FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number: 1-3203
_______________________
CHESAPEAKE CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-0166880
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1021 East Cary Street
Richmond, Virginia 23218-2350
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: 804-697-1000
Not Applicable
(Former name, former address, and former fiscal year,
if changed since last report)
_______________________
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the receding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/. No / /.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of June 30, 1998: 21,328,154 shares.
CHESAPEAKE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings-
Quarter and Six months ended June 30, 1998
and June 30, 1997 3
Consolidated Balance Sheets
at June 30, 1998 and December 31, 1997 5
Consolidated Statements of Cash Flows-
Six months ended June 30, 1998
and June 30, 1997 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Position and Results of Operations 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
-2-
PART I
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share data)
(Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------------
1998 1997 1998 1997
------ ------ ------ ------
Net sales $237.0 $264.3 $453.8 $558.8
Costs and expenses:
Cost of products sold 171.6 201.3 326.2 424.9
Depreciation and cost of
timber harvested 15.1 19.8 29.7 46.5
Selling, general and
administrative expenses 32.2 41.2 65.2 82.5
Restructuring/special charges - 18.9 - 18.9
------ ------ ------ ------
Earnings(loss)from operations 18.1 (16.9) 32.7 (14.0)
Gain on sale of businesses - 86.3 - 86.3
Other income and expenses, net 3.3 2.1 6.0 3.1
Interest expense, net (4.7) (6.8) (9.3) (16.3)
------ ------ ------ ------
Earnings before taxes and
extraordinary item 16.7 64.7 29.4 59.1
Income taxes 6.2 27.6 10.9 25.5
------ ------ ------ ------
Income before extraordinary
item 10.5 37.1 18.5 33.6
Extraordinary item, net of
income tax - (2.3) - (2.3)
------ ------ ------ ------
Net earnings $ 10.5 $ 34.8 $ 18.5 $ 31.3
====== ====== ====== ======
-3-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, Continued
(In millions, except per share data)
(Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------------
1998 1997 1998 1997
------ ------ ------ ------
Basic earnings per share
Earnings before
extraordinary item $ .50 $ 1.58 $ .87 $ 1.43
Extraordinary item, net of
income taxes - (.10) - (.10)
------ ------ ------ ------
Earnings $ .50 $ 1.48 $ .87 $ 1.33
====== ====== ====== ======
Weighted average number of
common shares 21.1 23.8 21.3 23.7
====== ====== ====== ======
Diluted earnings per share
Earnings before
extraordinary item $ .49 $ 1.56 $ .86 $ 1.41
Extraordinary item,
net of income taxes - (.10) - (.10)
------ ------ ------ ------
Earnings $ .49 $ 1.46 $ .86 $ 1.31
====== ====== ====== ======
Weighted average number of
common shares and equivalents
outstanding, assuming dilution 21.5 23.8 21.5 23.7
====== ====== ====== ======
Cash dividends declared per
share of common stock $ .20 $ .20 $ .40 $ .40
====== ====== ====== ======
See accompanying notes to consolidated financial statements.
-4-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
(Unaudited)
June 30, Dec. 31,
1998 1997
---------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 58.6 $ 73.3
Accounts receivable, less allowances for
doubtful accounts (1998-$4.7; 1997-$5.9) 127.8 111.8
Inventories, at lower of cost or market 103.4 98.8
Deferred income taxes 17.8 17.8
Other 7.4 6.6
------ ------
Total current assets 315.0 308.3
------ ------
Property, plant and equipment, at cost 847.1 818.6
Less accumulated depreciation 372.4 350.1
------ ------
474.7 468.5
Timber and timberlands, net 39.8 39.8
------ ------
Net property, plant and equipment 514.5 508.3
------ ------
Goodwill, net 46.4 44.0
Other assets 50.9 52.4
------ ------
Total assets $926.8 $913.0
====== ======
-5-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(Millions of dollars, except share data)
(Unaudited)
June 30, Dec. 31,
1998 1997
---------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 53.8 $ 52.1
Accrued liabilities 75.9 74.5
Current maturities of long-term debt 0.8 0.6
Dividends payable 4.3 4.3
Income taxes payable 2.4 1.9
------ ------
Total current liabilities 137.2 133.4
------ ------
Long-term debt 267.8 264.3
Other long-term liabilities 5.6 5.8
Postretirement benefits other than pensions 20.4 19.1
Deferred income taxes 68.8 68.4
------ ------
Total liabilities 499.8 491.0
------ ------
Shareholders' equity:
Preferred stock, $100 par value, issuable
in series; authorized, 500,000 shares;
issued, none - -
Common stock, $1 par value; authorized,
60,000,000 shares; outstanding 21,328,154
in 1998 and 21,330,232 shares in 1997,
respectively 21.3 21.3
Additional paid-in capital 20.8 24.7
Other comprehensive income (3.9) (2.8)
Retained earnings 388.8 378.8
------ ------
Total shareholders' equity 427.0 422.0
------ ------
Total liabilities and shareholders'
equity $926.8 $913.0
====== ======
See accompanying notes to consolidated financial statements.
-6-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)
(Unaudited)
Six Months Ended
June 30,
1998 1997
------ -------
Operating activities
Net earnings $ 18.5 $ 31.3
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation, cost of timber harvested and
amortization of intangibles 31.0 48.2
Deferred income taxes .4 (62.5)
Gain on sale of property, plant and equipment (1.6) ( .6)
Gain on sale of business - (86.3)
Restructuring/special charges - 18.9
Extraordinary item - 4.0
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable (15.0) (6.1)
Inventories (3.3) (5.6)
Other assets (1.0) 5.5
Accounts payable 1.7 9.5
Accrued liabilities 1.4 9.1
Income taxes payable .5 78.2
Other current liabilities .9 2.6
------ ------
Net cash provided by operating activities 33.5 46.2
------ ------
Investing activities
Purchases of property, plant and equipment (36.6) (32.1)
Acquisitions and proceeds from sale of
property, plant and equipment (2.9) .4
Proceeds from sale of businesses, net of
disposition expenses - 472.7
Other, net - (2.3)
------ ------
Net cash (used in) provided by investing
activities (39.5) 438.7
------ ------
-7-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Millions of dollars)
(Unaudited)
Six Months Ended
June 30,
1998 1997
----- -----
Financing activities
Net borrowings (payments) on lines of credit 4.6 (169.0)
Payments on long-term debt (1.6) (63.6)
Proceeds from long-term debt .5 .1
Proceeds from issuances of common stock - .6
Purchases of outstanding common stock (6.9) -
Dividends paid (8.5) (9.4)
Other, net 3.2 -
------ ------
Net cash used in financing activities (8.7) (241.3)
------ ------
(Decrease) increase in cash and cash
equivalents (14.7) 243.6
Cash and cash equivalents at beginning of
period 73.3 9.8
------ ------
Cash and cash equivalents at end of period $ 58.6 $253.4
====== ======
See accompanying notes to consolidated financial statements.
