative Disclosures about Market Risk (concluded) The table below provides information about the Company's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates. For the revolving credit facility, the table presents principal cash flows and related weighted average interest rates by contractual maturity dates. For interest rate swaps, the table presents annual amortization of notional amounts and weighted average interest rates by contractual maturity dates. Under the swap agreements, the Company receives interest quarterly from the counterparty and pays interest quarterly to the counterparty. The fair value of the revolving credit facility is based on current rates available to the Company for debt of the same remaining maturity. The fair values of the interest rate swap agreements have been determined by the counterparty. Financial Instruments (Dollars in millions) Expected Maturity Date There- Fair 2000 2001 2002 2003 2004 after Total Value Revolving credit facility: Variable rate $ -- $ -- $ -- $258(a) $ -- $ -- $ 258 $ 258 Average interest rate 6.20%(b) Interest rate swaps: Variable to fixed rates $ 20 $ 30 $ 10 $ 20 $ 10 $ 60 $ 150 $ 3 Average pay rate 6.15% 5.53% 6.15% 6.15% 6.15% 6.15% 6.03% Average receive rate (c) 5.87% 5.87% 5.87% 5.87% 5.87% 5.87% 5.87% (a) Includes $258 million of borrowings under the $325 million unsecured revolving credit facility which expires in 2003. The Company has the option under the credit facility to repay borrowings prior to 2003 or to request an extension. (b) Variable rate specified is based on the prime rate or LIBOR rate plus a calculated margin at October 31, 1999. Interest is paid and reset quarterly. (c) The average receive rate is based upon the LIBOR rate at October 31,1999. The rates presented are not intended to project the Company's expectations for the future. Foreign Currency Risk The Company's exposure to foreign currency fluctuations on its financial instruments is not material because most of these instruments are denominated in U.S. dollars. The net sales and total assets of the Company which are denominated in foreign currencies (i.e., Canadian dollars and Mexican pesos) represent less than 10% of the consolidated net sales and total assets. Commodity Price Risk The Company has no financial instruments subject to commodity price risks. Item 8. Financial Statements and Supplementary Data GREIF BROS. CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) For the years ended October 31, 1999 1998 1997 (As Restated) (As Restated) Net sales $818,827 $814,432 $660,782 Other income, net 17,834 15,718 13,801 836,661 830,150 674,583 Cost of products sold 640,473 644,892 562,165 Selling, general and administrative expenses 112,995 90,282 74,958 Restructuring costs -- 27,461 5,285 Interest expense 15,835 11,928 2,670 769,303 774,563 645,078 Income before income taxes and equity in earnings of affiliates 67,358 55,587 29,505 Income taxes 26,740 22,483 11,419 Income before equity in earnings of affiliates 40,618 33,104 18,086 Equity in earnings of affiliates 10,755 4,337 4,440 Net income $ 51,373 $ 37,441 $ 22,526 Basic earnings per share: Class A Common Stock $ 1.78 $ 1.30 $ 0.78 Class B Common Stock $ 2.67 $ 1.94 $ 1.17 Diluted earnings per share: Class A Common Stock $ 1.78 $ 1.29 $ 0.78 Class B Common Stock $ 2.67 $ 1.94 $ 1.17 See accompanying Notes to Consolidated Financial Statements. Item 8. Financial Statements and Supplementary Data (continued) GREIF BROS. CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS October 31, 1999 1998 (As Restated) CURRENT ASSETS Cash and cash equivalents $ 8,935 $ 41,329 Canadian government securities 5,314 6,654 Trade accounts receivable - less allowance of $2,456 for doubtful items ($2,918 in 1998) 124,754 113,931 Inventories 50,706 64,851 Deferred tax asset 6,857 13,355 Net assets held for sale 6,462 1,760 Prepaid expenses and other 14,270 16,626 Total current assets 217,298 258,506 LONG-TERM ASSETS Goodwill - less amortization 142,977 123,677 Investment in affiliates 124,360 49,059 Other long-term assets 25,218 27,393 292,555 200,129 PROPERTIES, PLANTS AND EQUIPMENT - at cost Timber properties - less depletion 9,925 9,067 Land 12,280 17,170 Buildings 124,594 157,501 Machinery and equipment 491,533 505,236 Capital projects in progress 40,651 17,045 678,983 706,019 Accumulated depreciation (277,850) (286,234) 401,133 419,785 $910,986 $878,420 See accompanying Notes to Consolidated Financial Statements. Item 8. Financial Statements and Supplementary Data (continued) GREIF BROS. CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) LIABILITIES AND SHAREHOLDERS' EQUITY October 31, 1999 1998 (As Restated) CURRENT LIABILITIES Accounts payable $ 46,703 $ 45,361 Accrued payrolls and employee benefits 10,154 9,859 Restructuring reserves 5,157 32,411 Other current liabilities 10,017 10,604 Total current liabilities 72,031 98,235 LONG-TERM LIABILITIES Long-term obligations 258,000 235,000 Deferred tax liability 48,960 42,299 Postretirement benefit liability 21,154 27,257 Other long-term liabilities 22,859 15,527 Total long-term liabilities 350,973 320,083 SHAREHOLDERS' EQUITY Capital stock, without par value 10,207 9,936 Class A Common Stock: Authorized 32,000,000 shares; issued 21,140,960 shares; outstanding 10,653,396 shares (10,909,672 shares in 1998) Class B Common