-8-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies
The condensed consolidated financial statements of
Chesapeake Corporation and subsidiaries (the "Company") included
herein are unaudited, except for the December 31, 1997
consolidated balance sheet, and have been prepared by the Company
pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the condensed
consolidated financial statements reflect all adjustments, all of
a normal recurring nature, necessary to present fairly the
Company's consolidated financial position and results of
operations for the interim periods reported hereon.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates in reporting the amounts of certain revenues and
expenses during the reporting period of the financial statements
and certain assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and the
notes thereto included or incorporated by reference in the
Company's latest Annual Report on Form 10-K. The results of
operations for the 1998 interim period should not be regarded as
necessarily indicative of the results that may be expected for
the entire year.
Certain prior-year data have been reclassified to conform to
the 1998 presentation.
Note 2. Adoption of Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which is effective for all fiscal periods beginning after
December 15, 1997. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full
set of general-purpose financial statements, either in the
statements of operations or in a separate statement.
Additionally, SFAS 130 requires the display
-9-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited),continued
Note 2. Adoption of Accounting Pronouncements, continued
of the accumulated balance of other comprehensive income. For
the quarter and six months ended June 30, 1998 and 1997,
comprehensive income is as follows:
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------------
1998 1997 1998 1997
------ ------ ------ ------
Net earnings $10.5 $34.8 $18.5 $31.3
Foreign currency translation
(Net of tax) (.4) (.5) (.8) (.8)
----- ----- ----- -----
Comprehensive income $10.1 $34.3 $17.7 $30.5
===== ===== ===== =====
The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards No. 131, "Disclosure
about Segments of an Enterprise and Related Information" ("SFAS
131"), Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132") and Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"). SFAS 131 establishes standards
for the way that public business enterprises report information
about operating segments. The Company expects to adopt this
standard by the end of the year. SFAS 132, which is effective
for fiscal years beginning after December 31, 1997, requires
revisions to disclosures for pensions and other postretirement
benefits. SFAS 133, which is effective for fiscal years
beginning after June 15, 1999, requires companies to record
derivatives on the balance sheet as assets or liabilities,
measured at fair market value. These standards are not expected
to have a material impact on the Company's financial statements.
The American Institute of Certified Public Accountants has issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" and SOP
98-5, "Reporting on the Costs of Start-up Activities." SOP 98-1
provides guidance on accounting for the cost of computer software
for internal use
-10-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements(Unaudited),continued
Note 2. Adoption of Accounting Pronouncements, continued
and SOP 98-5 provides guidance on the financial reporting of
start-up and organizational costs. SOP 98-1 and SOP 98-5 are
effective for fiscal years beginning after December 15, 1998.
The Company has adopted these pronouncements, and there was no
impact on its financial statements for the first quarter and no
material impact for the second quarter of 1998.
Note 3. Acquisitions and Dispositions
On June 24, 1998, Chesapeake Corporation signed a letter of
intent to acquire all of the outstanding capital stock of Capitol
Packaging Corporation, a specialty packaging company located in
Denver, Colorado.
On February 2, 1998, Chesapeake Packaging Co. purchased
substantially all of the assets, and assumed certain liabilities,
of Rock City Box Co., Inc., located in Utica, NY. This operation
manufactures corrugated containers, trays, and pallets, as well
as wood and foam packaging products.
On May 23, 1997, the Company completed the sale to St.
Laurent Paperboard (U.S.) Inc. ("St. Laurent (U.S.)"), a wholly-
owned subsidiary of St. Laurent Paperboard Inc. (Toronto and
Montreal:(SPI)), of: (i) the sole membership interest in
Chesapeake Paper Products Company LLC (successor to Chesapeake
Paper Products Company), a wholly-owned subsidiary of Chesapeake
which, as of the closing date, owned and operated Chesapeake's
kraft products mill located in West Point, VA (the "West Point
Mill"); (ii) all of the capital stock of Chesapeake Box Company
which, as of the closing date, owned and operated directly or
through a subsidiary substantially all of the assets of four of
Chesapeake's corrugated box plants; and (iii) all of the capital
stock of Chesapeake Fiber Company which, as of the closing date,
owned and operated directly or through a subsidiary certain
assets related to the West Point Mill's wood procurement
operations. The four box plants involved in the transaction are
located in Richmond, VA; Roanoke, VA; Baltimore, MD; and North
Tonawanda, NY.
The purchase price of approximately $500.0 million was paid
in cash at closing, with a post-closing purchase price adjustment
of approximately $10 million paid to the buyer. The transaction
resulted in an after-tax gain for Chesapeake of $49.1 million, or
$2.07 a share, recorded in the second quarter of 1997.
Chesapeake used approximately $250 million of net
-11-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements(Unaudited),continued
Note 3. Acquisitions and Dispositions, continued
after-tax proceeds to reduce debt, $79 million to repurchase
common stock, and plans to use the remainder of the net after-tax
proceeds for further repurchases of its common stock and to
finance growth opportunities internally and through acquisitions.
Note 4. Inventories
June 30, Dec. 31,
1998 1997
-------- --------
(In millions)
Inventories consist of:
Finished goods $ 35.4 $ 26.7
Work in process 25.4 36.2
Materials and supplies 42.6 35.9
------ ------
Totals $103.4 $ 98.8
====== ======
Note 5. Commitments
At June 30, 1998, commitments, primarily for capital
expenditures, approximated $28 million. These commitments
include anticipated expenditures of $1.5 million in 1998 for
environmental protection related to the Company's tissue mills.
The remaining commitments of $26.5 million are related to various
capital projects, none of which is individually material.
Additional non-determinable environmental protection
expenditures could be required in the future if facilities are
expanded or if more stringent standards become applicable. See
Note 8.
Note 6. Litigation
Wisconsin Tissue ("WT"), a wholly-owned subsidiary of the
Company, has been identified by the federal government and the
State of Wisconsin as a potentially responsible party with
respect to possible natural resource damages and Superfund
liability in the Fox River and Green Bay System. See Note 8 for
further information regarding this matter.
-12-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 6. Litigation, continued
On May 13, 1997, the Attorney General of Florida filed a
civil complaint against WT alleging violations of antitrust laws.