Stock: Authorized and issued 17,280,000 shares; outstanding 11,873,896 shares (12,001,793 shares in 1998) Treasury stock, at cost (52,940) (41,858) Class A Common Stock: 10,487,564 shares (10,231,288 shares in 1998) Class B Common Stock: 5,406,104 shares (5,278,207 shares in 1998) Retained earnings 537,126 500,068 Accumulated other comprehensive income - foreign currency translation (6,411) (8,044) 487,982 460,102 $910,986 $878,420 See accompanying Notes to Consolidated Financial Statements. Item 8. Financial Statements and Supplementary Data (continued) GREIF BROS. CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) For the years ended October 31, 1999 1998 1997 (As Restated) (As Restated) Cash flows from operating activities: Net income $ 51,373 $ 37,441 $ 22,526 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 42,360 39,686 31,926 Equity in earnings of affiliates (10,755) (4,337) (4,440) Deferred income taxes 15,815 (964) 4,703 Gain on disposals of properties, plants and equipment, net (7,962) (1,747) (7,023) Increase (decrease) in cash from changes in certain assets and liabilities, net of effects from acquisitions: Trade accounts receivable (21,578) (4,271) (769) Inventories 11,046 (2,794) 9,660 Prepaid expenses and other 2,846 (1,367) (2,563) Other long-term assets 2,597 (5,447) (11,719) Accounts payable 3,534 1,362 1,809 Accrued payrolls and employee benefits 307 (2,729) 130 Restructuring reserves (23,882) 17,858 4,319 Other current liabilities (1,858) 6,288 (6,989) Postretirement benefit liability 591 (1,765) -- Other long-term liabilities 7,332 (352) (1,455) Net cash provided by operating activities 71,766 76,862 40,115 Cash flows from investing activities: Acquisitions of companies, net of cash acquired (74,233) (186,472) (41,121) Disposals of investments in government securities 1,340 -- 12,585 Purchases of investments in government securities -- -- (639) Purchases of properties, plants and equipment (49,253) (38,093) (36,193) Proceeds on disposals of properties, plants and equipment 18,874 3,041 7,634 Net cash used in investing activities (103,272) (221,524) (57,734) Cash flows from financing activities: Proceeds from issuance of long-term obligations 54,500 271,000 52,753 Payments on long-term obligations (31,500) (88,152) (25,804) Debit issuance costs -- (410) -- Acquisitions of treasury stock (11,102) -- (31) Exercise of stock options 291 207 735 Dividends paid (14,315) (13,756) (17,208) Net cash (used in) provided by financing activities (2,126) 168,889 10,445 Effects of exchange rates on cash 1,238 (617) (1,667) Net (decrease) increase in cash and cash equivalents (32,394) 23,610 (8,841) Cash and cash equivalents at beginning of year 41,329 17,719 26,560 Cash and cash equivalents at end of year $ 8,935 $ 41,329 $ 17,719 See accompanying Notes to Consolidated Financial Statements. Item 8. Financial Statements and Supplementary Data (continued) GREIF BROS. CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (As restated for 1997 and 1998) (Dollars and shares in thousands, except per share amounts) Accumulated Other Capital Stock Treasury Stock Retained Comprehensive Shareholders' Shares Amount Shares Amount Earnings Income Equity Balance at November 1, 1996 22,875 $ 9,034 15,546 $(41,867) $471,065 $(3,207) $435,025 Net income 22,526 22,526 Other comprehensive income - foreign currency translation (2,076) (2,076) Comprehensive income 20,450 Dividends paid (Note 5): Class A - $0.60 (6,526) (6,526) Class B - $0.89 (10,682) (10,682) Treasury shares acquired (1) 1 (31) (31) Stock options exercised 28 705 (28) 30 735 Balance at October 31, 1997 22,902 $ 9,739 15,519 $(41,868) $476,383 $(5,283) $438,971 Net income 37,441 37,441 Other comprehensive income - foreign currency translation (2,761) (2,761) Comprehensive income 34,680 Dividends paid (Note 5): Class A - $0.48 (5,235) (5,235) Class B - $0.71 (8,521) (8,521) Stock options exercised 9 197 (9) (10) 207 Balance at October 31, 1998 22,911 $ 9,936 15,510 $(41,858) $500,068 $(8,044) $460,102 Net income 51,373 51,373 Other comprehensive income - foreign currency translation 1,633 1,633 Comprehensive income 53,006 Dividends paid (Note 5): Class A - $0.50 (5,435) (5,435) Class B - $0.74 (8,880) (8,880) Treasury shares acquired (396) 396 (11,102) (11,102) Stock options exercised 12 271 (12) 20 291 Balance at October 31, 1999 22,527 $10,207 15,894 $(52,940) $537,126 $(6,411) $487,982 See accompanying Notes to Consolidated Financial Statements. Item 8. Financial Statements and Supplementary Data (continued) GREIF BROS. CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Business Greif Bros. Corporation and its subsidiaries (the "Company") principally manufacture industrial shipping containers and containerboard and corrugated products which it sells to customers in many industries primarily in the United States, Canada and Mexico. The Company has over 80 operating locations in the United States, Canada and Mexico. In addition, the Company owns timber properties which are harvested and regenerated in the United States and Canada. Due to the variety of its products, the Company has many customers buying different types of its products and, due to the scope of the Company's sales, no one customer is considered principal in the total operation of the Company. Because the Company supplies a cross section of industries, such as chemicals, food products, petroleum products, pharmaceuticals and metal products, and must make spot deliveries on a day-to-day basis as its products are required by its customers, the Company does not operate on a backlog to any significant extent and maintains only limited levels of finished goods. Many customers place their orders weekly for delivery during the week. The Company's raw materials are principally pulpwood, waste paper for recycling, paper, steel and resins. The approximate number of persons employed during the year was 5,100. Basis of Consolidation The Consolidated Financial Statements include the accounts of Greif Bros. Corporation and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Item 8. Financial Statements and Supplementary Data (continued) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant estimates are related to the allowance for doubtful accounts, expected useful lives assigned to properties, plants and equipment and goodwill, restructuring reserves, postretirement benefits, income taxes and contingencies. Actual amounts could differ from those estimated. Revenue Recognition Revenue is recognized when goods are shipped. Income Taxes Income taxes are accounted for under Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." In accordance with this statement, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as measured by enacted tax rates that are expected to be in effect in the periods which the deferred tax liabilities and assets are expected to be settled or realized. Cash and Cash Equivalents The Company considers highly liquid investments with an original maturity of three months or less to be cash and cash equivalents. Included in these amounts are repurchase agreements of $1,391,000 in 1999 ($23,300,000 in 1998). Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of trade accounts receivable. Such credit risk is considered by management to be limited due to the Company's many customers, none of whom are considered principal in the total operations of the Company, doing business in a variety of industries throughout the United States, Canada and Mexico. Canadian Government Securities The Canadian government securities are classified as available-for- sale and, as such, are reported at their fair value which approximates amortized cost. Item 8. Financial Statements and Supplementary Data (continued) Inventories Inventories are stated at the lower of cost (principally on last-in, first-out basis) or market. The inventories are comprised as follows at October 31 (Dollars in thousands): 1999 1998 Finished goods $20,504 $ 20,557 Raw materials and work-in-process 68,072 87,694 88,576 108,251 Reduction to state inventories on last-in, first-out basis (37,870) (43,400) $50,706 $ 64,851 Properties, Plants and Equipment Depreciation on properties, plants and equipment is provided by the straight-line method over the estimated useful lives of the assets as follows: Years Buildings 30-45 Machinery and equipment 3-19 Depreciation expense was $35,237,000 in 1999, $35,585,000 in 1998 and $30,660,000 in 1997. Expenditures for repairs and maintenance are charged to expense as incurred. Depletion on timber properties is computed on the basis of cost and the estimated recoverable timber acquired. When properties are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the asset and related allowance accounts. Gains or losses are credited or charged to income as incurred. Item 8. Financial Statements and Supplementary Data (continued) Net Assets Held for Sale Net assets held for sale represent land, buildings and land improvements less accumulated depreciation for locations that have been closed. As of October 31, 1999 and October 31, 1998, there were nine and three locations held for sale, respectively, the majority of which were the result of the 1998 restructuring plan. The net sales and loss before income tax benefit of these locations were $22,132,000 and $1,762,000, respectively, during 1999. The net sales and income before income taxes of these locations were $15,433,000 and $561,000, respectively, during 1998. The effect of suspending depreciation on the facilities held for sale is immaterial to the results of operations. The net assets held for sale have been listed for sale, and it is the Company's intention to complete the sales within the upcoming year. Internal Use Software In 1998, the Company adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Internal use software is software that is acquired, internally developed or modified solely to meet the entity's needs and for which, during the software's development or modification, a plan does not exist to market the software externally. Costs incurred to develop the software during the application development stage, upgrades and enhancements that provide additional functionality are capitalized. Adoption of SOP 98-1 did not have a significant impact on the Company's financial position or results of operations. Goodwill Goodwill is amortized on a straight-line basis over fifteen or twenty- five year periods. The weighted average period of goodwill amortization is twenty-three years. Amortization expense was $6,482,000 in 1999, $3,547,000 in 1998 and $1,032,000 in 1997. Accumulated amortization was $11,081,000 at October 31, 1999 ($4,599,000 at October 31, 1998). The Company's policy is to periodically review its goodwill and other long-lived assets based upon the evaluation of such factors as the occurrence of a significant adverse event or change in the environment in which the business operates or if the expected future net cash flows (undiscounted and without interest) would become less than the carrying amount of the asset. An impairment loss would be recorded in the period such determination is made based on the fair value of the related businesses. Item 8. Financial Statements and Supplementary Data (continued) Financial Instruments The carrying amounts of cash and cash equivalents, Canadian government securities and long-term obligations approximate their fair values. The carrying amounts of interest rate swap agreements are $2,000 at October 31, 1999 and zero at October 31, 1998. The fair values of interest rate swap agreements are $2,738,000 at October 31, 1999 and $(7,020,000) at October 31, 1998. The fair values of the long-term obligations are estimated based on current rates available to the Company for debt of the same remaining maturities. The fair values of interest rate swap agreements have been determined by the counterparties. The Company uses interest rate swaps for the purpose of hedging its exposure to fluctuations in interest rates. The swaps meet the requirements of designation and correlation for use of the accrual method of accounting. Differentials in the swapped amounts are recorded as adjustments of the underlying periodic cash flows that are being hedged. Foreign Currency Translation In accordance with SFAS No. 52, "Foreign Currency Translation," the assets and liabilities denominated in foreign currency are translated into U.S. dollars at the current rate of exchange existing at year-end and revenues and expenses are translated at the average monthly exchange rates. The cumulative translation adjustments, which represent the effects of translating assets and liabilities of the Company's foreign operations, are presented in the Consolidated Statements of Changes in Shareholders' Equity in "Accumulated Other Comprehensive Income." The transaction gains and losses included in income are immaterial. Earnings Per Share The Company has two classes of common stock and, as such, applies the "two-class method" of computing earnings per share as prescribed in SFAS No. 128, "Earnings Per Share." In accordance with the statement, earnings are allocated first to Class A and Class B Common Stock to the extent that dividends are actually paid and the remainder allocated assuming all of the earnings for the period have been distributed in the form of dividends. Item 8. Financial Statements and Supplementary Data (continued) The following is a reconciliation of the shares used to calculate basic and diluted earnings per share: For the years ended October 31, 1999 1998 1997 Class A Common Stock: Basic earnings per share 10,882,081 10,905,692 10,878,233 Assumed conversion of stock options 19,229 69,014 16,670 Diluted earnings per share 10,901,310 10,974,706 10,894,903 Class B Common Stock: Basic and diluted earnings per share 11,989,605 12,001,793 12,001,793 There are 496,789 options that are antidilutive for 1999 (12,000 for 1998 and 298,600 for 1997). Environmental Cleanup Costs The Company expenses environmental expenditures related to existing conditions resulting from past or current operations and from which no current or future benefit is discernable. Expenditures which extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company determines its liability on a site by site basis and records a liability at the time when it is probable and can be reasonably estimated. The Company's estimated liability is reduced to reflect the anticipated participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially capable of paying their respective shares of the relevant costs. Reclassifications Certain prior year amounts have been reclassified to conform to the 1999 presentation. Recent Accounting Standards The Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," in June 1998 and SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," in June 1999, which are effective for all quarters of 2001 for the Company. The statements require that all derivatives be recorded in the balance sheet as either assets or liabilities and be measured at fair value. The accounting for changes in fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company has not determined what impact these statements will have on the Item 8. Financial Statements and Supplementary Data (continued) Consolidated Financial Statements. NOTE 2 - ACQUISITIONS AND DISPOSITIONS CorrChoice Joint Venture On November 1, 1998, the Company entered into a Joint Venture Agreement with RDJ Holdings Inc. ("RDJ") and a minority shareholder of a subsidiary of Ohio Packaging Corporation (the "Minority Shareholder") to form CorrChoice, Inc. ("CorrChoice"). Pursuant to the terms of the Joint Venture Agreement, the Company contributed all of its stock of Michigan Packaging Company ("Michigan Packaging") and Ohio Packaging Corporation ("Ohio Packaging") in exchange for a 63.24% ownership interest in CorrChoice. RDJ and the Minority Shareholder contributed all of their stock of Ohio Packaging and its subsidiaries in exchange