The complaint also names nine other commercial and industrial
tissue manufacturers and seeks compensatory monetary damages,
civil penalties, and injunctive relief. Other private civil
antitrust class actions have also been filed against WT (or
against the Company, identifying WT as a "division" of the
Company) and against the other defendants. WT and the Company
believe that WT has valid defenses to the plaintiffs' claims and
intend to defend the actions vigorously.
The Company is a party to various other legal actions which
are ordinary and incidental to its business.
While the outcome of legal actions cannot be predicted with
certainty, the Company believes the outcome of any of these
proceedings, or all of them combined, will not have a materially
adverse effect on its consolidated financial position, results of
operations, or cash flows.
Note 7. Income Taxes
The Company's effective income tax rate was 37.5% for the
first two quarters of 1998 and 43.2% for the first two quarters
of 1997. The difference between the Company's effective income
tax rate and the statutory federal income tax rate are primarily
due to state income taxes and purchase accounting adjustments
resulting from a one-time second quarter 1997 disposition and
from acquisitions.
Note 8. Environmental Matters
Chesapeake has a strong commitment to protecting the
environment. The Company has an environmental audit program to
monitor compliance with environmental laws and regulations.
The Company is committed to abiding by the environmental,
health and safety principles of the American Forest & Paper
Association. Each expansion project has been planned to comply
with applicable environmental regulations and to enhance
environmental protection at existing facilities. The Company
faces increasing capital expenditures and operating costs to
comply with expanding and more stringent environmental
regulations, although compliance with existing environmental
-13-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Environmental Matters, continued
regulations is not expected to have a materially adverse effect
on the Company's earnings, financial position, or competitive
position.
The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") and similar state "Superfund" laws
impose liability, without regard to fault or to the legality of
the original action, on certain classes of persons (referred to
as potentially responsible parties or "PRPs") associated with a
release or threat of a release of hazardous substances into the
environment. Financial responsibility for the clean-up or other
remediation of contaminated property or for natural resource
damages can extend to previously owned or used properties,
waterways, and properties owned by third parties, as well as to
properties currently owned and used by a company even if
contamination is attributable entirely to prior owners. As
discussed below, the U.S. Environmental Protection Agency ("EPA")
has given notice of its intent to list the lower Fox River in
Wisconsin on the National Priorities List under CERCLA and has
identified WT as a PRP.
Except for the Fox River matter, the Company has not been
identified as a PRP at any CERCLA-related sites. However, there
can be no assurance that the Company will not be named as a PRP
at any other sites in the future, or that the costs associated
with additional sites would not be material to the Company's
financial position or results of operation.
In June 1994, the United States Fish and Wildlife Service
("FWS"), a federal natural resources trustee, notified WT that it
had identified WT and four other companies located along the
lower Fox River in northeast Wisconsin as PRPs for purposes of
natural resources liability under CERCLA arising from alleged
releases of polychlorinated biphenyls ("PCBs") in the Fox River
and Green Bay System. Two other companies subsequently received
similar notice from the FWS. The FWS and other governmental and
tribal entities, including the State of Wisconsin, allege that
natural resources, including endangered species, fish, birds,
-14-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Environmental Matters, continued
tribal lands, or lands held by the United States in trust for
various Indian tribes, have been exposed to PCBs that were
released from facilities located along the lower Fox River. The
FWS is proceeding with a natural resource damage assessment with
respect to the alleged discharges. On January 31, 1997, the FWS
notified WT of its intent to file suit, subject to final approval
by the Department of Justice, against WT to recover alleged
natural resource damages. WT and other PRPs are engaged in
discussions with the parties asserting federal trusteeship of the
natural resources concerning the damage assessment and the basis
for resolution of the federal natural resource damage claims.
WT and other PRPs are also engaged in discussions with the
State of Wisconsin with respect to resolving possible state
claims concerning remediation, restoration, and natural resource
damages related to the alleged discharge of PCBs into the Fox
River and Green Bay System. Under an interim agreement with the
State of Wisconsin, the PRPs are providing funds for an interim
phase of resource damage assessment and restoration work. WT's
obligation under the agreement is not material to the Company's
financial position or results of operations.
On June 18, 1997, the EPA announced that it was initiating
the process of listing the lower Fox River on the CERCLA National
Priorities List of hazardous waste sites. The EPA identified
several PRPs including WT. The EPA has announced that it will
proceed with a remedial investigation/feasibility study of the
lower Fox River site.
The ultimate cost to WT, if any, associated with these
matters cannot be predicted with certainty at this time, due to
the inability to determine the outcome of pending settlement
discussions or, if a settlement cannot be reached, WT's share of
any multi-party clean-up expenses; the uncertain extent of any
contamination; the varying costs of alternative restoration
methods; the evolving nature of clean-up technologies and
governmental regulations; the lack of controlling legal
precedent; the extent to which contribution will be available
from other parties; and the scope of potential recoveries from
insurance carriers and prior owners of WT. Based on presently
available information, the Company believes that there are
-15-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Environmental Matters, continued
additional parties, some of which may have substantial resources,
that may also be identified as PRPs with respect to this matter
and could be expected to participate in any final
settlement. The Company believes that it is entitled to
indemnification from a prior owner of WT, pursuant to a stock
purchase agreement between the parties, with respect to
liabilities related to this matter. The prior owner has
reimbursed WT for out-of-pocket costs and attorneys' fees related
to investigation of the matter. The Company believes that the
prior owner intends to, and has the financial ability to, honor
its indemnification obligation under the stock purchase
agreement.
In March 1995, the EPA issued "Final Guidance" for basin-
wide water quality standards pursuant to the Great Lakes Water
Quality Agreement between the U.S. and Canada regarding the
development of water quality standards for the Great Lakes and
their tributaries. The State of Wisconsin has issued a discharge
permit for WT's mill in Menasha, WI, based on the Final Guidance.
WT does not expect to have significant capital expenditures or
additional operating costs to comply with the permit.
The EPA has published draft rules under the Clean Water Act
and the Clean Air Act which would impose new air and water
quality standards for pulp and paper mills (the "Cluster Rules").
The recently published Cluster Rules, which are primarily
applicable to the bleached kraft industry, require compliance
within three years after the date of adoption. Based on the
Company's preliminary estimates, compliance with the recently
published cluster rules will require capital expenditures
totaling not more than approximately $5 to 6 million, primarily
at the Company's largest tissue mill located in Menasha, WI. The
EPA has stated its intent to develop additional Cluster Rules.
The eventual capital cost impact on the Company of compliance
with the additional Cluster Rules is not presently determinable
and will depend on a number of factors, including the scope of
the standards imposed and time permitted for compliance; the
Company's strategic decisions related to compliance, including
potential changes in product mix and market; and development in
compliance technology.