for a 36.76% ownership interest in CorrChoice. The contribution of the Michigan Packaging stock and the Ohio Packaging stock was recorded by the Company at book value with no gain or loss recognized in accordance with Emerging Issues Task Force ("EITF') No. 86-29, "Nonmonetary Transactions: Magnitude of Boot and the Exceptions to the Use of Fair Value." In connection with the closing of the CorrChoice joint venture, the Company and RDJ entered into a voting agreement which enables the Company and RDJ to be equally represented on CorrChoice's Board of Directors. As such, the Company does not control CorrChoice. Therefore, in accordance with generally accepted accounting principles, the Company has recorded its investment in CorrChoice using the equity method of accounting. Prior to the formation of the CorrChoice joint venture, the Company accounted for its investment in Ohio Packaging's non-voting stock under the cost method of accounting because the Company did not have significant influence over the operations of Ohio Packaging. Because the Company's investment in the common stock of Ohio Packaging that previously was accounted for by the cost method now qualifies for use of the equity method (through the Company's ownership interest in CorrChoice), the Company's investment in Ohio Packaging, results of operations and retained earnings were retroactively restated in accordance with Accounting Principles Board Opinion ("APBO") No. 18, "The Equity Method of Accounting for Investments in Common Stock," to account for the Company's ownership interest in Ohio Packaging under the equity method. The previously reported amounts, Ohio Packaging adjustments and the restated amounts follow (Dollars in thousands, except per share amounts): Item 8. Financial Statements and Supplementary Data (continued) The Company (As Previously Ohio Packaging The Company Reported) Adjustments (As Restated) As of and for the year ended October 31, 1998: Investment in affiliates $ -- $ 49,059 $ 49,059 Other long-term assets $ 27,395 $ (2) $ 27,393 Deferred tax liability $ 36,412 $ 5,887 $ 42,299 Retained earnings $456,898 $ 43,170 $500,068 Net income $ 33,104 $ 4,337 $ 37,441 Basic earnings per share: Class A Common Stock $ 1.15 $ 0.15 $ 1.30 Class B Common Stock $ 1.71 $ 0.23 $ 1.94 Diluted earnings per share: Class A Common Stock $ 1.15 $ 0.14 $ 1.29 Class B Common Stock $ 1.71 $ 0.23 $ 1.94 As of and for the year ended October 31, 1997: Investment in affiliates $ -- $ 44,130 $ 44,130 Other long-term assets $ 22,022 $ (2) $ 22,020 Deferred tax liability $ 29,740 $ 5,295 $ 35,035 Retained earnings $437,550 $ 38,833 $476,383 Net income $ 18,086 $ 4,440 $ 22,526 Basic earnings per share: Class A Common Stock $ 0.63 $ 0.15 $ 0.78 Class B Common Stock $ 0.94 $ 0.23 $ 1.17 Diluted earnings per share: Class A Common Stock $ 0.63 $ 0.15 $ 0.78 Class B Common Stock $ 0.94 $ 0.23 $ 1.17 The difference between the cost basis of the Company's investment in the underlying equity of CorrChoice of $5,600,000 is being amortized over a fifteen-year period. At October 31, 1999, the financial position of CorrChoice included current and non-current assets of $112 million and $95 million, respectively, and current and non-current liabilities of $14 million and $8 million, respectively. For the year ended October 31, 1999, the results of operations for CorrChoice included net sales of $262 million, gross profit of $47 million, operating income of $29 million and net income of $19 million. Item 8. Financial Statements and Supplementary Data (continued) Intermediate Bulk Containers ("IBC") Acquisition On January 11, 1999, the Company purchased the assets of the IBC business from Sonoco Products Company ("Sonoco") for $38,013,000 in cash. In addition, the Company paid $234,000 in legal and professional fees related to the acquisition. Prior to the acquisition date, and subsequent to March 30, 1998, the Company marketed and sold IBCs under a distributorship agreement with Sonoco. The acquisition of the IBC business has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets purchased and liabilities assumed based upon their fair values at the date of acquisition. The fair values of the assets acquired and liabilities assumed were $15,677,000 and $1,234,000, respectively. The excess of the purchase price over the fair values of the net assets acquired of $23,804,000 has been recorded as goodwill. The goodwill is being amortized on a straight-line basis over twenty-five years based on careful consideration regarding the age of the acquired business, its customers and the risk of obsolescence of its products. Great Lakes and Trend Pak Acquisitions On April 5, 1999, the Company purchased the common stock of Great Lakes Corrugated Corp. ("Great Lakes") and Trend Pak, Inc. ("Trend Pak") from their shareholders for $20,813,000 in cash. In addition, the Company paid $107,000 in legal and professional fees related to the acquisitions. The acquisitions of Great Lakes and Trend Pak have been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets purchased and liabilities assumed based upon their fair values at the date of acquisition. The fair values of the assets acquired and liabilities assumed were $14,770,000 and $5,895,000, respectively. The excess of the purchase price over the fair values of the net