In March 1998, WT's Chicago tissue mill received a Notice of
Violation from EPA alleging violation of the Illinois State
-16-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Environmental Matters, continued
Implementation Plan as adopted pursuant to the Clean Air Act.
The alleged violation involves the emission of volatile organic
material. WT is in the process of evaluating the EPA's
allegations. The ultimate cost to WT, if any, associated with
the alleged violation cannot be determined with certainty at this
time due to the absence of a determination that there has been a
violation, and, if a violation is found to have occurred, a
determination of the appropriate capture and control techniques
or other corrective action and the cost thereof, and the amount
of any penalties imposed by EPA. WT believes that it is entitled
to significant indemnification for any costs or expenses incurred
with regard to this matter from the prior owner of the Chicago
mill and that the prior owner has the financial ability honor its
indemnification obligation.
One July 17, 1998, WT's Menasha paper mill received a Notice
of Violation from the Wisconsin Department of Natural Resources
("WDNR") alleging violations of Wisconsin's Air Management Rules.
The alleged violations involve the emission of volatile organic
material and the failure to comply with reporting requirements.
WT is in the process of evaluating the WDNR's allegations. The
ultimate cost to WT, if any, associated with the alleged
violations cannot be determined with certainty at this time due
to the absence of a determination that there have been violations
and, if violations are found to have occurred, a determination of
the appropriate corrective action and the cost thereof and the
amount of any penalties imposed by WDNR.
Chesapeake operates under, and believes it is in substantial
compliance with, the terms of various air emission and water and
effluent discharge permits and other environmental regulations.
-17-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
BUSINESS SEGMENT HIGHLIGHTS
Second Quarter Year-to-Date
-------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Net sales:
Tissue $113.4 $102.0 $215.2 $196.7
Specialty packaging 111.5 97.1 215.7 190.9
Forest products/land development 12.1 9.2 22.9 15.7
------ ------ ------ ------
Ongoing operations 237.0 208.3 453.8 403.3
Divested businesses - 56.0 - 155.5
------ ------ ------ ------
$237.0 $264.3 $453.8 $558.8
====== ====== ====== ======
EBIT:
Tissue $ 18.4 $ 13.5 $ 33.8 $ 26.7
Specialty packaging 1.7 (0.6) 2.5 (2.6)
Forest products/land development 5.1 2.9 8.4 5.6
Corporate (3.8) (3.4) (6.0) (7.4)
------ ------ ------ ------
Ongoing operations 21.4 12.4 38.7 22.3
Divested businesses - (8.3) - (14.3)
Gain on sale of business - 86.3 - 86.3
Restructuring/special charges - (18.9) - (18.9)
------ ------ ------ ------
$ 21.4 $ 71.5 $ 38.7 $ 75.4
====== ====== ====== ======
Second Quarter 1998 vs. Second Quarter 1997
Net earnings for the three months ended June 30, 1998, were
$10.5 million, or $.49 a share fully diluted, compared with the
1997 second quarter reported net earnings of $34.8 million, or
$1.46 a share. Reported net income for the second quarter of
1997 included: an after-tax gain of $49.1 million, or $2.07 per
share, on the sale of the West Point Mill and four box plants to
St. Laurent Paperboard Inc.; restructuring charges of $10.8
million after tax, or $.45 per share; and an extraordinary loss
of $2.3 million, or $.10 per share, net of income taxes, related
-18-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
to the repurchase of debt. Net earnings from ongoing operations
for the second quarter of 1997 on a pro forma basis (after giving
effect to the May 23, 1997, sale of the West Point Mill and
related assets as if it had occurred as of the beginning of the
second quarter of 1997) were $5.4 million, or $.23 a share fully
diluted. The increase in net earnings was primarily the result
of higher sales volume and lower outstanding debt.
Net sales for the three months ended June 30, 1998, were
$237.0 million, compared with second quarter reported net sales
of $264.3 million in 1997. Second quarter 1998 net sales were up
14% from second quarter 1997 net sales from ongoing operations of
$208.3 million. This increase was primarily the result of growth
in unit volume.
Net sales for the Tissue segment of $113.4 million for the
second quarter of 1998 were up 11% from the second quarter of
1997. Shipments of converted tissue products were up more than
10% over the second quarter of 1997. Sales of parent rolls were
nearly twice those of last year's second quarter. Earnings
before interest and taxes ("EBIT") for the tissue segment for the
second quarter of 1998 of $18.4 million increased 36% compared to
the second quarter of 1997 due primarily to volume growth and
improved converting efficiencies.
Net sales for the Specialty Packaging segment for the second
quarter of 1998 of $111.5 million were up 15% compared to net
sales from ongoing operations for the segment during the second
quarter of 1997 due primarily to volume growth. For the second
quarter of 1998, segment EBIT was $1.7 million, a $2.3 million
improvement over the $.6 million loss for the second quarter of
1997 for ongoing operations. The increase was primarily due to
cost reductions in the display and custom packaging business
coupled with strong revenue growth. The corrugated container
business unit continued to perform well.
Net sales for the Forest Products/Land Development segment
for the second quarter of 1998 were $12.1 million, up 32% from
net sales of $9.2 million in the second quarter of 1997, due
primarily to additional pulpwood shipments and higher land sales.
Segment EBIT for the second quarter of 1998 was $5.1
million, up 76% compared to $2.9 million for the second quarter
last year. The increase was primarily due to modestly higher
pulpwood pricing and increased land sales.
-19-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Part of the proceeds from the sale of the West Point Mill
and related assets were used to reduce outstanding debt during
1997, thereby reducing interest expense in the second quarter of
1998 by $2.1 million from $6.8 million in the second quarter of
1997.
Second Quarter Year-to-date 1998 vs. Second Quarter Year-to-date
1997
Net income for the six months ended June 30, 1998 was $18.5
million, or $.86 per diluted share, compared with pro forma net
income from ongoing operations of $9.0 million, or $.38 per
share, for the first half of 1997. Reported net income the first
six months of 1997, including the one-time and extraordinary
item, was $31.3 million, or $1.31 per share.
Net sales for the six months ended June 30, 1998, were
$453.8 million, compared with net sales of $403.3 million from
ongoing operations for the first half of 1997. Reported sales
for the first half of last year, including divested businesses,
were $558.8 million.
Net sales for the Tissue segment of $215.2 million for the
first half of 1998 were up greater than 10% from the first half
of 1997. Converted shipments were 144,283 tons, a 12% increase
over last year. EBIT for the Tissue segment of $33.8 million was
up 27% compared to the first half of 1997. The increase in EBIT
was due primarily to improved margins resulting from increased
volume and improved converting efficiencies.