assets acquired of $12,045,000 has been recorded as goodwill. The goodwill is being amortized on a straight-line basis over fifteen years based on careful consideration regarding the age of the acquired businesses, their customers and the risk of obsolescence of their products. Abzac-Greif Investment During June 1999, Greif Containers Inc., a wholly owned Canadian subsidiary of the Company, exchanged its spiral core manufacturing assets with Abzac S.A., a privately held company in France, for a 49% equity interest in Abzac's fibre drum business (which will be known as "Abzac- Greif"). The effective date of the transaction was January 1, 1999. The investment in Abzac-Greif of $2.0 million has been recorded using the equity method of accounting. Item 8. Financial Statements and Supplementary Data (continued) Industrial Containers Business of Sonoco Acquisition On March 30, 1998, pursuant to the terms of a Stock Purchase Agreement between the Company and Sonoco, the Company acquired the industrial containers business of Sonoco by purchasing all of the outstanding shares of KMI Continental Fibre Drum, Inc., a Delaware corporation ("KMI"), Sonoco Plastic Drum, Inc., an Illinois corporation ("SPD"), GBC Holding Co., a Delaware corporation ("GBC Holding"), and Fibro Tambor, S.A. de C.V., a Mexican corporation ("Fibro Tambor") and the membership interest of Sonoco in Total Packaging Systems of Georgia, LLC, a Delaware limited liability company ("TPS"). KMI, SPD, GBC Holding, Fibro Tambor, TPS and their respective subsidiaries are in the business of manufacturing and selling plastic and fibre drums principally in the United States and Mexico and refurbishing and reconditioning plastic drums principally in the United States and Mexico. As consideration for the shares of KMI, SPD, GBC Holding and Fibro Tambor and the membership interest of Sonoco in TPS, the Company paid $182,895,000 in cash. In addition, the Company paid $1,218,000 in legal and professional fees related to the acquisition. The acquisition was funded through new long-term obligations (see Note 4). The acquisition of the industrial containers business from Sonoco has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets purchased and liabilities assumed based upon their fair values at the date of acquisition. The fair values of the assets acquired and the liabilities assumed were $127,004,000 and $42,233,000, respectively. The excess of the purchase price over the fair values of the net assets acquired of $99,342,000 has been recorded as goodwill. During 1999, the Company's purchase price allocation was finalized resulting in a $10,065,000 reduction in goodwill and acquisition liabilities. The reasons for this decrease are the termination of certain postretirement benefits of $6,694,000 and an adjustment to the restructuring liability of $3,371,000. The goodwill is being amortized on a straight-line basis over twenty-five years based on careful consideration regarding the age of the acquired companies, their customers and the risk of obsolescence of their products. Other Acquisitions In November 1996, the Company purchased the assets of Aero Box Company, a corrugated container company, located in Michigan. In March 1997, the Company acquired the assets of two steel drum manufacturing plants located in California and Ontario, Canada. In May 1997, the Company purchased all of the outstanding common stock of Independent Container, Inc., a corrugated container company with two locations in Kentucky and a location in Indiana. In June 1997, the Company purchased all of the outstanding common stock of Centralia Container, Inc., located in Illinois. Item 8. Financial Statements and Supplementary Data (continued) These other acquisitions have been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets purchased and liabilities assumed based upon the fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired has been recorded as goodwill. The Consolidated Financial Statements include the operating results of each business from the date of acquisition. Pro forma results of operations for these other acquisitions have not been presented because the results of these acquisitions were not significant to the Company. Dispositions In February 1997, the Company sold its injection molding plant in Ohio. In addition, the Company sold its wood component facilities, which manufactured door panels, wood moldings and window and door parts, with locations in Kentucky, California, Washington and Oregon in August 1997. The transactions resulted in a gain of $3.7 million which is included in other income. Pro Forma Information The following pro forma (unaudited) information assumes the CorrChoice joint venture, the acquisition of the IBC business, the acquisitions of Great Lakes and Trend Pak, the investment in Abzac-Greif and the acquisition of the industrial containers business from Sonoco had occurred on November 1, 1997 (Dollars in thousands, except per share amounts): For the years ended October 31, 1999 1998 Net sales $827,412 $846,936 Net income $ 50,239 $ 37,558 Basic and diluted earnings per share: Class A Common Stock $ 1.74 $ 1.30 Class B Common Stock $ 2.61 $ 1.95 The above amounts reflect adjustments for the contribution of Michigan Packaging to the CorrChoice joint venture and recognition of the Company's equity interest in CorrChoice. In addition, the amounts reflect the contribution of the spiral core assets and the recognition of the equity interest in Abzac-Greif by the Company's Canadian operation. Further, the amounts reflect adjustments for interest expense related to the debt issued for the purchases, amortization of goodwill and depreciation expense on the revalued properties, plants and equipment resulting from the acquisitions. Item 8. Financial Statements and Supplementary Data (continued) The pro forma information, as presented above, is not necessarily indicative of the results which would have been obtained had the transactions occurred on November 1, 1997, nor are they necessarily indicative of future results. NOTE 3 - RESTRUCTURING CHARGES During the third quarter of 1998, the Company approved a plan to consolidate some of its locations in order to improve operating efficiencies and capabilities. The plan was the result of an in-depth study to determine whether certain locations, either existing or newly acquired, should be closed and the sales and manufacturing volume associated with such plants relocated to a different facility. Eighteen existing fibre drum, steel drum and corrugated container plants were identified to be closed. The plants are located in Alabama, Georgia, Illinois, Kansas, Maryland, Massachusetts, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee and Texas. As a result, the Company recognized a pretax restructuring charge of approximately $27.5 million, consisting of $20.9 million in employee separation costs (approximately 500 employees) and $6.6 million in other costs. The $6.6 million in other costs included $2.5 million for the impairment of long- lived assets due to the significant reduction in the remaining useful lives of the assets resulting from the decision to exit or close the facilities and other exit costs expected to be incurred after operations had ceased to maintain the facilities ($1.9 million) and remove the equipment ($2.2 million). The plant closures were announced and have been completed except for four plants expected to be announced and closed during 2000. The Company has sold or is planning to sell its seventeen owned facilities. A lease has been terminated on the remaining plant. Subsequent to the recognition of the restructuring charge, the Company did incur or, for plants not yet closed, expects to incur additional costs to relocate machinery and equipment and employees upon the closure of these plants. The amounts charged against this restructuring reserve during 1999 are as follows (Dollars in thousands): Balance at Balance at 10/31/98 Activity 10/31/99 Cash charges: Employee separation costs $17,735 $(15,627) $2,108 Cash and non-cash charges: Impairment of long-lived assets and other exit costs 7,012 (5,571) 1,441 $24,747 $(21,198) $3,549 Item 8. Financial Statements and Supplementary Data (continued) The restructuring reserve activity in the preceding table includes the following non-cash charges: $1.0 million of accrued employee separation costs related to employees that have been terminated as of October 31, 1999 have been reclassified to accrued compensation costs; and a $1.4 million charge for the impairment of long-lived assets has been reclassified as a valuation account recorded net against the related fixed asset accounts. During the year ended October 31, 1999, 299 employees were terminated in accordance with this restructuring plan. As of October 31, 1999, there were a total of 403 employees that had been terminated and provided severance benefits under this restructuring plan. In addition, in connection with the acquisition of the industrial containers business from Sonoco and the consolidation plan, five locations purchased as part of the acquisition were identified to be closed. The locations are located in California, Georgia, Missouri and New Jersey. The plan to close or consolidate these locations was being formulated at the date of acquisition. Accordingly, the Company recognized a $9.5 million restructuring liability in its purchase price allocation related to these locations during the second quarter of 1998. This liability was accounted for under EITF No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." The liability consisted of $6.1 million in employee separation costs (approximately 150 employees), $1.2 million in lease termination costs and $2.2 million in other exit costs. The $2.2 million in other exit costs included amounts expected to be incurred after operations had ceased to maintain the facilities ($1.0 million), remove the equipment ($0.5 million) and other closing costs ($0.7 million). The Company has sold or is planning to sell three of these locations. The leases have been or will be terminated on the remaining two locations. The amounts charged against this restructuring reserve during 1999 are as follows (Dollars in thousands): Balance at Balance at 10/31/98 Activity 10/31/99 Cash charges: Employee separation costs $5,722 $(4,114) $1,608 Lease termination costs 1,183 (1,183) -- Cash and non-cash charges: Other exit costs 759 (759) -- $7,664 $(6,056) $1,608 Item 8. Financial Statements and Supplementary Data (continued) The restructuring reserve activity in the preceding table includes the following non-cash charges: $0.3 million of accrued