Net sales for the Specialty Packaging segment for the first
half of 1998 were $215.7 million, up from 13% compared to net
sales from ongoing operations of $190.9 million in 1997. EBIT
year-to-date was $2.5 million, up $5.1 million from the $2.6
million loss from ongoing operations in 1997. The increase in
EBIT was primarily due to cost reductions in the display and
custom packaging business coupled with strong revenue growth.
Net sales for the Forest Products/Land Development segment
of $22.9 million were up 46% from net sales of $15.7 million from
ongoing operations for the first half of 1997. EBIT for the
first half of 1997 was $8.4 million, or 50% higher than 1997's
EBIT from ongoing operations of $5.6 million. The increase in
EBIT was primarily due to modestly higher pulpwood pricing and
increased land sales.
-20-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Liquidity and Financial Position
Management assesses the Corporation's liquidity in terms of
its overall ability to generate cash to fund its operating and
investing activities. Significant factors affecting the
management of liquidity are cash flows generated from operating
activities, capital expenditures, acquisitions, common stock
repurchases, adequate bank lines of credit, and financial
flexibility to attract long-term capital on satisfactory terms.
Cash flows provided by operating activities were $33.5
million during the first six months of 1998 compared to $46.2
million for the first six months of 1997. The reduction resulted
from the sale of the West Point Mill and related assets.
Cash flows used in investing activities were $39.5 million
during the first six months of 1998 compared to funds provided of
$438.7 million in the first six months of 1997. Capital
expenditures for the six months ended June 30, 1998 totaled $36.6
million and related primarily to strategic initiatives in the
packaging and tissue businesses. Capital expenditures in the
first half of 1997 totaled $32.1 million and also related
primarily to strategic initiatives in the packaging and tissue
businesses. Capital expenditures for the full year 1998 are
expected to be approximately $65 to $70 million. These
initiatives include new tissue converting equipment at the
Menasha, WI, Bellemont, AZ, and Greenwich, NY, facilities;
implementation of several new information systems throughout the
company; and expansion and modernization of the West Point, VA,
sawmill. On June 24, 1998, the Company signed a letter of intent
to acquire all of the outstanding capital stock of Capitol
Packaging Corporation. On February 2, 1998, Chesapeake Packaging
Co. acquired substantially all of the assets, and assumed certain
liabilities, of Rock City Box Co., Inc. These projects are
consistent with Chesapeake's strategy of expanding its core
businesses, reducing costs, and focusing capital spending on
projects that are expected to generate a high return on
investment. No other 1998 capital project is expected to account
for more than 5% of the total planned spending. Capital
expenditures for 1998 are expected to be financed with internally
generated cash. The Corporation also invested $6.3 million in
acquisitions of businesses in the first half of 1998.
-21-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Liquidity and Financial Position, continued
The Corporation repurchased $6.9 million of common stock,
representing .2 million shares, in the first six months of 1998
under previously announced stock repurchase programs. Share
repurchase continues to be a significant use of the Corporation's
strong cash flows and serves to offset the dilutive effect
resulting from the issuance of stock under stock-based employee
benefit programs.
Working capital increased $2.9 million for the first six
months of 1998. The increase was primarily due to an increase in
accounts receivable driven by higher sales. The average accounts
receivable collection period for the first six months of 1998
improved slightly compared to the first six months of 1997. The
inventory turnover rate for the first six months of 1998 was
approximately the same as for the first six months of last year.
The ratio of current assets to current liabilities was 2.3 at the
end of the second quarter of 1998 and 1997.
EBITDA, a measure of internal cash flow combining earnings
before interest and income taxes plus non-cash charges for
depreciation, cost of timber harvested and amortization, was
$37.2 million for the second quarter of 1998. This was 51%
higher than pro forma EBITDA of $24.6 million for the second
quarter of 1997. Net cash provided by operating activities for
the second quarter was $16.4 million, down from $44.2 million of
net cash provided by operating activities for the second quarter
of 1997.
At the end of the second quarter of 1998, long-term debt
totaled $267.8 million, compared to $265.5 million at the end of
the same period of 1997. Long-term debt was substantially
reduced in the second quarter of 1997 by applying part of the
proceeds from the sale of the West Point Mill and related assets.
The ratio of long-term debt to total capital was 35% at the end
of the second quarter of 1998, an increase of 3% from
the end of the same period last year. The ratio of long-term
debt to shareholders' equity was 63% at the end of the second
quarter of 1998 compared to 54% at the end of the second quarter
of 1997. Out of a total of $67 million committed and $105
million uncommitted domestic and foreign credit lines available
at the end of the second quarter of 1998, none of the domestic
lines and $13 million of foreign lines were utilized.
-22-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Liquidity and Financial Position, continued
Management believes that its existing cash position and
other available sources of liquidity are sufficient to meet
current and anticipated requirements for the foreseeable future.
Management anticipates that the debt-to-capital will increase
slightly during the balance of the year in order to satisfy its
various cash flow requirements, including acquisition spending
and continued share repurchases.
Year 2000 Planning
The Company continues to assess its exposure related to the
impact of the Year 2000 date issue which is attributable to the
fact that many computer programs use only two digits that
identifies a year in a date field. The Company has established a
Company-wide plan to address the Year 2000 issue, primarily
through significant upgrades of information systems to improve
productivity of the Company's packaging businesses. Contracts
have been signed with application vendors and consultants to
provide most of the upgrades of the packaging segment's business
systems and certain modifications or upgrades to the systems for
the Company's other businesses. The Company's plans, and the
contracts with the outside vendors, anticipate substantial
completion of the upgrades and modifications by 1999. The Year
2000 data conversion effort is expected to increase costs in 1998
and 1999. However, based on the contracts with outside vendors
and current cost estimates, management does not expect the cost
of compliance with the Year 2000 issues will have a material
impact on the Company's financial position, results of operations
or cash flow. While the Company believes its planning efforts
are adequate to address its Year 2000 concerns, the Company could
be adversely impacted by the Year 2000 date issue if the
conversion schedule and cost estimate for its internal systems
are not met or suppliers, customers and other businesses do not
address this issue successfully. The Company is requesting that
its significant suppliers and customers confirm that they have
plans for achieving Year 2000 compliance. Management continues
to assess these risks in order to reduce any impact on the
Company.
Foreign currency transactions and financial statements of
foreign subsidiaries are translated into U.S. dollars at
prevailing or current rates, respectively, except for revenue
costs and expenses, which are translated at average current rates
during each reporting period. Gains and losses resulting from
foreign currency transactions are included in income.
-23-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Accounting Pronouncements
The Financial Accounts Standards Board has issued several
new pronouncements, including standards on capital structure,
comprehensive income, business segment reporting, pensions and
other post-retirement benefits, and derivatives. In addition, the
American Institute of Certified Public Accountants has issued
several new standards on accounting for computer software and
reporting the cost of start-up activities. These standards are
not expected to have a material impact on the Company's financial
statements. See Note 2 in the notes to consolidated financial
statements for more information on these standards.
Other
"Management's Discussion and Analysis of Financial Condition
and Results of Operations" may include "forward-looking
statements" that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Changes
in the following important factors, among others, could cause
Chesapeake's actual results to differ materially from those
expressed in the forward-looking statements: competitive products
and pricing; production costs, particularly for raw materials
such as waste paper and corrugated box and display materials;
fluctuations in demand; governmental policies and regulations
affecting the environment; interest rates; currency translation
movements; and other risks that are detailed from time to time in
reports filed by the Company with the Securities and Exchange
Commission.
-24-
PART II
Item 1. Legal Proceedings
Reference is made to Note 6 of the Notes to
Consolidated Financial Statements included herein.
Item 6. Exhibits and Reports on Form 10-Q
(a) Exhibit 10.1 - Agreement with Robert F. Schick
(b) Exhibit 10.2 - Agreement with Jack C. King
(c) Exhibit 27.1 - Financial Data Schedule - 1998
(d) Exhibit 27.2 - Financial Data Schedule - 1997
Restated
(e) Exhibit 27.3 - Financial Data Schedule - 1996
Restated
(f) Exhibit 27.4 - Financial Data Schedule - 1995
Restated
(g) Reports on Form 8-K:
None.
-25-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CHESAPEAKE CORPORATION
(Registrant)
Date:_________________ BY: /s/ William T. Tolley
William T. Tolley
Group Vice President -
Finance & Chief
Financial Officer
-26-
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
- ------- --------------------
10.1 Agreement with Robert F. Schick *
10.2 Agreement with Jack C. King *
27.1 Financial Data Schedule - 1998 *
27.2 Financial Data Schedule - 1997 Restated *
27.3 Financial Data Schedule - 1996 Restated *
27.4 Financial Data Schedule - 1995 Restated *
* Filed herewith electronically
-1-
Exhibit 10.1
EMPLOYMENT AND SEVERANCE BENEFITS AGREEMENT
Employment and Severance Benefits Agreement (the
"Agreement"), dated as of March 6, 1997, between Chesapeake
Packaging Co., a Virginia corporation (the "Company"), and Robert
F. Schick (the "Employee").
WHEREAS, the Board of Directors recognizes that the Employee
has made and is expected to make substantial contributions to the
past and future growth and prospects of the Company; and
WHEREAS, the Board of Directors desires to assure the
Company of the continued services of the Employee now and in the
event that the Company or an affiliate is faced with a change in
control; and
WHEREAS, the Employee desires to agree to remain in the
employ of the Company during the term of this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual
covenants and agreements set forth herein, the parties hereto
covenant and agree as follows:
1. When used in this Agreement, the following terms shall
have the meanings specified:
(a) CAUSE. "Cause", when referring to a termination of
employment, shall mean any termination resulting from the
Employee's failure to devote his full business time and energies
to the business and affairs of the Company, failure to use his
best efforts, skill and abilities to promote the Company's
business, aiding competitors of the Company or conviction by a
court of competent jurisdiction for a felony involving dishonesty
or moral turpitude.
(b) CHANGE IN CONTROL. "Change in Control" shall mean
(i) the sale of all or substantially all of the outstanding stock
of Chesapeake Paper Products Company ("CPPC") or (ii) the sale of
all or substantially all of the assets of CPPC.
(c) CONTROL CHANGE DATE. "Control Change Date" shall
mean the effective date of a Change in Control.
(d) PURCHASER. "Purchaser" shall mean the company or
entity or its successors that purchases all or substantially all
of the outstanding stock or assets of CPPC.
-1-
(e) REDUCTION IN SERVICE. A "Reduction in Service"
shall be deemed to have occurred if the job title, job
description, responsibilities or duties assigned to the Employee
are materially reduced from those assigned to him on the date
hereof.
(f) RETIREMENT. "Retirement" shall mean early, normal or
delayed retirement under the terms of the Chesapeake Corporation
Retirement Plan for Salaried Employees.
(g) TOTAL AND PERMANENT DISABILITY. "Total and Permanent
Disability" shall have the same meaning as such term is defined
in the Chesapeake Corporation Retirement Plan for Salaried
Employees.
2. If a Control Change Date has not occurred on or before
5:00 p.m. Richmond, Virginia time on December 31, 1997, then this
Agreement shall terminate as of such time.
3. During the period that the Employee is an active
employee of the Company pursuant to this Agreement, the Employee
agrees to (i) devote his full business time and energies to the
business and affairs of the Company, (ii) use his best efforts,
skill and abilities to promote the Company's interests and (iii)
not aid competitors of the Company.
4. From the date of this Agreement to the earlier of a
Control Change Date or December 31, 1997, the Company will not
terminate the employment of the Employee without Cause or reduce
the base salary of the Employee from the base salary as of the
date of this Agreement.
5. The Employee will be eligible to receive any awards
under the Chesapeake Packaging Co. Management Incentive Plan (or
any other plan implemented by management to replace this plan)
that may be awarded to him under the plan.
6. If a Control Change Date occurs during the term of this
Agreement and the Employee is in the employ of the Company on
such Control Change Date:
(a) The Employee will be eligible to receive the lump
sum bonus as set forth in the memorandum dated January 8, 1997.
-2-
(b) The Company agrees that it will retain the
Employee in its employ for a period of two years after the
Control Change Date unless the Employee's employment is
terminated for Cause. The Employee's base salary during this two
year period will not be reduced below his base salary as of the
Control Change Date. In the event (i) the Employee voluntarily
terminates his employment due to a Reduction in Service or (ii)
the Company terminates the Employee's employment without Cause,
during the two year period and the Employee does not accept
another position with the Company or one of its affiliates, the
Employee will be entitled to continue to receive his base salary
on the normal payroll payment dates for a period of twelve (12)
months. In addition, the Employee shall continue to be eligible
to participate in all life, medical, dental and retirement
benefit plans or programs or arrangements in which he
participates immediately prior to his date of termination on such
terms as are then in effect, provided that his continued
participation is possible under the general terms and provisions
of such plans and programs. In the event that the Employee's
participation in any such plan or program is barred by its terms,
the Company shall arrange to provide the Employee with benefits
substantially similar to those which he is entitled to receive
under such plans and programs. Cause shall not include refusal to
accept a transfer or relocation to another facility or office of
the Company or any affiliate. If the Employee voluntarily
terminates his employment for any reason other than a Reduction
in Service during the two year period, the Employee will not be
entitled to any continuation of compensation or benefits.