employee separation costs related to employees that have been terminated as of October 31, 1999 have been reclassified to accrued compensation costs; and an adjustment of $3.4 million was recorded as a reduction to goodwill in accordance with EITF No. 95-3 because the ultimate cost is less than the amount initially recorded in the purchase price allocation. During the year ended October 31, 1999, 89 employees were terminated in accordance with this restructuring plan. As of October 31, 1999, there were a total of 96 employees that had been terminated and provided severance benefits under this restructuring plan. During the fourth quarter of 1997, the Company adopted a plan to consolidate its operations. This plan included a realignment of some of the administrative functions that were being performed at the subsidiary and division offices which resulted in staff reductions. In addition, costs associated with the reduction of certain support functions were incurred. As a result, a restructuring charge of $5.3 million, consisting of $3.8 million of severance benefits and $1.5 million for the impairment of long- lived assets, was recorded in the results of operations. During 1998, the Company paid $4.1 million in severance benefits to 62 employees. The additional $0.3 million was charged to the results of operations. As of October 31, 1998, all expenditures related to the charge had been made and the liability eliminated. NOTE 4 - LONG-TERM OBLIGATIONS On March 30, 1998, the Company entered into a credit agreement with various financial institutions, as banks, and KeyBank National Association, as agent, which provides a revolving credit facility of up to $325 million. The Company is required to pay a facility fee each quarter equal to .025% to .050% of the total commitment amount based upon the Company's leverage ratio. As of October 31, 1999, the Company has borrowed $258 million primarily to fund the Company's recent acquisitions and to consolidate all of the Company's other long-term borrowings. The interest rate is either based on the prime rate or LIBOR rate plus a calculated margin amount (.33% at October 31, 1999). Interest resets on a quarterly basis. At October 31, 1999, the interest rate is 6.20%. The revolving credit loans are due on March 31, 2003, however, management intends to extend a portion of the debt beyond that date. At October 31, 1999, the Company has outstanding $6.2 million in letters of credit under the credit agreement. The quarterly fee related to these letters of credit is .03% of the outstanding amount plus a calculated margin (.33% at October 31, 1999). Item 8. Financial Statements and Supplementary Data (continued) The revolving credit facility contains certain covenants. Under the most restrictive of these covenants, the Company is required to maintain a certain leverage ratio, sufficient coverage of interest expense and a minimum net worth. In addition, the Company is limited with respect to additional debt. At October 31, 1999, the Company was in compliance with these covenants. During 1998, the Company entered into an interest rate swap agreement with an original notional amount of $140 million which periodically reduces through the expiration date of March 30, 2008 ($130 million at October 31, 1999). The Company entered into another swap agreement during 1998 with a notional amount of $20 million expiring on October 31, 2001. The interest rate swaps were entered into to manage the Company's exposure to its variable rate debt. Under the agreements, the Company receives interest quarterly from the counterparty equal to the LIBOR rate and pays interest quarterly to the counterparty at a fixed rate of 6.15% and 5.22% for the $130 million and $20 million swap agreements, respectively. The differentials to be currently paid or received under these agreements are recorded as an adjustment to interest expense and are included in interest receivable or payable. The adjustment to interest expense resulting from the differentials was an increase of $1,414,000 during 1999 and $348,000 during 1998. Annual maturities of long-term obligations are $258 million in 2003. During 1999, the Company paid $15,472,000 of interest ($11,500,000 in 1998 and $3,726,000 in 1997) related to its long-term obligations. Interest of $377,000 in 1999, $344,000 in 1998 and $1,163,000 in 1997 was capitalized. The Company has entered into non-cancelable operating leases for buildings, trucks and computer equipment. The future minimum lease payments for the non-cancelable operating leases are $6,618,000 in 2000, $6,105,000 in 2001, $4,067,000 in 2002, $3,024,000 in 2003, $2,160,000 in 2004 and $2,722,000 thereafter. Rent expense was $12,456,000 in 1999, $8,615,000 in 1998 and $5,684,000 in 1997. NOTE 5 - CAPITAL STOCK Class A Common Stock is entitled to cumulative dividends of one cent a share per year after which Class B Common Stock is entitled to non- cumulative dividends up to a half cent a share per year. Further distribution in any year must be made in proportion of one cent a share for Class A Common Stock to one and a half cents a share for Class B Common Stock. The Class A Common Stock shall have no voting power nor shall it be entitled to notice of meetings of the shareholders, all rights to vote and all voting power being vested exclusively in the C