(c) The Company further agrees that if the Employee
elects retirement from the Company after the two year period
specified in Section 6(b) above, the Employee's retirement
benefits under the Chesapeake Corporation Retirement Plan for
Salaried Employees (the "Qualified Plan") and the Chesapeake
Corporation Executive Supplemental Retirement Plan (the
"Supplemental Plan") will be enhanced by adding five (5) years to
his age and service under both plans. The enhancement amount will
be paid as an additional benefit under the Supplemental Plan and
will be subject to the provisions of the Supplemental Plan.
-3-
7. In the event that, as of the Control Change Date, the
Employee owns or has the right (except to the extent such right
is generally available to public investors) to acquire, in excess
of one percent (1%) of the equity of any entity participating in
a Change in Control transaction involving the Company or CPPC,
all obligations under this Agreement on the part of the Company
or Chesapeake Corporation to provide employment, pay compensation
or provide benefits shall terminate. It is the Employee's
responsibility to notify the Chesapeake Corporation of his
ownership interest or his right to acquire such interest.
8. During the period of his employment by the Company, the
Employee has had access to certain confidential, non-public
information concerning the Company and Chesapeake Corporation
(the "Information"). The Employee agrees to maintain the
Information as confidential and not disclose it to third parties
or to use it in his employment following the Control Change Date.
The Employee agrees that if this confidentiality obligation is
breached, the Company and/or Chesapeake Corporation shall, in
addition to other remedies available, be entitled to injunctive
relief.
9. In the event of the Employee's death, Total and
Permanent Disability, or Retirement while an employee of the
Company during the term of this Agreement, the Company's and/or
Chesapeake Corporation's obligations to provide employment, pay
compensation or provide benefits shall cease except to the extent
that such obligations are provided for under applicable Company
benefit plans as are then in effect.
10. The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the
Company expressly to assume and agree to perform this Agreement
in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place.
Failure by the Company to obtain such agreement prior to the
effectiveness of any succession shall be a breach of this
Agreement and shall entitle the Employee to compensation from the
Company in the same amount and on the same terms as he would be
entitled to receive pursuant to Sections 5 and 6 hereof. As used
in this Agreement, "Company" shall mean the Company as defined
herein and any successor to its business and/or assets which
executes and delivers the agreement provided for in this Section
10 or which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law or otherwise.
-4-
11. The Employee agrees that he will not voluntarily leave
the employ of the Company during the term of this Agreement and
that he will render services to the Company and its affiliates
commensurate with his position throughout the term of this
Agreement.
12. In the event the Employee becomes eligible to receive
benefits under the Chesapeake Corporation Salaried Employees'
Benefits Continuation Plan, those benefits shall reduce the
Company's and/or Chesapeake corporation's obligation to pay
compensation or provide benefits under this Agreement.
13. This Agreement shall inure to the benefit of and be
enforceable by the personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees of the Employee. If the Employee should die while any
amounts are still payable to him hereunder, then all such
amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to his devisees,
legatees, or other designees or, if there be no such designees,
to his estate.
14. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Employee and such officer
as may be specifically designated by the Board of Directors of
the Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter
hereof have been made by either party which are not set forth
expressly in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed
by the laws of the Commonwealth of Virginia other than its choice
of laws provision.
15. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full
force and effect.
-5-
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed on its behalf, and the Employee has duly
executed this Agreement, all as of the date first above written.
Chesapeake Packaging Co.
By: /s/ Robert F. Schick By: /s/ J. Carter Fox
-------------------- -----------------
Robert F. Schick J. Carter Fox
Employee Vice President
Chesapeake Corporation hereby confirms acceptance of its
obligations as stated in this Agreement.
Chesapeake Corporation
By: /s/ Thomas A. Smith
-------------------
Thomas A. Smith
Vice President
-6-
Exhibit 10.2
EMPLOYMENT AND SEVERANCE BENEFITS AGREEMENT
Employment and Severance Benefits Agreement (the
"Agreement"), dated as of February 27, 1997, between Chesapeake
Forest Products Company, a Virginia corporation (the "Company"),
and Jack C. King (the "Employee").
WHEREAS, the Board of Directors recognizes that the Employee
has made and is expected to make substantial contributions to the
past and future growth and prospects of the Company; and
WHEREAS, the Board of Directors desires to assure the
Company of the continued services of the Employee now and in the
event that the Company or an affiliate is faced with a change in
control; and
WHEREAS, the Employee desires to agree to remain in the
employ of the Company during the term of this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual
covenants and agreements set forth herein, the parties hereto
covenant and agree as follows:
1. When used in this Agreement, the following terms shall
have the meanings specified:
(a) CAUSE. "Cause", when referring to a termination of
employment, shall mean any termination resulting from the
Employee's failure to devote his full business time and energies
to the business and affairs of the Company, failure to use his
best efforts, skill and abilities to promote the Company's
business, aiding competitors of the Company or conviction by a
court of competent jurisdiction for a felony involving dishonesty
or moral turpitude.
(b) CHANGE IN CONTROL. "Change in Control" shall mean
(i) the sale of all or substantially all of the outstanding stock
of Chesapeake Paper Products Company ("CPPC") or (ii) the sale of
all or substantially all of the assets of CPPC.
(c) CONTROL CHANGE DATE. "Control Change Date" shall
mean the effective date of a Change in Control.
(d) PURCHASER. "Purchaser" shall mean the company or
entity or its successors that purchases all or substantially all
of the outstanding stock or assets of CPPC.
-1-
(e) REDUCTION IN SERVICE. A "Reduction in Service"
shall be deemed to have occurred if the job title, job
description, responsibilities or duties assigned to the Employee
are materially reduced from those assigned to him on the date
hereof.
(f) RETIREMENT. "Retirement" shall mean early, normal or
delayed retirement under the terms of the Chesapeake Corporation
Retirement Plan for Salaried Employees.
(g) TOTAL AND PERMANENT DISABILITY. "Total and Permanent
Disability" shall have the same meaning as such term is defined
in the Chesapeake Corporation Retirement Plan for Salaried
Employees.
2. If a Control Change Date has not occurred on or before
5:00 p.m. Richmond, Virginia time on December 31, 1997, then this
Agreement shall terminate as of such time.
3. During the period that the Employee is an active
employee of the Company pursuant to this Agreement, the Employee
agrees to (i) devote his full business time and energies to the
business and affairs of the Company, (ii) use his best efforts,
skill and abilities to promote the Company's interests and (iii)
not aid competitors of the Company.
4. From the date of this Agreement to the earlier of a
Control Change Date or December 31, 1997, the Company will not
terminate the employment of the Employee without Cause or reduce
the base salary of the Employee from the base salary as of the
date of this Agreement.
5. The Employee will be eligible to receive any awards
under the Chesapeake Paper Products Company Management Incentive
Plan, Key Employees' Profit Sharing Plan and/or Gainsharing Plan
(or any other plan implemented by management to replace one of
these plans) that may be awarded to him under the plans.
6. If a Control Change Date occurs during the term of this
Agreement and the Employee is in the employ of the Company on
such Control Change Date:
(a) The Employee will be eligible to receive the lump
sum bonus as set forth in the memorandum dated January 10, 1997.
-2-
(b) The Company agrees that it will retain the
Employee in its employ for a period of two years after the
Control Change Date unless the Employee's employment is
terminated for Cause. The Employee's base salary during this two
year period will not be reduced below his base salary as of the
Control Change Date. In the event that during the two year period
(i) the Employee voluntarily terminates his employment due to a
Reduction in Service or (ii) the Company terminates the
Employee's employment without Cause, and the Employee does not
accept another position with the Company or one of its
affiliates, the Employee will be entitled to continue to receive
his base salary on the normal payroll payment dates for the
remainder of the two year period or for a period of twelve (12)
months whichever is longer. In addition, the Employee shall
continue to be eligible to participate in all life, medical,
dental and retirement benefit plans or programs or arrangements
in which he participates immediately prior to his date of
termination on such terms as are then in effect, provided that
his continued participation is possible under the general terms
and provisions of such plans and programs. In the event that the
Employee's participation in any such plan or program is barred by
its terms, the Company shall arrange to provide the Employee with
benefits substantially similar to those which he is entitled to
receive under such plans and programs. Cause shall not include
refusal to accept a transfer or relocation to another facility or
office of the Company or any affiliate. If the Employee
voluntarily terminates his employment for any reason other than a
Reduction in Service during the two year period , the Employee
will not be entitled to the continuation of compensation or
benefits.
(c) The Company further agrees that if the Employee
elects retirement from the Company after the two year period
specified in Section 6(b) above, the Employee's retirement
benefits under the Chesapeake Corporation Retirement Plan for
Salaried Employees (the "Qualified Plan") and the Chesapeake
Corporation Executive Supplemental Retirement Plan (the
"Supplemental Plan") will be enhanced by adding five (5) years to
his age and service under both plans. The enhancement amount will
be paid as an additional benefit under the Supplemental Plan and
will be subject to the provisions of the Supplemental Plan.
-3-
7. In the event that, as of the Control Change Date, the
Employee owns or has the right (except to the extent such right
is generally available to public investors) to acquire, in excess
of one percent (1%) of the equity of any entity participating in
a Change in Control transaction involving the Company or CPPC,
all obligations under this Agreement on the part of the Company
or Chesapeake Corporation to provide employment, pay compensation
or provide benefits shall terminate. It is the Employee's
responsibility to notify the Chesapeake Corporation of his
ownership interest or his right to acquire such interest.
8. During the period of his employment by the Company, the
Employee has had access to certain confidential, non-public
information concerning the Company and Chesapeake Corporation
(the "Information"). The Employee agrees to maintain the
Information as confidential and not disclose it to third parties
or to use it in his employment following the Control Change Date.
The Employee agrees that if this confidentiality obligation is
breached, the Company and/or Chesapeake Corporation shall, in
addition to other remedies available, be entitled to injunctive
relief.
9. In the event of the Employee's death, Total and
Permanent Disability, or Retirement while an employee of the
Company during the term of this Agreement, the Company's and/or
Chesapeake Corporation's obligations to provide employment, pay
compensation or provide benefits shall cease except to the extent
that such obligations are provided for under applicable Company
benefit plans as are then in effect.
10. The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the
Company expressly to assume and agree to perform this Agreement
in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place.
Failure by the Company to obtain such agreement prior to the
effectiveness of any succession shall be a breach of this
Agreement and shall entitle the Employee to compensation from the
Company in the same amount and on the same terms as he would be
entitled to receive pursuant to Sections 5 and 6 hereof. As used
in this Agreement, "Company" shall mean the Company as defined
herein and any successor to its business and/or assets which
executes and delivers the agreement provided for in this Section
10 or which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law or otherwise.
-4-
11. The Employee agrees that he will not voluntarily leave
the employ of the Company during the term of this Agreement and
that he will render services to the Company and its affiliates
commensurate with his position throughout the term of this
Agreement.
12. In the event the Employee becomes eligible to receive
benefits under the Chesapeake Corporation Salaried Employees'
Benefits Continuation Plan, those benefits shall reduce the
Company's and/or Chesapeake corporation's obligation to pay
compensation or provide benefits under this Agreement.
13. This Agreement shall inure to the benefit of and be
enforceable by the personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees of the Employee. If the Employee should die while any
amounts are still payable to him hereunder, then all such
amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to his devisees,
legatees, or other designees or, if there be no such designees,
to his estate.
14. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Employee and such officer
as may be specifically designated by the Board of Directors of
the Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter
hereof have been made by either party which are not set forth
expressly in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed
by the laws of the Commonwealth of Virginia other than its choice
of laws provision.
15. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full
force and effect.
-5-
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed on its behalf, and the Employee has duly
executed this Agreement, all as of the date first above written.
Chesapeake Forest Products Company
By: /s/ Jack C. King By: /s/ J. Carter Fox
---------------- -----------------
Jack C. King J. Carter Fox
Chairman
Chesapeake Corporation hereby confirms acceptance of its
obligations as stated in this Agreement.
Chesapeake Corporation
By: /s/ Thomas A. Smith
-------------------
Thomas A. Smith
Vice President
-6-
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0
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<DEPRECIATION> 696,300,000 716,900,000 738,300,000 756,300,000
<TOTAL-ASSETS> 1,160,900,000 1,212,500,000 1,278,700,000 1,290,200,000
<CURRENT-LIABILITIES> 134,800,000 143,200,000 169,800,000 166,800,000
<BONDS> 411,600,000 457,200,000 491,300,000 499,400,000
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<SALES> 277,700,000 554,300,000 863,600,000 1,158,600,000
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<EPS-PRIMARY> .33 .50 .91 1.28
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